Strathcona Resources Ltd

TSX:SCR

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon, and welcome to theScore Fiscal Year 2021 Q3 Financial Results Conference Call and Webcast. [Operator Instructions] This call is being recorded today, Tuesday, July 13, 2021 at 5:30 Eastern Daylight Time. I would now like to turn the call over to your host, Alvin Lobo, Chief Financial Officer. Mr. Lobo, you may begin.

[Alvin Lobo, Chief Financial Officer]

Thank you, Boina. Hello, and good afternoon. Thanks for joining us on today's call and webcast for theScore's Fiscal 2021 Q3 Results. This is Alvin Lobo, theScore's Chief Financial Officer, and joining me on the call today are theScore's Chairman and CEO, John Levy; and President and COO, Benjie Levy. 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 statements contained in this presentation represent the views of management and are presented for the purpose of assisting theScore's shareholders and analysts in understanding theScore'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, theScore's reported results and factors and assumptions related to forward-looking information are all available in our financials and MD&A for Q3 fiscal 2021, both of which were filed on SEDAR a few moments ago and are also available on our Investor Relations page at ir.scoremediaandgaming.com. Our CEO, John Levy, will now begin the presentation.

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

Thanks, Alvin, and good afternoon to everyone. And thank you for joining us today as we review what was a record-setting third quarter, continuing our strong fiscal year. The third quarter of fiscal 2021 was an incredibly productive period as we saw highlights in our media business, further traction for our sports betting operation, and of course, the recent monumental step forward here in Canada with the legalization of single-event sports betting, which clears the path for the opening of the Ontario market later this year. We began our third quarter by completing our U.S. IPO, a significant company milestone that raised gross proceeds of USD 186.3 million. We're deploying the capital towards the ongoing build-out of our integrated sports, media and betting platform, further investments in technology, expanding our market access footprint and to rapidly scale our team. We continue to make progress with the licensing across several additional states where we hope to launch theScore Bet in the coming months. In support of our ongoing expansion across North America, we continue to make big strides in our technology development. Next month will mark a major milestone with the planned deployment of our proprietary internally developed player account management system and promotion engine, which have been approved by GLI and the applicable state gaming labs. This transition moves us closer to the full vertical integration of our sportsbook operation, which is foundational to our strategy to establish theScore as a leading, integrated provider of digital sports media and sports betting throughout North America. I will turn my attention to our gaming business in a moment but would like to spend a bit of time touching on our media business as media is still at the heart of what we do. We set a new Q3 record for media revenue of $8.9 million, which was sharply up with a 270% gain over the prior year when sports calendar was disrupted due to COVID-19 pandemic. Compared to the same period in 2019, media revenue was up 5%, thereby exceeding the pre-COVID number. Our media business has now generated revenue of $27.5 million to date in fiscal 2021. This is an all-time high for the first 9 months of any fiscal year in our history, demonstrating the continued health of our North American audience, the substantial reach of our platform and the ongoing willingness of leading brands to activate our audience via a range of highly successful campaigns. We also achieved a quarterly record for our total user sessions of 470 million, up 19% from the third quarter of 2019. This averaged roughly 126 sessions per user, the highest quarterly engagement in our company history across a base of 3.7 million active users, marking a strong return to the pre-COVID user levels. Our sports content across social channels achieved an average monthly reach of 172 million users, another quarterly record. And across our esports platforms, we registered an impressive 241 million cross platform video views. Our team is extremely proud of these results, and I'm confident that our expansive audience and powerful engagement positions us well for the long-term growth, particularly as we roll out theScore Bet in new U.S. states and prepare for the launch of online sports betting and iGaming in Ontario and across Canada. Turning to our gaming business. We generated a handle of $73 million on theScore Bet during the third quarter. This includes the much anticipated return of the NCAA tournament after its cancellation last year due to the pandemic. Our team took full advantage leaning into the tournament to drive user acquisition and betting interest, generating March handle of $30.8 million, a new single-month record. Now as I noted earlier, we are progressing towards transitioning our entire tech stack onto our internally developed and fully controlled betting platform. From the outset, it has been a core strategic priority of ours to own and fully control our technology. We've made great strides to that and over the past 2 years, while working in tight alignment with our partners at Bet.Works, whose technology and platform services have enabled us to successfully roll out to theScore Bet across multiple states. Next month, however, we plan to fully deploy our proprietary PAM and promo engine, which represents a major step in our tech migration and will further streamline our gaming operations. We expect the full vertical integration of our sportsbook operation to be complete in the next 12 months, when we bring our risk and trading services in house. Heading up this initiative will be Patrick Jay, who I'm very pleased to announce will be joining us this fall. Patrick is a highly regarded online betting industry leader who has nearly 30 years of experience at some of the world's largest online and retail sports books. Benjie will provide further details on this exciting news later in the presentation. Finally, before I turn this over to Benjie, who will review our products, sales and development initiatives, I want to give you a brief update on the forthcoming opportunity around sports betting and iGaming in Canada and in our home province of Ontario. Canada realized a significant milestone on June 22 with the passage of Bill C-218 and its subsequent Royal Assent on June 29, legalizing single event sports wagering in Canada. This legislation now paves the way for the provinces to implement their own regulated sports betting frameworks. As it stands to date, we believe Ontario is on track to implement its new sports betting and iGaming framework by the end of 2021, which is expected to allow private operators like theScore to enter the market. What we had long hoped for, the legalization of sports betting, is finally happening, and we couldn't be more excited by the prospect of serving fans in our home country where our brand affinity is unmatched. We have already begun reinforcing our brand via activations in Ontario, which we will accelerate in the lead-up to the market opening. With a large and passionate Canadian user base, strong brand identity and experience in operating a powerful mobile betting platform in the U.S., we are extremely well positioned to succeed in Ontario and across the country. Ontario is expected to offer a huge market opportunity with many industry observers marking the province as the largest regulated sports betting market in North America by population once it opens. This is a very exciting time and subject to regulatory approval, we expect to be ready to go when Ontario opens. I'll now turn it over to Benjie for his comments.

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

Thanks, John, and good afternoon, everyone. As John mentioned, our handle this quarter was highlighted by a record wagering in March and the execution of another highly successful marketing push around a marquee sports event in March Madness. Our integrated marketing campaign led theScore Bet to generate its highest ever betting week during the first week of the tournament. During the quarter, our product and engineering team was focused on a number of key enhancements to our proprietary wallet, including the addition of payment options that allow customers to more efficiently access and withdraw their funds. Over the last quarter, we've improved and expanded our offerings for automated withdrawals, and we are now in the process of integrating additional payment solutions in the U.S. and in preparation for our expected launch in Canada. Earlier, John discussed our upcoming technology deployment and the addition of Patrick Jay to oversee our sportsbook operations, including in-house risk and trading. As we have emphasized previously, our strategic plan from the outset has been to own our full technology stack, and we have been working towards that objective since even before theScore Bet launched. This strategy is underpinned by our incredibly capable and rapidly growing product and engineering team who cut their teeth building our leading mobile sports media platform. The full deployment next month of our proprietary PAM system and promo engine is hugely significant as it expands our ability to more efficiently and creatively serve users across our integrated product set. These custom-built cutting-edge systems will unlock additional user personalization, cross-platform media and betting integration capabilities and platform automation, which will serve to further differentiate theScore Bet's best-in-class offering and drive both near- and long-term growth. As John noted, we expect to complete the vertical integration of our sportsbook operations over the next year with the migration of risk and trading in-house. And in Patrick Jay, we believe we have the ideal candidate to lead our efforts. Patrick is a highly regarded industry veteran with an impressive track record leading risk and trading services at high-profile properties across the global gaming sector including 5 years at the Hong Kong Jockey Club and 6 years at Ladbrokes. Patrick will oversee our sportsbook operations, including the rollout of our in-house risk and trading and work cross-functionally on all aspects of theScore Bet. We are looking very forward to welcoming him to the team. Our media business continues to produce record revenue and engagement numbers. New and returning brand partners are clearly eager to connect with our mobile media audience that is more engaged than ever. Notably, this quarter, we secured deals with returning top-tier brands such as Nissan, Microsoft and TAG Heuer. We also signed a number of new partners, including Burger King, Callaway and EQ Bank. In addition, we were excited to expand our mobile ad tech offering with a custom-built animated launch page that debuted in May with PepsiCo as our first-to-market advertiser. This innovative new product offering provides another high visibility touch point for our brand partners. We've highlighted the monthly gaming handle driven by March Madness, but it also bears mentioning that this high-profile event drove significant user engagement for our media app. Activity was incredibly strong throughout the NCAA tournament with an average of 535,000 users viewing March Madness content daily, generating over 235 million page views across the 3 weeks of the tournament. Moving on to esports and the impressive results we continue to achieve. We registered 241 million video views across all esports platforms in the quarter. Our ability to generate video views at this level each quarter has solidified theScore esports as a leading global media destination enticing brands such as GEICO, who recently resigned for a 6-month campaign commitment. Our strong media performance metrics extended to social media in the third quarter with theScore delivering our highest ever quarterly cross-platform reach. We grew significantly on TikTok, where we added another 700,000 new followers and on Instagram, where we added more than 143,000 new followers. This quarter, we also secured deals with Audi and Captain Morgan, who signed on for content series across social and digital. We're now consistently monetizing our social media presence and are actively building out our digital team to broaden our content capabilities. We've worked hard to cultivate an influential and authentic voice across social media and believe our expertise in this area will be a key growth driver moving forward. I'll now turn things over to Alvin, who will talk in more detail about our financials.

[Alvin Lobo, Chief Financial Officer]

Thanks, Benjie. Total revenue for our fiscal third quarter was $6.4 million, with record third quarter media revenue partially offset by negative net gaming revenue of $2.5 million. Media revenue was $8.9 million compared to $2.4 million for the same period of last year, representing a 270% year-over-year increase and a 5% increase compared to the same period in 2019. Gaming handle was $73 million and gross gaming revenue was a negative $40,000 in the third quarter. When taking into account promotional costs and fair value adjustments on unsettled bets, this resulted in negative net gaming revenue of $2.5 million. EBITDA loss in Q3 fiscal 2021 was $21.1 million versus an EBITDA loss of $8.7 million for the same period last year. The wider EBITDA loss was driven primarily by additional expenses incurred in connection with the ongoing expansion of our gaming operations, and costs and professional service fees related to the recently completed U.S. initial public offering, which closed in the third quarter. In terms of our liquidity position, we closed the third quarter with $229.1 million of cash on hand. This concludes the formal part of our presentation. Boina, we will now take questions from analysts.

[Operator]

Your first question is from Matthew Lee of Canaccord Genuity.

[Matthew James Lee, Associate Analyst of Telecom and Media]

So maybe I'll just start with a housekeeping question here. In terms of the G&A, can you tell me how much of that was onetime in nature?

[Alvin Lobo, Chief Financial Officer]

Sure. Sorry, John.

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

No, I'll turn it over to Alvin. Yes, you can respond on that.

[Alvin Lobo, Chief Financial Officer]

Yes. So I would say about $5 million of it was onetime in nature. And the rest -- look, there's a balance of some ongoing U.S.-related public company costs as well as some of what you're seeing in G&A also reflects the overall growth of the business, including as we continue to scale an increase in headcount, which the vast majority of that is related to product and engineering, just given what we're continuing to do from a tech perspective in terms of taking on more and more of the sports betting platform in-house. And so I would say, when you back out the nonrecurring, like that gives you a good sense of both the elevation and public company costs as well as just an overall sort of growth in the business.

[Matthew James Lee, Associate Analyst of Telecom and Media]

So then we should be expecting kind of an $8 million to $9 million per quarter G&A cadence going forward?

[Alvin Lobo, Chief Financial Officer]

Yes. Again, in that -- yes. Look, as we continue to invest in scale, like there will be other things to be mindful of, too. But I -- as you know, Matt, we don't necessarily guide, but I think it's fair to kind of look at that as a baseline.

[Matthew James Lee, Associate Analyst of Telecom and Media]

Great. And then maybe just a bigger picture, can you discuss at what level of handle you believe you need to reach for that kind of -- make that GGR consistently positive?

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

Benjie, why don't you talk about what our thoughts are in terms of we talk about scale and we talk about early days in each of the states. And I know it's a little difficult to anticipate without sort of specifically guiding, particularly since we're saying that we're in 4 states now, we hope to have that doubled within the next couple of months, maybe even a little more than that in the U.S. And that's without talking specifically about Ontario. But maybe perhaps Benjie, give some color around that.

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

Yes. No, listen, Matt, I think we're not going to put a specific handle number on where we think that ultimately converts. I think our view on this is that at scale, we do start to see that normalize. And we're on our way there, and we're starting to see that in some of the results on a day-to-day and week-to-week basis. But until we get to that scale, we are still susceptible to some of these swings. And -- but at the end of the day, it's all consistent with our overall approach, which has been building slow and steady. This is not about us buying market share and buying scale in the market from a marketing perspective. And ultimately, as we're looking forward to the future and the opportunities that are ahead of us in jurisdictions like Ontario, we think there's the opportunity to get there in the not-too-distant future and do it on our own tech stack with our own services.

[Matthew James Lee, Associate Analyst of Telecom and Media]

Right. That's perfect. And then just maybe could you provide some color on the next couple of quarters in terms of the expected handle on the market overall, given the sports calendar? Are you starting to see, and I know you don't guide, but like a similar handle overall for the industry in Q4 as you saw in Q3, which you...

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

Yes. Listen, I mean, look, for us, it follows the sports calendar, right? I mean -- and our fiscal Q3, which we just came out of, when you line up the sports calendar against our fiscal Q2, is a softer quarter. Fiscal Q4 is after all of the -- after NBA and NHL wrap up, yes, we have Olympics over the summer, but it's largely MLB. And then you're getting into our fiscal Q1 in the fall where kind of our fiscal Q1 is seasonally our strongest quarter. So I think it's natural to expect handle to ebb and flow along the lines of the sports calendar.

[Operator]

[Operator Instructions] Your next question is from Chad Beynon of Macquarie.

[Chad C. Beynon, Head of US Consumer, Senior VP & Senior Analyst]

I wanted to ask about some of the initiatives about bringing more of the tech in-house. I know you guys have talked about this as a primary goal, but you're actually doing it and executing it and talked about the timeline. Does this change how you're thinking about long-term margins for the business over time as you -- as the revenues and the handle start to grow? And if you can't talk about that, are there reasons why it can't be as high, if not higher than what some of your peers are talking about?

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

So I'll start out by just saying that -- firstly, thanks, Chad, for the question. And we've said right from the get-go that when we first launched, building the tech stack and having control and management and over that tech stack was critical to the type of offering that we are going to deploy over time. And it's really put us in a position where we're starting to see the fruits of our labor. We announced today that PAM has been basically fully authorized and licensed and ready to go, and we've already launched wallet, and the promotional vehicles, and these are all attributes of allowing us to be able to provide theScore Bet as part of this integrated omnipresent uniform offering with theScore as the core, right? And I'll let maybe Alvin or Benjie talk to how that improves our margins in the context of our go-forward strategy. but it also -- it touches every aspect of what we're doing from -- mark from being -- having attractive offering for market access to increasing our penetration, as we were doing within the 4 states and as we're going to show once we launch in Ontario, right to the margin that we're going to be able to, which is I think at the core of what you're asking in the context of -- from a financial offering in terms of what the results are. But I don't know, Alvin, do you want to talk a little bit more maybe about what the financial impact of our own tech stack is in the context of our rollout?

[Alvin Lobo, Chief Financial Officer]

Sure. And I think, Chad, the short answer is we're not doing it for the margins, but this is a really nice side benefit of it. And to your point, we do think that this is one of the components, along with just the overall philosophy of having an integrated media embedding approach, but the ownership of the tech stack is really important to what that whole experience looks like from the consumer's perspective in terms of not just acquisition but retention and engagement and sort of the frequency at which that user participates in the ecosystem. But we do think it helps us attain margins at the high end of the industry just as a result of not having to pay rev shares to tech partners. So the short answer is yes, but that's not why we're doing it. It's just a really nice added effect of owning our own tech.

[Chad C. Beynon, Head of US Consumer, Senior VP & Senior Analyst]

Okay. That makes sense. And then regarding the iGaming initiatives, can you help lay out the timeline in terms of launching iGaming products? And then once you achieve the doubling of the markets on OSB, if you're in markets where iGaming is currently legal or expected to legalize such as Ontario, should we expect that you'll be offering a product to your customers in those markets?

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

I can take that one, Chad. So the short answer is our plan is to have iGaming up and running in the fall, and that would be in both New Jersey where we have existing iGaming market access as well as Ontario, where the plan is to have iGaming and online sports betting available at the market open in December based on the current timelines that iGaming Ontario has put out subject, of course, to all regulatory approvals.

[Operator]

Your next question is from Ben Chaiken of Credit Suisse.

[Benjamin Nicolas Chaiken, Research Analyst]

You have a material presence -- material existing presence in Ontario through your media arm already. In the first few months of the iGaming and OSB rollout, how do you think about customer acquisition? Like is there an education process that's required for those existing customers? Is it promo expense? Just -- can you help us think about the strategy at least high level and appreciating that some of this still may be in flux currently?

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

Okay. So I'll -- Benjie, do you want to lead off or go ahead?

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

Sure. Listen, Ben, I think Ontario, as John and we've been talking about, is a very, very exciting market for us. And it's not just because we have a tremendous user base who loves our platform here. We have a brand history and a brand legacy with theScore having been in market as a first as a television business for the better part of 20 years. And so what that brand presence allows us to do is to target the market and attack the market in a bit of a different way than we have been in the U.S. where -- it's been -- our marketing approach has been predominantly conversion-based and also selected digital marketing that we've done in the states. Up here, because of that brand presence and because the audience knows us, we're able to do a lot more from a creative execution perspective. So you can expect us to be more active from a marketing perspective across the board because ultimately, that brand allows us to generate an ROI on that spend much more effectively because we're not educating people about who theScore is and what theScore Bet is. People know theScore here more so than any other sports media brand in the market.

[Operator]

Your next question is from Adhir Kadve of Eight Capital.

[Adhir Kadve, Research Analyst]

Can you maybe just talk about like additional state rollouts? I know Illinois with the Caesars partnership was something that was slated for H2. Is that kind of still in line? Or are expected to go live around -- in that time frame?

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

Yes. So thanks, Adhir, and glad to have you on the call. We are currently pursuing licensing in Illinois in partnership with Caesars in front of the iGB. I wouldn't want to put down an exact timeline on when that's going to be. We're working through that process now, though.

[Adhir Kadve, Research Analyst]

Okay. Great. Then just maybe kind of looking at the broader market on the regulatory side. I know there's been some movement with several more states kind of legalizing over the last couple of months. Can you guys talk about some of the market access agreements or some of the initiatives when it comes around the additional market access and other things you guys are working on?

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

Listen, I can't get into details on confidential discussions that are ongoing on that front. I mean it is -- it's been reported publicly that we've applied for a license in Virginia and also Tennessee. Maryland is an open licensing jurisdiction that's organizing for -- organizing to get their market open in short order. We have said publicly that we anticipate that over the course of the next 12 months, we anticipate our footprint from a launch state perspective more than doubling. And so based on kind of what we've got line of sight into, we believe we're well positioned to execute on that.

[Operator]

Your next question is from David McFadgen of Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions. So just looking at the handle. So $73 million in Q3, and Q2 was $81.6 million. Is this just a function of following the sports schedule? Or was there some other factors that caused it to dip sequentially?

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

No. I think, David, kind of consistent with my previous comment that it's just kind of the sequential sports calendar.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then, Alvin, just on the $5 million of onetime costs in nature for Q3, is that primarily all related to our U.S. IPO? Or are there some other factors at play there?

[Alvin Lobo, Chief Financial Officer]

Yes, primarily all related to the U.S. IPO, correct.

[David John McFadgen, Director of Institutional Equity Research]

Okay. So feedback that when you took that out, then the EBITDA loss instead of $21.1 million, would be $16 million, correct?

[Alvin Lobo, Chief Financial Officer]

Yes.

[David John McFadgen, Director of Institutional Equity Research]

Yes. Okay. And then I just want to look at your monthly active users of 3.7 million in the quarter. It typically bounced around sort of between that say, high 3s, 3.7 million up to 4.2 million. I'm just wondering, do you think you can take it back up to over 4 million and actually grow it from here? Or do you think, look, this is just where it's going to sit and this is where it's going to be, but with this level of user base, we can still convert a lot of people to bet on sports?

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

Well, I think the second part of the -- I'll take the second part first about do we think we can convert a lot of users to bet on sports? And the answer is yes. And I think with respect to the first part about it, you're correct that kind of bounces around in that 3.7 million, 3.8 million, low 4s range. And we do believe very strongly that we have the capability to grow that user base. A lot of the things we think about from a product perspective on our media app and what we can do to continue to grow users and engagement, we think should translate into user growth steadily over time.

[Operator]

And this concludes today's conference call. Thank you for participating. You may now disconnect.