Overactive Media Corp

XTSX:OAM

Earnings Call Transcript 2024-Q1

[Operator]

Good day, everyone and welcome to OverActive Media's First Quarter Conference Call. [Operator Instructions]. This conference call is being recorded and a replay of 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 Babak Pedram, Investor Relations for OverActive Media for introduction and reading of the safe harbor statement. Please go ahead, sir.

[Babak Pedram, executive]

Thank you very much and good morning, everyone. Welcome to OverActive Media's First Quarter 2024 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, Chief Executive Officer; and Rikesh Shah, Chief Financial Officer. Today, we'll review the highlights and financial results for the first quarter 2024 and recent developments. 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 2024 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 reflects management's current beliefs 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 a supplement not as a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our MD&A, which is available on sedarplus.ca and our website.

At this time, it is my pleasure to introduce Mr. Adam Adamou, Chief Executive Officer of OverActive Media. Adam, please go ahead.

[Adam Adamou, executive]

Good morning and buenos dias to everyone. Thank you for joining today's call. Today has begun with tremendous -- sorry, 2024 has begun with tremendous momentum and I want to start by expressing my sincere gratitude to our business and performance teams for their dedication and commitment. Additionally, our heartfelt thanks to our fans and brand partners for an incredible start to the year. We have more fans, more partners and more engagement across the board and at the highest level.

The first quarter of 2024 continues to highlight the transformation of OverActive Media. We achieved record revenues of $3.7 million, a 126% increase compared to the same period last year. This growth is due to several key developments. We completed the acquisitions of KOI and Movistar Riders on March 1, 2024. These acquisitions have expanded our footprint in Spain, EU and Latin America. The integration of these teams has already contributed positively to our revenue and adjusted EBITDA. I note that only 1 month of consolidated post-acquisition results are reflected in our numbers for the quarter, alongside fulsome costing of various acquisition-related onetime costs.

The VALORANT Champions tournament EMEA team, now operating as Movistar KOI, began contributing to our revenue following transfer approval from Riot team. This addition has also enhanced our presence in the competitive VALORANT ecosystem. We also changed the revenue recognition of our league revenue to a straight-line basis, which added $900,000 in the first quarter, reflecting a more accurate representation of our ongoing revenue stream. This change was made as a result of greater certainty of our share of league revenues under the new league partnership model.

We also made several significant strides in the first quarter. As part of our acquisition strategy, we welcomed Gabriel Saenz de Buruaga and Gerard Pique to our Board of Directors. Their expertise and leadership will be invaluable as we continue to grow our global presence. Our MAD Lions KOI League of Legends EMEA Championship match on February 18 became the most watched LEC match since summer 2021 with a peak viewership of 800,816 viewers. This highlights our strong engagement and growing fan base.

We secured the largest financial partnership in our history with Telefonica, extending their support for Movistar Riders for 3 years. Additionally, in North America, we renewed our relationship with Scuf Gaming and signed a new partnership with the emerging lifestyle and gaming brand, Blacklyte. Our teams performed exceptionally well with the Overwatch Champions Series team emerging as champions of Stage 1 and Stage 2 in North America and qualifying for the first Overwatch Major in Dallas.

Toronto Ultra, our Call of Duty League team, won CDL Major 1 in Boston and our Movistar KOI Counterstrike 2 team qualified for the Copenhagen Major. In League of Legends, MAD Lions KOI qualified for the Grand Finals of the Winter Split in the LEC to record viewership. Looking ahead, we are focused on several strategic priorities to drive our long-term growth. First, the long-term agreement with the Call of Duty League effective from April 16, 2024, eliminates over $35 million in outstanding entry fees and adds a termination payment of approximately $2.8 million. This agreement strengthens our financial position and opens new revenue streams, including direct team participation in digital in-game merchandise and opportunities from licensed third-party tournaments. These changes will be reflected in our results for the second quarter ending June 2024. We continue to streamline our operations, aiming to bring our costs in line with our objectives for revenue growth and profitability. This disciplined approach will ensure that we continue the path to profitability while maintaining our competitive edge.

Third, global expansion. The integration of KOI and Movistar Rider demonstrates our commitment to expanding our global footprint. We are leveraging their established presence to enhance our brand and engage more deeply with our audiences across multiple regions. Our focus in 2024 will be on growing our revenues and our brands in EMEA and the Americas and we are currently reviewing various opportunities for expansion of teams and regions.

Finally, we are in advanced discussions with Riot team to finalize a new model for our League of Legends esports ecosystem. This model aims to ensure more predictable revenue streams through enhanced partnerships and innovative in-game digital sales strategy, aligning with our vision for a robust and dynamic esports ecosystem. We expect to have an agreement with Riot Games on this front by the end of 2024. The first quarter of 2024 has been a period of significant progress and achievement for our company. We are well positioned to capitalize on our recent successes and continue driving value for our shareholders and partners. We have a strong balance sheet, strong growth. Costs are in line with expectations and I'm confident in our ability to execute our strategic growth plans and achieve our long-term objectives.

Thank you once again to our dedicated team, partners and shareholders for your continued support. I will now turn the call over to Rikesh Shah, our CFO, to provide more detailed insights into our financial performance.

[Rikesh Shah, executive]

Thank you, Adam and good morning, everyone. Today, I'll briefly 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-month period ended March 31, 2024, we reported total revenue of $3.7 million, a substantial increase of 126% compared to the same period last year. The revenue increase was related to several factors, including the acquisitions of Riders and KOI that closed on March 1, 2024, a positive contribution from Movistar KOI, the VALORANT Champions tournament EMEA team that was transferred to OAM by Riot Games on February 13, 2024. And a change in estimates to record league revenues on a straight-line basis, as certain revenues contain minimum guarantees that can be evenly recorded throughout the period rather than during discrete quarters.

This had a positive $900,000 impact in the first quarter. During the quarter, we further strengthened our financial results by managing our operating expenses effectively. Operating costs for the 3-month period ended March 31, 2024, were $6.2 million, an increase of approximately 16% compared to the same period last year. The increase was primarily due to acquisition-related expenses. However, we focused on lowering costs in our core business, driving efficiencies and supporting revenue growth. Adjusted EBITDA for the same period improved significantly by 51%, reducing the loss to $1.8 million compared to a loss of $3.7 million in the same period last year.

This improvement is mainly due to the increased revenue from our Team Operations segment and effective cost management despite higher operating costs from recent acquisitions. Our cash position as of March 31, 2024, was $10.1 million, providing us with a strong balance sheet to pursue our strategy prudently and with fiscal discipline top of mind. As Adam indicated earlier, we further strengthened our balance sheet in Q2 by eliminating $35.2 million of liabilities in addition to a $2.8 million cash infusion as a result of the new long-term agreement we secured with Call of Duty League.

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

[Operator]

[Operator Instructions] And your first question will be from Towaki Dojima at TD Cowen.

[Towaki Dojima, analyst]

I just wanted to start off with a clarification on the $900,000 you talked about on the straight-line basis. Just wanted to make sure that, that's effectively a pull forward of what used to be recognized in second half that's now being realized evenly across the year?

[Adam Adamou, executive]

Yes, that's correct.

[Towaki Dojima, analyst]

All right. Perfect. And I think in the MD&A, for the first time in a while -- or I guess for the first time, there's a mention of non-franchise teams, which is effectively the other teams that came with the KOI and Movistar acquisitions. Can you kind of outrun through your logic on the difference in strategy between the franchise teams and the non-franchise teams? Is anything different, if there's differences in revenue structure or cost structure or anything along those lines?

[Adam Adamou, executive]

Yes. Great question, Towaki. Our -- the way that we look at the market is through the lens of the primary monetizable assets that we have or own, whether they're franchised or not. And the assets that we have, we look at in terms of 3 primary categories. One is the brands that we are associating with that particular team or asset, whether it's KOI or Ultra or what have you and the impact on improving the brand.

Second is the audience that we can reach. The size of the audience and then the engagement of that audience with that particular brand. So brand audience engaging, it's how we look at the various teams and games that we're involved with. And then to that, we apply the opportunities for selling, activating and performing. Selling is both sponsorship and digital MTX type revenues or marketing guarantees that we get to monetize the particular game.

So when we look at that lens, okay, assets are brands, audience engagement actions are selling, activating performance. We apply that lens to a particular game and then we make a determination whether there's a positive impact to our profitability and growth from being involved in that particular ecosystem, which I understand is a change in the approach that we had before. But we've been doing this for 5 years and I think we understand what the success factors are, whether the game is franchised or not.

[Towaki Dojima, analyst]

Yes, that makes a lot of sense. And I know it's early days but have you seen the success in kind of having brand across all of these games? I know in the past, the focus was more on those franchise gains but there are other gains in the non-franchise that, that there are definitely endemic brands pay attention to. So are you seeing any synergies there in you're selling ability?

[Adam Adamou, executive]

Yes. Yes, we are. And not only just the selling ability but also the digital MCX side of it as well, which is the most scalable part of the business. It's a particular publisher or partner and there's league agreements with the developer in almost every game that we're in, except for maybe the Riot Games. They do provide opportunities for the sale of digital items in the game. And if your brand is strong, you're going to sell more, okay? And that's basically a simple as that calculation is. If your brand is strong and your audience is connected to it and they're very engaged, they're going to buy more skins. And you're also going to have more interest from sponsors and partners.

And what we're finding is that there is generally a benefit to having fewer brands than more brands. And we're reviewing that now with -- internally and with advisers in terms of what optimal branding strategy we can use going forward. But we have seen, again, already the results of that. And one of the best ways to view that is how well are we doing in terms of selling digital items in the game, for the games in which those are available. And what we see is both in Europe and in North America, we're doing exceptionally well in terms of the sale of digital items and skin. And that's a direct consequence of the strong branding in the audience and the engagement we've developed in those markets.

[Towaki Dojima, analyst]

Perfect. And correct me if I'm wrong but that branding is effectively still kind of siloed today and you're working towards unifying that brand sometime this year, correct?

[Adam Adamou, executive]

Yes. We've got too many brands right now and I think it's inefficient. So we've got Movistar KOI. We've got MAD Lions KOI. We've got Toronto Defiant. We've got Toronto Ultra. We got OverActive Media. That's 5 brands, too many, I would say. And that's what we're reviewing to determine how to best consolidate those brands into fewer names.

[Towaki Dojima, analyst]

Makes sense. And sorry to go back to the MTX, the digital in-game sales but was there any of that in this quarter being recognized? Or is that more of a future quarters thing?

[Adam Adamou, executive]

Rikesh?

[Rikesh Shah, executive]

Yes. Sorry, can you say that again, Towaki?

[Towaki Dojima, analyst]

Were there any material amounts of MTX revenues recognized in the quarter?

[Rikesh Shah, executive]

Yes. So there are components within each agreement that has a minimum guarantee on digital goods. So those are reflected in the $900,000 that was mentioned previously. But there was also MTX recorded through our Movistar KOI CS2 team that participated in the Copenhagen Major, which was a significant add.

[Towaki Dojima, analyst]

Awesome. And I guess one larger topic. I think the Esports World Cup is going to be sometime this summer. Correct me if I'm wrong but I think KOI is on that list. And I assume that is the KOI that you guys -- that you have. Are there any associated costs in taking part in the World Cup? And then also what are the returns for those costs?

[Adam Adamou, executive]

We're still reviewing that. I don't want to comment on it just yet until we're ready to comment on it. But most of the cost -- my understanding of the Esports World Cup, are covered by the tournament organizer. Where there would be additional cost would be if we were to enter into new games and so forth. But we're kind of reviewing various things and we're just going to kind of hold off on commenting on that until we're ready.

[Towaki Dojima, analyst]

Got it. And sorry, just to make sure. So effectively, if you wanted to, you can go into playing more of the games that are in the World Cup. You don't register to specific games, KOI is part of the Esports World Cup and you can join as many of those games in that -- in those, I think, 8 weeks?

[Adam Adamou, executive]

Yes. Well, let me just take a step back because I think the messaging has been a little convoluted here. So OverActive Media is in the Esports World Cup, okay? And so again, it's confusing because we've got 5 brands, okay? And so which one do you use in terms of your marketing and so forth, almost by necessity excludes the other team, right? So I would say OverActive Media has been invited into the Esports World Cup. We're reviewing that currently in terms of what that means and the pros and the cons. And so we will make it, just kind of a final determination on that at some point, okay?

So beyond that then, taking a look at our brand, our KOI teams will not be involved in Esports World Cup. First, none of them have qualified including Counterstrike and League of Legends and so forth. So none of the KOI-branded teams will be at the Esports World Cup this year for various reasons, including that none of them have qualified. So you have to qualify and/or be invited regardless of whether you're a member of the partnership program or not. And so there will be no KOI related brands at the Esports World Cup this year.

The teams that may or may not be able to qualify are still in the qualification process but they will likely be the North American-based teams at this point. So they may have an opportunity to qualify at some point, most of those qualifications are made clear and we will make that determination. But as of right now, this day, none of our teams are -- have qualified or are attending the Esports World Cup.

[Operator]

Thank you. And at this time, I would like to turn the call back over to Adam Adamou.

[Adam Adamou, executive]

Okay. Thank you, everybody, for attending the call. 2024 has already proven to be a transformative year for OverActive media and we are very excited about the opportunities that lie ahead. Our strategic acquisitions, strong financial performance and innovative partnerships position us well for continued growth and success. We look forward to keeping you updated on our progress throughout the year. Thank you and have a great day.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today.