Overactive Media Corp

XTSX:OAM

Earnings Call Transcript 2022-Q3

[Operator]

Good day, everyone. Welcome to OverActive Media's Third Quarter 2022 Results Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow management's remarks. The 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 and 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 instructions and the reading of the safe harbor statement. Please go ahead, sir.

[Babak Pedram, executive]

Thank you, Michelle, and good morning, everyone. Welcome to OverActive Media's Third Quarter 2022 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 Chris Overholt, OverActive Media's President and Chief Executive Officer; and Rikesh Shah, Chief Financial Officer. Today, we'll review the highlights and financial results for the third quarter 2022 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 2022 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 beliefs, and are based on information currently available to management and is 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 as a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our MD&A and which is available on sedar.com and our website. At this time, it is my pleasure to introduce Chris Overholt, President and CEO of OverActive Media. Chris, please go ahead.

[Chris Overholt, executive]

Thanks, Bobby, and good morning, everyone. I appreciate you taking the time to join us today. We share our third quarter 2022 earnings report. As we speak to you this morning, I can say with confidence that we're executing our plan for the fiscal year 2022 despite the challenging macroeconomic conditions. As of September 30, '22, the company had $17.7 million or $0.22 per share in cash and believes it has sufficient funds to operate as a target achieving a sustainable and profitable business. As a result, it does not require additional access to capital in the near term. We feel fortunate to continue to have strong balance sheet with sufficient working capital to fund our operations, allowing our senior leadership team to focus on achieving key milestones and building long-term value for our shareholders. Our sponsorship business remains strong. Our leads are underway, and our franchise teams progressed nicely this season. The value opportunity around the business that we are building is showcased through both our results and by the year-over-year growth of our industry and the third-party validation of the tremendous growth in our franchise assets. I'd like to start by touching on some notable success that the publishers we're partnered with. In October, Activision Blizzard launched new game titles in both Overwatch and Call of Duty. Following the launch of Overwatch 2 on October 4, Activision Blizzard confirmed the new game reached 25 million players in the first 10 days and a daily player base that nearly tripled the previous daily player peak from the original Overwatch. On October 28, the company launched a highly anticipated new Call of Duty game Modern Warfare 2, had the highest earning opening weekend in Call of Duty history, generating USD 800 million in sell-through within the first 3 days. The latest figures have it surpassing USD 1 billion in sales in less than 2 weeks. The Ride Games League of Legends 2022 World Championship Grand Final on November 15, 5 absolutely smashed their previous peak viewership record. According to esports charts, more than 5.1 million fans turned in across multiple streaming platforms and channels. Twitt drew the most traffic with 2.8 million viewers on Rigames official accounts. It's worth noting that these metrics do not include Chinese viewers. The opening ceremony included American Wrapper and President of League of Legends, Liasc and Mr. Beast, one of the most popular YouTubes in the world. This was also the first time Ridgames allowed community streamers to cover the finals. The previous record for the event was 4 million viewers during the last year's final. These results reinforce the fan base and potential reach around these games and the leagues that we're invested in.With regard to our teams business, we remain focused on talent identification and coach development as an organization, our goal is to build and deliver consistently top-performing teams that compete at the highest levels. Our teams have wrapped up their 2022 seasons with each of OverActive's professional teams qualifying for the World Championships in their respective leagues. We're using the off-season to strategize roster builds and team development in preparation for next year. The Call of Duty League season kicks off earlier this year and Toronto Altra will feature a refreshed roster. We're looking forward to being a competitive season across all of our teams. It's also worth highlighting that the continued growth in enterprise value we're seeing in our franchise assets. As I spoke to last quarter, sales of League of Legends European Championship or LS franchises illustrate a positive trend. Esports organization, Misfit Gaming Group sold its League Legends European Championship franchise, slots to Team Heretic at a reported value of CAD 55 million. BBS acquired an LDC franchise slot from Shake for reported CAD 44 million in 2021. OverActive acquired an LEC franchise in 2019 that operates under Mad Lions brand for CAD 12 million. As Kesh will share in more detail in a moment, our business continues to see positive momentum coming out of Q3. Our record revenue growth of 23% helps position the company well for the remainder of the year. This growth was driven primarily by our strategic marketing sponsorship business and the live events that we hosted this summer. In particular, the long-term recurring revenues by our previously announced partnership and partnership renewals with Zilica, Bell and TD Bank Group and the Overwatch League event we hosted in September. When we connected last quarter, we were heading into our -- into hosting our second major esports at the end of the year, Canada's first ever Overwatch League tournament. The Toronto defined summer showdown Toronto or tournament powered by Bell took place from September 8 to 11 at Matamathletic center, are trained improved the power of Home stand Energy, earning their best finish in the team's history in front of hometown crowd. The team secured third place playing through to the final day of the 4-day event. A highly anticipated event allowed us to connect and engage with the Overwatch community across both the summer Showdown and major 3 tournaments held this year, approximately 12,000 fans attended to the experience best on best of some of the greatest professional sport players around the globe. The success of this year's events confirm the demand from new existing fans for in-person events, and this community shows no signs of slowing down. We confirm that once again, Toronto Altra will welcome professional Call of Duty to Toronto for a world-class experience at major 5 from May 25 to 28 in 2023. The tournament will continue to raise the bar in the Esports industry, giving the next generation of fans an unparalleled live experience with a few surprises along the way. And so our momentum continues. We remain keenly focused on our vision for building a sports media and entertainment company for today's generation of fans. Thank you once again for joining us today. At this time, I'll pass the call on to Rikesh, who will provide a more detailed review of our financial results.

[Rikesh Shah, executive]

Thank you, Chris, and good morning, everyone. Today, I'll review our third quarter 2022 financial results. Please note the financial information we discuss today is prepared in accordance with IFRS, International Financial Reporting Standards and is in Canadian dollars unless otherwise indicated. For the third quarter of 2022, we reported total revenues of $5.8 million, a 6% year-over-year increase driven organically by a 23% increase in business operations revenue, that's a result of higher sponsorships. In addition, for the third quarter of 2022, we reported adjusted EBITDA loss of approximately $0.4 million compared to a loss last year this time of $0.3 million. The quarter includes hosting our Overwatch League Summer Show down live event versus last year where we did not host events due to COVID-19. For the 9 months ending September 30, 2022, we reported total revenue of $10.2 million, a 15% year-over-year increase driven primarily again by higher sponsorship revenue.In addition, for the 9 months ended September 30, 2022, we reported adjusted EBITDA loss of $6.4 million versus approximately $4.6 million during the compared to the prior year period. The operating costs are attributable again to hosting live events. Our year-to-date results highlight our ability to generate long-term recurring revenues, resulting in business operations revenue increasing by 37%, driven by, again, higher sponsorship revenues. And additionally, our cash position allows us to fund operations and continue to provide flexibility to pursue targeted strategic acquisitions and opportunities in line with our long-term goals that increase our industry presence and capabilities as well as enhance our growth trajectory. That concludes our prepared remarks. And now I'd like to open the call for questions. Operator, please go ahead.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] One moment, please, for your first question. The first question comes from Dave McFadgen of Cormark Securities.

[David McFadgen, analyst]

So the question really just revolves around what you talked about in terms of a difficult macroeconomic environment. It looks like we're probably going into a recession here. So I was just wondering, how easy is it for your sponsors to say, pull back on spending if the macro environment gets tough? I'm just wondering how much they're locked in.

[Chris Overholt, executive]

Dave, obviously, I'm not able to comment on the subtlety or confidentiality of our contracts with each of our partners. I can tell you that Tyler's Group has been working consistently from the beginning to develop long-term strategic partnerships rather than to have transactional relationship with brands. Now in some cases, we do testing with brands as a matter of getting them started in the space, and that was actually true of some of our biggest partners in the early years. They were then later converted to multiyear deals. But on balance, most of our business is locked in for 2 or 3 years or longer. And so again, we can speak with confidence around the growth and development of our sponsorship number.

[David McFadgen, analyst]

So just on -- I guess someone enters into a 2 or 3-year deal. They've committed these amounts that they're going to spend for the next 2, 3 years, irrespective of the economic environment. Is that the way to understand it?

[Chris Overholt, executive]

Again, we have a contract with those partners with that hypothetical partner over that period of time. We have an obligation to provide value in exchange for these paid. So yes, each party has an obligation to itself in that contract moment.

[David McFadgen, analyst]

And then just on the franchise fees, as we -- obviously, the team winning is very difficult to predict. But just on the franchise fees, I was wondering if you could comment on the outlook for those if we're going into a more difficult economic event. Has that changed at all or is that pretty locked in as well?

[Chris Overholt, executive]

Yes. I mean our obligations are to Activision Blizzard contractual to League of Legends and dry games contractual. But I think what I know you and we have talked about, David, in the past, is the great flexibility that has come to our business as a result of these great relationships with the biggest publishers in the world. Again, we take confidence in our relationship with Ride games and with Activision Blizzard for exactly that reason, as we've said from the beginning of the company. Adam can certainly speak to the conversation around the leagues and so on. But again, we've seen consistent great flexibility in these difficult times and enjoy a continued great partnership with both of those publishers. So Adam, I don't know if you want to comment further on that in particular.

[Operator]

Adam's not on the line.

[Chris Overholt, executive]

Sorry, David, I'm in Vancouver today, so I'm not able to see that Adam's not on the line. I apologize.

[Operator]

The next question comes from Towaki Dojima from TD Securities.

[Towaki Dojima, analyst]

Just following up on the first question on the first question on sponsorship. So if you look at business operations revenue growth, it slowed to 23% year-over-year. And last quarter was 52%, Q1 was 40%. And I had thought that given new partnerships, you had Ziluca, you had Novus and then the Bell renewal, the TD renewal in '22. And on top of that, with a tailwind from live events revenue, I thought that there would be a little bit more growth in that revenue line item. So kind of going back to that topic, maybe if there's no way for the sponsorship to back out. Are there -- were there a material number of short-term kind of the trial type sponsorship partnerships in '21 that maybe didn't get renewed? Or is there another reason kind of for that slowdown?

[Chris Overholt, executive]

I'll provide a little detail and Rik, if I miss anything, you can highlight it for me. The Bell deal and the Bell renewal that we announced actually was for 2023 forward. So the deal was solidified and contracted. But we were heading -- we always set our deals up to wake so that we've got a long tail and a good advanced window to renew them, then we work to get the contracts secured for the future, then we announce them because we're obliged to, of course. But the future revenue from the Bell deal starts in 2023. There's a little bit of money that will be attached to Call of Duty given it's early start this year, but on balance, most of that deal and that revenue doesn't show up until then. We did have a couple of trial deals that actually shows up in this quarter -- in this quarter's numbers. So we did a deal in Q4 last year. Again, I wouldn't be obliged to talk about -- sorry, can those in the room that overhead keep us on mute because it's echoing. Again, we did a Q4 deal or Q3 deal last year with Cray Frozen Foods that was a test deal. It was a significant test deal around Call of Duty playoffs, again, the particulars of which show up in the numbers. So again, it is fluid year-over-year quarter-over-quarter in that way, David, we're always looking to test. We just did another -- sorry, I said David, Towaki. We just did another test recently with a new brand that had just joined us. We're always looking for those opportunities around moments and beats across the calendar. But on balance, again, maybe the disappointment that you're expressing in our growth numbers around those big deals is in part because that Bellvue won't show up until next year.

[Towaki Dojima, analyst]

And kind of following up on the renewals. I know you can't comment on particulars, but directionally speaking, is it fair to assume that these are step up in relative to the prior contract that they've had?

[Chris Overholt, executive]

It certainly is.

[Towaki Dojima, analyst]

And switching to team revenues. It was relatively flat despite, I think, nonrecurring price money of what million, a little $1.3 million, I think, in Q3 of '21. And so is it fair to say that basically the entire shortfall was covered by increases in league revenue share? And were there any timing impact on that? Or was it just -- there was a higher revenue from leaser?

[Rikesh Shah, executive]

So there is seasonality to the way we recognize that lead revenue, and we do it on season. And in this case and in this year, the Call of Duty League did end in August, and we had line of sight to what that lead revenue was and we did recognize it in the third quarter. So there is a timing impact because of that quarter-over-quarter.

[Towaki Dojima, analyst]

So does that mean relatively speaking relative to Q4 '21, some of that gets pulled forward on a year-over-year basis?

[Rikesh Shah, executive]

Yes, that's right.

[Operator]

Next question comes from David McFadgen of Cormark Securities.

[David McFadgen, analyst]

I just thought I'd squeeze in a follow-up. I was wondering, can you guys give us an update on the Valorant team that you guys starting?

[Chris Overholt, executive]

Yes, sure. We -- Ryan has been through its process. Valorant, as you may know, David, it sounds like you've been following. Valorant is setting up again as a reminder in a couple of different tiers. One is in I'll call it, a hybrid franchise model that Ryan had proposed. We looked pretty hard at that. And at this time, couldn't really make sense of it in a collection of ways, right, have their own process for selection as well. So at this moment, we're not expecting to be involved in the Valorant ecosystem as we see it today. We are continuing to look at the game. Certainly, as we've noted before, it is the fast-growing game, and we'll watch the Valorant championship series kind of take shape this year, but we're not quite there yet. And we're going to keep our eyes on it, but on balance, we're not ready to enter the Valorant space.

[Operator]

I show no further questions in the queue. At this time, I'd like to turn the call over to Mr. Chris Overholt, President and CEO, for closing remarks.

[Chris Overholt, executive]

Thanks, Michele. Sorry, just getting to the end of my script here. I'm working off my computer today. But thanks, everybody. We're -- again, we continue to be really positive with the business we're building, the core fundamentals we have in place around this. We've seen quite a bit of industry change. I think, in the last 6 months, I think it's fair to say the industry is again meeting the challenging headwinds of the economy. And I think OverActive Media is positioned quite well for the reasons we've highlighted over the years. We've got a core business here that is substantial and scalable, we've partnered with the biggest publishers in the world, and again, our confidence remains. So I'll leave it at that, but thanks, everybody, for joining this morning, and of course, happy to speak offline.

[Operator]

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