Overactive Media Corp

XTSX:OAM

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to OverActive Media's Second 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'll now hand the call over to Mr. Babak Pedram, Investor Relations for OverActive Media for introduction and reading the safe harbor statement. Please go ahead, sir.

[Babak Pedram, executive]

Thank you, Joel, and good morning to everyone. Welcome to OverActive Media's Second Quarter 2024 Earnings Conference Call. A copy of the company's earnings press release is available on the IR section of our website at overactimedia.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 second quarter 2024 and recent developments. Unless otherwise specified, all amounts mentioned on today's call are in Canadian dollars. Before we begin, I'll read our cautionary notes 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 as supplements not a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our management discussion and analysis, which is available on sedarplus.ca and our website.

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

[Adam Adamou, executive]

Good morning, everyone. Thank you for joining today's call. We're seeing the benefits of our considered and focused approach to esports in the current quarter. In the second quarter, we saw a 71% increase in revenue relative to the same quarter in 2023 and only a 31% increase in associated operating expenses. Combined with other income, this resulted in a 52% improvement in adjusted earnings. Our progress this year is driven by several key factors. We've leveraged our access to top digital storefronts in games like Call of Duty, VALORANT, Counterstrike 2 and League of Legend.

These platforms not only provide high-quality recurring revenue, but also strengthen our operational leverage. Our expanding fan base has established us as one of the leading esports organizations in terms of viewership and engagement. This prominence attracts both regional and global brand sponsorships and coupled with our digital storefront access positions us to sell digital merchandise associated with our brand to a large and growing audience of fans.

Additionally, our recent acquisitions are enhancing our margins and adding value for our shareholders. These strategic moves have proven beneficial in boosting our financial performance. Our strong partnerships with the leading esports publishers and tournament organizers also gave us a direct influence on the industry's evolution. This quarter is the first to fully reflect our comprehensive approach to esports and I'm proud of what we've accomplished.

Let me highlight some of our key accomplishments. The new long-term agreement with the Call of Duty League, which became effective in April, marked a significant turning point in our business. This agreement eliminated over $35 million in outstanding entry fees and allowed us to realize a $2.7 million cash termination gain. Relative to the same quarter in 2023, our working capital has increased by 57%.

Aside from various deferred tax liabilities, which are payable only against future profitability and given our strong net working capital position, we're virtually debt free. I'm very proud of this accomplishment. During this time, we've acquired 5 businesses and acquired teams in the most important and sought after league. These tremendously valuable assets are essential to our business and a few others have the mix of teams, franchises, brand, engagement and reach that we've assembled.

Our agreement with the Call of Duty League has also opened new revenue opportunities, particularly through digital in-game merchandise and licensed third-party tournaments. On the digital merchandise front, I'm proud to announce that Toronto Ultra leads all Call of Duty League teams in the sale of digital merchandise by units and revenue in 2024. This revenue stream replaces what was previously a minimum guarantee team from the Call of Duty League and provides a strong upside to teams like Toronto Ultra that have a committed global fan base, strong marketing ability and a commitment to hosting annual majors in front of live audiences.

Our percentage share of this revenue stream is set to grow in 2025 and again in 2026. Having successfully finalized agreements with Overwatch 2 in 2023 and Call of Duty in 2024, we're now focused on our discussions with Riot Games to finalize a new model for the League of Legends esports ecosystem. We expect these discussions to be completed by the end of the year, and we'll have more to share soon.

The acquisitions of the KOI assets and Movistar riders in the first quarter played a pivotal role in building our market presence, particularly in Spain and across Europe and in Mexico and Latin America. These acquisitions have expanded our operational capabilities and contributed meaningfully to our financial results in this current quarter. The positive impact of these acquisitions on our revenue and adjusted earnings underscores the impact of our strategic growth initiatives. We believe that these acquisitions will continue to positively impact our return with an even stronger second half of the year.

Additionally, our position in the esports ecosystem was significantly strengthened via our entry into the VALORANT Champion Tour, EMEA and the launch of Movistar KOI into that ecosystem. Our entry is driving both fan engagement and financial returns. This franchise, less than a year into our ownership, is in the top 40% of all teams globally for digital merchandise sales in -- on the VALORANT storefront. We expect this to be a positive long-term driver to our business.

Our Counterstrike 2 team also under the Movistar KOI brand, qualified for the first ever Counterstrike 2 Major in 2024. This provided us with access to digital merchandise sales via the Steam online marketplace, and we saw strong sales in the first 6 months of this year as a result. Our other teams are performing exceptionally well. Toronto Ultra placed third in the Call of Duty League in 2024 after winning Call of Duty Major 1 earlier in the year and placing second in the Call of Duty Toronto Major this summer.

Toronto Defiant, our Overwatch 2 team is virtually undefeated in North America this year and finished second at the Esports World Cup last month. Our League of Legends team, MAD Lions KOI has locked in a top 3 finish on the season and is set to compete in Munich for the LEC Championship and a place in the World Championship later this year.

Congratulations to all of our teams, players and staff for another outstanding year on the competitive season. Beyond the numbers, Q2 2024 was a period of strategic advancements that laid the foundation for sustainable growth. We're thrilled to welcome Neil Duffy as our Chief Commercial Officer for the Americans. Neil's extensive experience in driving commercial success will be instrumental as we expand our footprint across the Americas. We also saw a significant expansion in our strategic partnerships, securing new collaborations with global brands like Monster Energy, Cupra, Mahou and OWO. These partnerships are a testament to the strength of our brand and our ability to attract leading companies to see the value in connecting with our passionate and highly engaged fan base.

OverActive Media stands as the leader in the gaming industry and I'm honored to guide this exceptional organization. We remain committed to delivering value to our shareholders, partners and fans, while shaping the future of the industry through innovation and leadership.

I'll 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 second quarter financial results for 2024. 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 June 30, 2024, we reported total revenues of $6.6 million with the significant increase of 71% compared to the same period last year. And this revenue increase was driven by several factors, including the full quarter contribution from the acquisitions of Movistar Riders and KOI, which closed earlier this year and strong performance from our Movistar KOI team, which is our VALORANT Champions Tour EMEA team, which continues to drive significant fan engagement and viewership.

For the first 6 months of 2024, total revenue was also -- was $10.3 million, and that represents an 88% increase year-to-date compared to the first half of 2023. This growth reflects, again, the positive impact of our strategic acquisitions and the strengthening of our core business operations.

Operating costs for the second quarter were $8.6 million and an increase of approximately 31% compared to the same period in 2023. This increase in cost is primarily due to the onetime integration expenses for the acquisitions and ongoing operational costs for the newly acquired teams. And nonetheless, we continue to manage overall costs to ensure that we're driving efficiencies and supporting revenue growth.

Adjusted EBITDA for the second quarter showed significant improvement with a reduced loss of $1.2 million compared to a loss of $2.5 million in Q2 2023. This represents a 52% improvement year-over-year, driven by strong revenue growth and strategic cost management.

Our cash position as of June 30, 2024, stood at $9.2 million. That ensures that we've the financial flexibility to continue executing our strategy with fiscal discipline. Additionally, as Adam mentioned earlier, we further strengthened our financial position with a $9.8 million gain from the termination of the Call of Duty League franchise obligation. This gain combined with the elimination of $35.2 million in the cash franchise fees, along with a $2.7 million cash infusion from the new long-term agreement with the Call of Duty League provides substantial financial support for our ongoing initiatives.

That concludes our prepared remarks. And I'll bring it back to the operator.

[Operator]

At this time, I'll now turn the call to Adam Adamou, Interim CEO, OverActive Media for closing remarks.

[Adam Adamou, executive]

Thank you all for your continued support. I look forward to our journey ahead. Have a great day.

[Operator]

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