Overactive Media Corp

XTSX:OAM

Earnings Call Transcript 2023-Q1

[Operator]

Good day, everyone, and welcome to OverActive Media's first quarter conference call. [Operator Instructions]

This conference call is recorded and a replay for today's call will be available on the Investor Relations section of OverActive Media's website. It will remain posted there for the next 30 days.

I will now hand the call over to Mr. Babak Pedram, Investor Relations for OverActive Media for introductions and the reading of the safe harbor statement. Please go ahead, sir.

[Babak Pedram, executive]

Thank you, Brian, and good morning, everyone. Welcome to OverActive Media's First Quarter 2023 Earnings Conference Call. A copy of the company's earnings press release is available on the Investor Relations section of our website at overactivemedia.com.

With us on today's call are Adam Adamou, OverActive Media's Interim Chief Executive Officer; Alyson Walker, Chief Commercial Officer; and Rikesh Shah, Chief Financial Officer.

Today, we'll review the highlights and the financial results for the first quarter of 2023 as well as recent developments. Please note that unless otherwise specified, all amounts mentioned on today's call are in Canadian dollars. Before we begin, I will read our cautionary note regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements within the meaning of applicable security laws including, among others, statements concerning the company's 2023 objectives, the company's strategy to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Such forward-looking statements reflect management's current belief and are based on information currently available to management and are subject to several significant risks and uncertainties that could cause actual results to differ materially from those anticipated.

Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our MD&A, which is available on sedar.com and our website.

At this time, it is my pleasure to introduce Adam Adamou, Interim CEO of OverActive Media. Adam, please go ahead.

[Adam Adamou, executive]

Thanks, Babak. Greetings, everyone, and welcome to today's conference call. I would like to start off by expressing my confidence in our business and strategy for 2023. We have been executing against a well thought out plan that will lead us toward building a successful, scalable and sustainable business model.

I would like to first address the challenging macro environment within the esports industry. While some face unprecedented pressure due to decreased sponsorship budgets and a lackluster equity market, we feel optimistic about our prospects. That said, we must acknowledge that these headwinds have impacted our short-term performance but we remain focused on addressing them effectively.

Our cash at the end of the first quarter was over $10 million, and I'm proud to report that our financial position is strong and getting stronger. In the second quarter, due to league-related inflows, player transfers, new revenues and advancements, we generated an additional $1.2 million in cash to date. As of May 23, our cash is $11.6 million, which provides a solid foundation to grow and pursue new opportunities. Having a solid balance sheet with sufficient working capital puts us in a unique position compared to many of our peers facing significant challenges due to the current market conditions.

Our ability to self-fund our growth strategies gives us a tremendous competitive edge, allowing us to take advantage of opportunities that may arise from industry consolidation. Additionally, we fully understand the importance of being prudent when managing our finances. Therefore, while we remain committed to investing in growth initiatives, we are monitoring our expenses carefully.

Moving into our operational highlights. I am pleased to share that we made great strides in reducing costs in Q1. By implementing cost-cutting measures, we saved approximately $700,000 relative to the same period in 2022. Moreover, we identified further areas where we could reduce costs without impacting the quality of our overall experience for fans or sponsors. These changes should yield incremental benefit throughout the rest of the year.

Regarding our teams business, our coach-led talent-first system continues to pay rewards for team performance. In Europe, our MAD Lions League of Legends team won the LEC Championship in the spring after placing as a finalist in the winter, along with this came a qualification for the Mid-Season Invitational Championship in London. MAD Lions continues to exceed expectations for viewership through its success, and it ranks at the top of peak and aggregate viewership hours across North America and Europe. At the Mid-Season Invitational last week, MAD Lions emerged with the highest peak viewership across all Western teams of the tournament. That is a remarkable achievement for a brand that was relaunched just 3 years ago.

Our Call of Duty team at Toronto Ultra won the Major III Championship in Arlington, Texas, securing the highest peak viewership in Call of Duty League history, a tournament that saw 5.5 million hours watched over 4 days. Unlike other North American leagues, the Call of Duty League has seen a surge in viewership and growth in its fifth season. Our Overwatch League team, the Toronto Defiant, finished in fourth place at the Pro-AM tournament in March and is now in its fifth season of play in the Overwatch League.

The exclusive-to-YouTube viewership is stronger than we anticipated, and we are building momentum across our channels as the season builds. Across our franchise and nonfranchise teams, we see growth and engagement and viewership. We see market weakness as an opportunity to expand our reach and broaden our fan base, which is what we are doing.

I will now turn it over to Alyson Walker, our Chief Commercial Officer, who will speak about our commercial and business highlights from Q1 and to date.

[Alyson Walker, executive]

Thank you, Adam, and good morning. As Adam highlighted, we remain laser-focused on generating high-margin revenues, driving audience growth and engagement and managing expenses strategically. Through Q1, we worked to finalize a number of new partnerships and renewals, which we announced in early May with AMD, LG UltraGear, Scuf Gaming and Nielsen Sports. Marketing partners continue to be attracted to the opportunity to engage directly and authentically with Gen Z fans in the esports ecosystem.

In terms of audience growth and engagement, high-quality content and strong team performance led to significant milestones. Both MAD Lions and Toronto Ultra topped their respective leagues for peak viewership, as Adam mentioned, driving more than 13.5 million viewership hours in the first quarter. Subsequent to Q1, the just over 3-year-old Toronto Ultra brand surpassed 1 million followers across its channels, an achievement to celebrate for our Call of Duty team brand.

[ OM ] is hosting the Call of Duty Toronto Ultra Major V tournament powered by Bell, starting today through Sunday. The events are tremendous engagement when announced and is expected to be sold out for all 4 tournament days. We are excited to showcase peak esports, again, in Canada to our fans and partners and hope to see you all at the event at Mattamy Athletic Centre this weekend.

Finally, our focus on fiscal responsibility keeps us on budget operationally while continuing to grow and engage our community, develop best-in-class activations and produce high-quality live events for thousands of today's generation of fans. Our teams are performing. Our business is delivering against brand and partner objectives and our organization remains motivated and diligent about achieving our corporate objectives for the remainder of the year.

I will now turn it over to Rikesh Shah, our Chief Financial Officer, to review our first quarter results.

[Rikesh Shah, executive]

Thank you, Adam and Alyson. Good morning, everyone. Today, I'll review our first quarter financial results. Please note that the financial information we discuss today is prepared in accordance with International Financial Reporting Standards and is in Canadian dollars unless otherwise indicated.

For the 3 months ending March 31, 2023, we reported a total revenue of $1.6 million and an adjusted EBITDA loss of $3.7 million versus a loss of $2.1 million in the comparative period. The difference being a nonrecurring player sale for $1.9 million in Q1 of 2022.

That said, our Q1 results are strengthened by the decisive actions that have reduced operating costs for the quarter by $0.7 million, and expect the savings trend to continue in the remaining quarters. Further, as Adam noted, our cash position as of May 23, 2023, is $11.6 million, and that provides us with a strong balance sheet to pursue our strategy prudently and with fiscal discipline top of mind.

That concludes our prepared remarks. I'd like to open the call for questions. Operator, please go ahead.

[Operator]

[Operator Instructions]

First question, we have Towaki Dojima with TD Cowen (sic) [ TD Securities ].

[Towaki Dojima, analyst]

I just want to start out with sponsorship revenues, down year-over-year. And I just wanted to see whether that's more of a timing and revenue recognition-related thing based on the number of gains that have been played to date? Or are you seeing kind of a bleed out of your non-long-term sponsorship partners that are kind of canceling sponsorships?

[Adam Adamou, executive]

Let me start, and I think Alyson can also assist in answering here. I don't think -- we're not seeing a bleed out of non-long-term sponsors, and we continue to see strong engagement. But we do see some reduced spending per transaction. In other words, where somebody might have had a budget to spend a certain amount, they might have a budget in the current environment to spend a lesser amount. And we think that, that is transient. That's not a long-term trend. It's kind of a shorter macro trend that really relates to particularly kind of greater weakness in -- kind of at the end of last year as we were kind of going into the first quarter. So I think those are the macro trends for the sponsorships. I think Alyson can kind of comment on some of the specific trends.

[Alyson Walker, executive]

Yes. I think Adam answered it well. I would say we're having to certainly work hard like every property is for dollars, and to prove ROI. There's no question about that, which means why we're focused on fiscal responsibility on the activation side. I would say that the way we look at things is pipeline conversion. We have a full pipeline of engaging discussions, some further along than others. And so we're still focused on hitting our partnership's target based on pipeline. And the key will be converting what's in the pipeline to finalize deals. So I think that's probably good enough for today.

[Towaki Dojima, analyst]

And if I could just dig into those budgets coming down that you mentioned. I'm assuming these longer-term agreements have a minimum spend, and then the sponsor partners can up their spend if they so choose to.

[Alyson Walker, executive]

Yes, exactly. And we have different opportunities that come along, whether they're live events or different programs that they could also opt into if they weren't part of that, as part of the partnership. We are not reducing spend against our sponsorship. I want to be clear. What we're doing is being responsible about how we spend. So each of our sponsors is certainly receiving the same deep engagement with our fans that they always have.

[Towaki Dojima, analyst]

Got you. Makes sense. And then moving on to lead share revenue. If I recall correctly, last year, CDL lead share hit Q3 based on when the final of CDL Championship, I think it's mid-June. And I'm guessing that it will hit in Q3 again this year, but I just wanted to double -- make sure that none of it kind of comes in a surprise in Q2.

[Adam Adamou, executive]

There's -- again, I won't speak to revenue recognition because how we recognize the revenue, and maybe [ Rick ] can kind of comment on that. I do expect earlier payments for revenue share across some of the leagues. As of right now, I can't comment, but I wouldn't necessarily, at this point, commit to the same cadence as previous years, I would say, kind of the league teams. Across all of the leagues, not just the leagues that we're in but other leagues, teams are suggesting earlier payment would be better. And I think there is some interest in the publisher partners to accommodate that.

[Towaki Dojima, analyst]

Okay. And one higher-level question. I think in your press release, you mentioned that you signed an all-female team in balance. Could you just outline your strategy when it comes to signing and developing players? I think there's a difference in how the economics look relative to, say, buying a seasoned team or a seasoned player as opposed to signing, developing and then seeing where that goes.

[Adam Adamou, executive]

Yes, that's actually at the core of our team strategy, what I refer to as coach-led player first. If you look at the our teams in general, we focus on very strong coaching and then a very strong player development environment for generally younger players that are high on the prospect list that come into our system and then we can develop them through our disciplined system, which includes holistically not only the game itself, but health and mental fitness and just a deeper understanding of the game strategy. So when we look across our teams, for example, the Toronto Ultra team, that won a major and is one of the favorites to win this year, and playing this week in Toronto. Every player on that team came through our system. These are not 3 agents that we signed. And we -- I'm not -- I haven't seen evidence to support the success of super teams. There are teams out there that are spending considerably more than we are spending by acquiring players. In some cases that have gone through our system, and you could see the other income for the same quarter last year, where somebody decided to pay substantially for one of our players. Buying really expensive good players does not make for a good team, and I think we've proven that over and over again. And frankly, it's also more conducive to sustainable spend on our player salaries.

[Towaki Dojima, analyst]

And so just to clarify on that, when you say purchase a player, that is different from signing a player, correct? Like when you purchase a player, there's a cash outlay upfront, while when you sign a layer, you just -- it flows through OpEx, and so that kind of helps out in managing your cash as well.

[Adam Adamou, executive]

Yes. It's kind of similar to the Premier League football than it is to kind of North American sports in a sense that you have players to your systems that are on contract. Typically, for most of our games, I would say we have 3-year contracts with the players. And if -- you can sell a contract or transfer the player to another organization. And typically, that is done in exchange for a cash spend. So you negotiate a price and then you sell that player's contract to another team. We -- throughout our kind of course of our career in OverActive Media, we have generated significantly more from inflows of people buying players from us than we have bought from them. And that's largely a function of the fact that we're very good at developing players.

In terms of the female team, which you mentioned in particular, we think that there is very, very strong potential for female, and potentially even mixed gender teams down the road. Women in gaming have challenges. It's a very young, very male-dominated competitive scene. And women need to feel safe, let's say, in terms of building their strengths and building their talent in a structured system with the same types of resources that we apply to men. So our MAD Lions Laurë is our first female team. I would say it's very early on, but we see that as a tremendous success. It's wonderful to work with these women. They are very focused on improving themselves. They -- sponsors and fans have really taken to them. And as we can see with the recent WNBA match, here in Toronto, there is very, very strong demand, I believe, for women in gaming, and that is a demographic that we are looking at very closely at expanding.

[Operator]

[Operator Instructions] And there are no further questions. I will now turn the call over to Adam.

[Adam Adamou, executive]

Okay. Thanks again for joining us on today's call and for your continued interest in OverActive Media. We look forward to having follow-up conversations with many of you and providing updates regarding our progress.

As we mentioned, the Call of Duty League Major V kicks off today, May 25. Toronto Ultra is on stage at around 3:00 p.m. Eastern Time, going up against the New York Subliners. The event runs through the 28th at the Mattamy Athletic Centre, and I look forward to connecting with many of you there. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.