Strathcona Resources Ltd

TSX:SCR

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Score Q3 Fiscal 2020 Earnings Conference Call. [Operator Instructions]I will now turn the conference over to your speaker today, James Bigg, Senior Manager of Communications. Thank you, please go ahead.

[James Bigg, Senior Manager of Communications]

Thank you. Hello, and good afternoon, everyone. Many thanks for joining us on today's call and webcast for the Score's Fiscal 2020 Q3 Results. Presenting today will be the Score Founder and Chief Executive Officer, John Levy; President and Chief Operating Officer, Benjie Levy; and Chief Financial Officer, Alvin Lobo.At this time, we would like to caution our listeners that this presentation contains forward-looking statements. There are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions are applied in making these forward-looking statements.Any forward-looking statement contained in this presentation represent the views of management and are presented for the purposes of assisting the Score shareholders and analysts in understanding the Score's financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes.Additional information on items of note, the Score's reported results and factors and assumptions related to forward-looking information are all available in our financials and MD&A for Q3 fiscal 2020, both of which were filed on SEDAR a few moments ago and are also available on our Investor Relations page at scoremediaandgaming.com.Our CEO, John Levy, will now begin the presentation.

[John S. Levy, Founder, Chairman & CEO]

Thanks, James. And good afternoon to everyone, and thank you for joining us today. We hope you are all well and keeping safe. As you all know, Q3 coincided with an unprecedented time for the world at large, as we all grappled with the impact of COVID-19 pandemic and the near-total disruption to sports events on a global scale.While today, we are all excited by the return in sports given the role they play in bringing a sense of familiarity and some reprieve from these otherwise challenging times, we recognize that we are all still living in and working through a very fluid situation. This will demand our ongoing flexibility and vigilance as we press forward, adapting as things unfold.As we have navigated through this over the past quarter, our focus was on keeping our teams safe and at full strength, mitigating the impact on audience and engagement and maintaining an unwavering focus on our ongoing product and corporate development initiatives. At the same time, we managed our costs responsibly, including reducing discretionary spending and availing ourselves of the government programs, thereby limiting our cash use in the quarter to $3.9 million. I'm very proud of our team's ability to successfully accomplish all of these goals.And that brings us to today. As major sports begin to return to action, we sit positioned with a prime media user base on the precipice of our on-time multistate rollout of the Score Bet and an ever-growing audience that set new records during the quarter.By staying focused on engaging our users with a highly creative content in Q3, we were able to retain nearly 75% of our app user base during the period. This puts us in an amazing position across the media and bedding platforms to take advantage of the upcoming avalanche of sports content and, as mentioned, our launch into 2 new states with the Score Bet.To that end, we're already seeing positive momentum across both media and gaming platforms as the major sports continue to return. On the Score, in the few days since baseball's return, sessions have doubled compared to the days prior. And at the same time, in the first week of live baseball on the Score Bet, we've nearly matched our total betting handle from Super Bowl Week. And we've accomplished all of this with just 1 major sports back in play.Obviously, circumstances continue to evolve, and we need to be flexible as we move forward. However, we have proven to be, and we will continue to be nimble and adaptable, ensuring we are being responsible in our approach but fully prepared to capitalize on all the opportunities directly ahead. As sports return and new states and new provinces here in Canada come online, we are ready to go.I'll now turn things over to Benjie, who will take a closer look at the product and content initiatives that make us so well positioned for the resumption of sports and have excited us for the immediate months ahead. Benjie?

[Benjamin David Levy, President, COO & Executive Director]

Thanks, John, and good afternoon, everyone. As John noted, in Q3, we continue to make ongoing product enhancements to the Score Bet, preparing us for this summer's multistate expansion into both Colorado and Indiana, subject to receiving all regulatory approvals. As part of this, we secured GLI-33 certification earlier this month for both Indiana and Colorado, significant milestones towards launching in those states and also strengthened our relationships with a major professional leagues by becoming an authorized gaming operator of MLB.From a user experience standpoint, we made significant improvements to our payments and promotional infrastructure, the latter of which facilitated the launch of our new cashback engine, forming the cornerstone of our market-leading Sports Are Back celebratory offering, where all new and existing users of the Score Bet can unlock 5% cashback on their bets up to $2,500.We also continue to deepen the unique and cutting-edge integrations between our gaming and media platforms that truly set us apart from our rivals, which will be further rolling out into the fall. Across our media platforms, we launched more innovative and interactive content format to keep fans as engaged as possible while sports were on pause. As mentioned, this led us to successfully retain 75% of our audience on the Score app compared to the same period last year with 2.9 million average monthly active users despite the total disruption to live events.Naturally, live sports are a significant driver of engagement on the Score app. But even during this downtime, the Score app remained a daily ritual for our fans with 35 average sessions per user per month. This is a real testament to the strong audience and loyalty we have built.From a feature standpoint, we expanded our popular public chat forums beyond our box scores and into our league and exclusive content sections, driving conversations and engagement around broader topics and breaking news with live sports on hiatus. Our focus in content innovation also extended to our social channels where we achieved an average monthly reach for the quarter of 104 million users across Twitter, Facebook and Instagram. We leveraged this reach to promote our interactive in-app content, while also delivering exclusives on those platforms, including live interviews with high-profile athletes. Our TikTok channel also continues to demonstrate incredible growth, adding more than 600,000 followers in the period to now exceed more than 1.7 million fans. This scale and engagement has opened up a new channel for our sales teams to explore, leading to our first activation on the platform with Epic Games to promote their digital storefront.On the Score esports, we set an all-time quarterly record of 145 million video views in Q3, which was year-over-year growth of 113%. Total watch hours on our YouTube channel were also up 76% year-over-year, reaching $9.7 million, with our subscriber base growing to over 1.4 million subscribers.On the top of the success of our on-demand content, the team now continues to deliver new and engaging ways to entertain fans of competitive gaming. And in Q3, began to experiment with live streaming content formats across YouTube and Twitch.Following the success of our sports TikTok channel, we also launched our esports TikTok offering in February and already sit at more than 500,000 fans.I'll now turn things over to Alvin, who will take a closer look at our financial results.

[Alvin Lobo, Chief Financial Officer]

Thanks, Benjie. Before diving deeper into our financial performance for the quarter, I want to first recap some of the actions taken in Q3 to mitigate the impact on our operations as a result of the pause in the sports calendar. To responsibly counteract the anticipated decline in revenue caused by the pandemic, we took a number of measures to manage costs, including the reduction of discretionary expenses and availing ourselves of all applicable government programs, including the Canada Emergency Wage Subsidy.We also secured a $6.25 million revolving term credit facility with the same Canadian chartered bank that maintains our $5 million revolving demand operating credit facility, supported by the Export Development Corporation's business credit availability program.Additionally, in April, every member of the Score's senior management team agreed to forgo 25% of their salary from May 1 through August 31 in exchange for an equivalent grant of restricted stock units in the company, with the variation of this program also made available on an optional basis to all full-time staff.As a result of these cost-containment measures, the company's cash use in the quarter was limited at $3.9 million, the equivalent of a mid-7-figure savings for the period. We will continue to manage our business operations responsibly and accordingly during what remains a fluid and uncertain period.Now for the financial recap for the quarter. Total revenue for the third quarter was $2.4 million compared to $8.5 million for the same period last year. Revenue for the 9 months ended May 31 was $18.3 million compared to $24.7 million for the same period last year. The decrease in revenue for the period reflects the direct impact of the disruption of the sports calendar caused by the COVID-19 pandemic. Gaming handle was $3.7 million in the third quarter and $26.4 million for the 9 months ended May 31.Gross gaming revenue was $81,000 in the quarter and $766,000 for the 9 months ended May 31. When taking into account promotional costs and fair value adjustments on unsettled debts, this resulted in negative net gaming revenue of $22,700 and $244,000 for the 3 and 9 months ended May 31.EBITDA loss in the third quarter was $8.7 million versus an EBITDA loss of $1.1 million for the same period last year. EBITDA loss for the 9 months ended May 31 was $22.2 million versus an EBITDA loss of $2.3 million in the same period last year. The increase in the EBITDA loss was due primarily to the COVID-19-related impact on revenue for the period and the result of additional expenses incurred in connection with the expansion of our gaming operations.From a liquidity perspective, we ended the quarter with cash of $17.6 million and our $5 million revolving credit facility remains undrawn. On July 24, 2020, we completed a drawdown of the $6.25 million under our new revolving term credit facility. Pro forma for this drawdown cash as of May 31 is $23.8 million.And I'll now turn it back over to James.

[James Bigg, Senior Manager of Communications]

Thanks, Alvin. That concludes the formal part of our presentation. Operator will now take any questions from analysts.

[Operator]

[Operator Instructions] Your first question comes from the line of David McFadgen with Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions. So you generated gaming hands of $3.7 million in the quarter, but obviously, that wouldn't be for the full quarter with the suspension of sports. So just wondering, for what period of time or how many weeks, does that $3.7 million represent?

[John S. Levy, Founder, Chairman & CEO]

That was for the full quarter, David.

[David John McFadgen, Director of Institutional Equity Research]

No, I know. But I mean like the sports were suspended probably for, I don't know, 8 weeks out of the quarter. So I'm just wondering, was that $3.7 million in the time of 1 week, 2 weeks.

[John S. Levy, Founder, Chairman & CEO]

A quarter starts at the beginning of March, right? So when did things shut down?

[David John McFadgen, Director of Institutional Equity Research]

Mid-March so...

[Benjamin David Levy, President, COO & Executive Director]

Mid-March.

[John S. Levy, Founder, Chairman & CEO]

But David, I think there were some events that were still being back on. We had other markets open through the end of the period. If memory serves me correctly, the NFL Draft was in the quarter as well. So there were other things that people were betting on as big or as small as they -- these events might seem, whether it was Korean baseball or certain international soccer events and the like. So there was activity beyond March 11.

[David John McFadgen, Director of Institutional Equity Research]

Okay. Okay. And then -- so obviously, you got some CEWS funding in the quarter. I think you disclosed it was $2 million. When does that funding run out, where you're no longer eligible to receive that?

[John S. Levy, Founder, Chairman & CEO]

Sorry, go ahead, Benjie.

[Benjamin David Levy, President, COO & Executive Director]

No. I was going to say the program runs, David. They've extended it through the end of December. And I think the kind of the existing formula carries on through the end of August. And then there's sort of different ratchets that used to be -- there's a current test, it's a 30% drop in revenue to be eligible for the 75% subsidy. And then moving forward it moves to a bit of a different sliding scale. So the government is providing that as revenues start to recover, the subsidy tapers off, but the program, in general, is available till the end of December in one form or fashion.

[David John McFadgen, Director of Institutional Equity Research]

Understood. So do you think it would be reasonable to expect another $2 million for Q4, assuming things stay the way they are?

[Benjamin David Levy, President, COO & Executive Director]

I mean, I think, listen, I think for -- in terms of when sports resume, I think we are now in the kind of end of July and baseball has been back for a week. And in the course of next week, we're expecting NBA to come back and NHL to come back. So that obviously would lead us to see uptick in activity and advertising on the platforms.So tough to speculate exactly what kind of the end calculations will be for August, but as I said, the program has been built to allow some modularity. So depending on exactly how the revenue test works, there certainly will be some subsidy available, we believe.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And you talked a little bit about -- or you gave some details on the -- how the wager activity has really picked up on baseball just for the first week. I was wondering, can you give us any details on how the media revenue is responding as sports resumes?

[Benjamin David Levy, President, COO & Executive Director]

It's been similar. I think one of the things our guys have done a great job of over the course of this period since March is staying very close to our advertisers, doing what they can to maintain campaigns, to shift campaigns. The advertisers are very keen to participate in the resumption of sports. We would see upticks of activity around events like NFL Draft and things like that, where there would be increased activity on the app around periods like that. And naturally, just like John was talking about an uptick -- significant uptick in engagement around the start of MLB, there has been a similar uptick in activity from our direct advertisers and programmatic advertisers around that period and with bookings continuing into August and into the fall.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then you highlighted your user engagement is obviously very good. And then on esports, it also continues to be quite strong. Any thoughts on when you actually might want to start monetizing the esports users?

[Benjamin David Levy, President, COO & Executive Director]

That's an ongoing process. We have campaigns running now. That's going to be a function of continuing to build out our sales execution capability on the esports platform, which is an ongoing project for us and just rolling that out into the marketplace.There's a lot of -- the audience is there and the eyeballs are there, and it's a process of getting -- helping to educate advertisers, helping to educate the mainstream advertisers that are now starting to come into the space about esports media opportunities that are available to them, how they're able to advertise, how they're able to integrate. And as we shift from a scenario where most of the advertising is endemic to a scenario where most of -- to a scenario where you're targeting mainstream advertisers. And that's a process that's starting and will continue over the course of the next fiscal year.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then just lastly, can you tell us what the -- what your cash position is right now?

[John S. Levy, Founder, Chairman & CEO]

Sorry, what our what is? Our what, sorry?

[David John McFadgen, Director of Institutional Equity Research]

Your cash. Your cash position is right now like sort of mid-quarter, mid-Q4?

[John S. Levy, Founder, Chairman & CEO]

Alvin, what did we report? I don't know if we...

[Alvin Lobo, Chief Financial Officer]

Well, as of Q3 -- at the end of Q3, it was $17.6 million, and then pro forma for the loan, the new revolving credit facility, it was $23.8 million.David, we're not going to provide like a mid-quarter cash number, but I would say that what we've been doing in terms of being responsible about managing our costs has continued through. So I don't think you're going to see anything that varies from how we've managed in the third quarter into the fourth.

[David John McFadgen, Director of Institutional Equity Research]

Okay, okay. And then just lastly, just on the sports betting win margin, in that 2% to 3% range in order to get it up to, say, 6% to 7%, is that just a function of just building scale still? Or are you just going to get some more betters on the platform? Is that really what we need to see?

[John S. Levy, Founder, Chairman & CEO]

I'll answer it. Yes, that's what we said in the past, and absolutely, that's the name of the game and whey we're excited now is coming out of this and seeing some of the early results, and this new 5% cashback up to $2,500 that we just launched looks very, very encouraging to start to bring -- quickly get us back to where we were when we shut down just before March Madness, right, when we were starting to scale up then. So hoping to scale back up pretty quickly. And then start to have the input and the numbers that would start to bring us to the range that we've always talked about, which I think is -- we've always said somewhere in the 6% to 8.5% or something like that.So yes. I think we're getting there, and early signs are encouraging us to say that the activity level continuing to grow, sports staying on, having -- assuming baseball can continue, and it looks like basketball is in good shape and hockey is in good shape and all -- pre-NFL, we're looking at sort of March Madness activity. So both on the media front, and I think Benjie or somebody or Alvin mentioned earlier, that's jumping up dramatically pretty quickly as well, just like the sports betting is. So I think we're kind of firing on all cylinders here and just hoping that everything continues in the context of games continuing to be played.What we do know is our users. First of all, we didn't lose that many of them. They were -- we had like 70% or 75% of our user base. I think we reported was -- stayed with us. And now we're getting the engagement back out of them. And the same sort of immediate lift we're seeing both in Canada on the direct sales and in the U.S., and the programmatic is just a matter of numbers, as you know. We deliver up double, triple the impressions, we're going to get more revenue. So -- and that's kind of what we're seeing.So all 3 sources, the Canadian ad sales, U.S. programmatic and betting in New Jersey are coming back very quickly, and it's very, very exciting to us, so just let the games continue.

[Operator]

[Operator Instructions] Your next question is from Suthan Sukumar with Eight Capital.

[Suthan Sukumar, Principal]

The first question for me. I guess I want to start on the media side of the business. It sounds like, obviously, that the user base is relatively healthy. It sounds like user engagement is on a track back up, maybe to even pre-COVID levels. I'm kind of curious to what you guys are seeing on the overall recovery of ad spend and monetization on your platform, and secondly, what's kind of been the advertiser response to your new content strategy, kind of wondering if there's broader interest building around some of these new content formats that you guys have rolled out as part of that platform strategy.

[Benjamin David Levy, President, COO & Executive Director]

Thanks, Suthan. So I think, generally speaking, we've seen a reasonable response from advertisers in response to the pandemic across really a wide variety of the advertising categories. Some advertisers like P&G have been leaning in and increasing spend. And other advertisers are coming back at more moderate levels. And the beauty of our platform is that we can offer advertisers a very high degree of flexibility in terms of when they want to book, what they want to run.We're starting to see, as I was saying, in response to David's question, bookings continue out into the fall. So -- and advertisers behaving kind of consistent what they have with us in the past.On the direct side, in Canada, we've got great relationships. We have preferred deals with most of the ad agencies, which is useful because that gives us -- as the advertisers are starting to come back and spend, it is typically, as a result of -- those relationships are the first conversations that typically happen. And so we're pretty happy with how things are starting to resume and pick up, and it really is a testament to the strength of our direct sales team.And in terms of some of the new formats, I think we're starting to see some pickup on our social channels, where we've talked about those not just being an opportunity for us to extend our brand and our reach. But ultimately, for those to become media assets for us in their own right. And the content is generating the engagement. It's generating the reach, and we're now starting to see advertisers engage with us for those platforms across Instagram and TikTok.

[Suthan Sukumar, Principal]

Great. That's helpful. On the sports betting side, just kind of thinking about the whole restart in New Jersey, some of the early betting handle growth that you guys disclosed is obviously encouraging. What type of player activity, but I guess I'm more curious on kind of on player activity side. What are you guys seeing with respect to kind of the cross-sell and versus new player acquisition today? And how is that compared to kind of pre-COVID levels?

[Benjamin David Levy, President, COO & Executive Director]

I don't think we're at a point to talk about sort of the percentages of where new users are coming from, as we look forward into Q4. But our strategy remains the same.Our differentiated approach is that this is about the ecosystem for us. This is about presenting an integrated offering and leveraging our highly engaged media app users. So that is where the core of our marketing efforts are. We supplement that with some targeted external paid acquisition. But our full expectation moving forward is that our mix of users is going to be comparable to what we were seeing earlier pre-COVID.

[Suthan Sukumar, Principal]

Okay. Okay, great. And then with respect to the mobile betting platform, I know New Jersey historically has been somewhat of a test bet for you guys. Can you speak to kind of where you guys are at currently with your technology stack and integration between media and betting? And just kind of where you're at in terms of road map of rolling out that more holistic betting solution?

[Benjamin David Levy, President, COO & Executive Director]

Yes. So I mean a couple of points there. I think we've done -- over the course of the last quarter or 2, we've done a lot of work both on the betting side. Where we've rolled out now our own wallet and our own payments infrastructure, the infrastructure to permit us to be able to offer cashback and similar types of promotions, which we just did.And then equally, on the media side to support the type of integrations that we're talking about, there's been a lot of groundwork laid for some of the bigger integrated features that you're going to see us deploy around the start of NFL season, which we're pretty excited about internally, not ready to unveil exactly what those are going to be yet, but kind of offering that increased depth of integration between the 2 platforms, building on our initial FUSE integration, which we rolled out last fall in November. It was just starting to really pick up momentum over the course of our Q2 and heading into -- we're super-excited for how that was going to play for March Madness when you have tons and tons of users in the media app all afternoon, all day, while those games are being played and didn't get the opportunity.But now in this kind of restart of sports, we are going to see that opportunity, admittedly, but it won't be college basketball. It's going to be with MLB, NBA, NHL, all kind of starting at noon and running until midnight every day of the week. So we think that's really when the integrated approach like ours can shine. And we're really excited to get back to it.

[Suthan Sukumar, Principal]

Great, great. And then just kind of looking ahead to your launch in Indiana and Colorado. Is it kind of reasonable to assume that all those kind of learnings that you've kind of experienced in New Jersey and kind of factored into the solution as it stands in New Jersey today, would that become the de facto platform that you're going to be looking to launch in Indiana and Colorado? Or will the product experience be slightly different than what you have in New Jersey today?

[Benjamin David Levy, President, COO & Executive Director]

No, it's going to be the same product experience. Obviously, there are some regulatory nuances in each jurisdiction. But by and large, the product experience is going to be the same. And that's one of the things actually that we've been spending, getting stood up in 1 state was a large amount of work. And we've spent as much time, as much effort getting ready for our multistate launch, where we're doing a lot of work behind the scenes from an infrastructure perspective to make sure that we can deliver a singular app experience to users anywhere in the United States where we're going to launch, where we're going to deploy.So it's not -- you don't have -- unlike some other operators, where you have to download a Score Bet New Jersey or Score Bet Indiana or Score Bet Colorado, that is not the case with us. It's a singular app and a singular experience wherever you are going to -- wherever you want to engage with us. And it's been a lot of work, a lot of infrastructure work to be able to get to that point. But ultimately, we think that pays dividends in the long run from a user experience perspective.

[Suthan Sukumar, Principal]

Okay. Okay, great. And maybe just one last one for me, guys, on esports. You guys obviously have a fairly prominent and quickly growing platform in esports. Can you touch on some of the progress that you guys are seeing with some of your newer initiatives that I think you touched on the whole streaming opportunity with Twitch. And also curious, has there been any kind of change to your mid- to long-term strategy with respect to esports, just given everything that you've been seeing on the side of the business in recent periods?

[Benjamin David Levy, President, COO & Executive Director]

No. I think, listen, I think one of the biggest questions for us actually so -- in this kind of transition to kind of -- as a result of COVID from the transition to work from home was esports is our kind of most intensive production. And we would -- there was typically for esports in the past a lot of in-person shooting in the office. We transitioned -- and so as we started, we were a little bit -- we were curious as to how this was going to work. And we -- our team responded in an amazing fashion.We were able to not just maintain our content output cadence but increase it. We saw -- and it ended up being a record quarter for us in terms of esports viewership. I think for us, it's going to -- there's nothing that's changed. Our overall approach to esports is to approach it as a media platform. We are covering the sports. We are covering the stories. We are covering the personalities and creating amazing engaging content around it.That started with VOD content on YouTube. That's going to continue. That's going to continue to grow. We're going to continue to add new formats and new series and new titles to that.And now we're starting to branch out into different forms of the same philosophy. It's -- we're covering competitive gaming and whether that -- whether we're going to be able to do that on social channels like TikTok or starting to try out some different live streaming formats on Twitch and on -- also on YouTube. We'll just -- we're going to be nimble, and we're going to see what gets heat, and then we'll apply resources behind those areas that are working.And so far, we don't see any limits to how big and how powerful this esports community can be. And then kind of taking that to the next level in the fullness of time, you're going to see betting on esports. And we know with what's going on in some of the offshore markets, that esports, kind of broadly speaking, is a top 5 betting category.And when that opens it up in a meaningful way in North America, we are going to be there with the #1 in traditional sports, where we sit #2 on a mobile perspective behind ESPN. In esports, we are far and away #1 from a media platform perspective. And when the time comes, that's going to be a very, very interesting channel for us to be able to leverage and deploy.

[Operator]

At this time, there are no additional questions. I'll turn it back over to management.

[James Bigg, Senior Manager of Communications]

Thanks, everyone, for joining us today for our Q3 results. We look forward to presenting to you again when we deliver our year-end results in mid-October. That concludes the presentation.

[Operator]

Thank you. This concludes today's conference. You may now disconnect.