Overactive Media Corp

XTSX:OAM

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone, and welcome to OverActive Media's Third Quarter Conference Call. [Operator Instructions] This 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 introductions and reading the safe harbor statement. Please go ahead.

[Babak Pedram, executive]

Thank you very much, and good morning, everyone. Welcome to OverActive Media's Third 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, Chief Executive Officer; and Rikesh Shah, Chief Financial Officer. Today, we'll review the highlights and financial results for the third quarter 2023 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 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 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 supplement not a substitute for GAAP financial measures. Reconciliations between the two 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 Adam Adamou, Chief Executive Officer of OverActive Media. Adam, please go ahead.

[Adam Adamou, executive]

Thank you, Babak. Greetings, everyone, and welcome to today's conference call. Let me start by thanking the Board for the opportunity to lead OverActive as CEO. I am eager to steer our focus towards growth and innovation in 2024 and beyond.

The third quarter saw groundbreaking progress. Revenue growth was strong at 56% sequentially and 3.5% year-over-year. We have accomplished this while reducing team and business costs annually and sequentially. I'm immensely proud to report that we generated almost $800,000 in adjusted EBITDA in the quarter, our first quarter of operating profitability as a public company. We have been executing a well-thought-out plan to lead us toward a successful, scalable and sustainable business model, and we are proud to report this as tangible evidence of our progress.

Our cash at the end of the second quarter was $9.7 million, up from $9.3 million in the previous quarter. A solid balance sheet with sufficient working capital puts us in a unique position relative to many of our peers and we are getting stronger. At the end of the quarter, we reached an agreement with the Overwatch League to eliminate over $8 million in current liabilities, which will be reflected in the fourth quarter. We will also receive a payment from the Overwatch League of an additional $7 million expected in the fourth quarter, which will, with everything else being equal, increase our cash position to over $16 million. We are very satisfied with how these discussions were resolved and look forward to similar discussions with our other league partners with optimism.

We are in an enviable position with cash, gross and positive EBITDA in the quarter. Our ability to self-fund gives us a tremendous competitive edge, allowing us to take advantage of opportunities that may arise from industry consolidation while unlocking organic growth initiatives. Our strategic patience is serving us well.

Moving on to our operational highlights. We have identified further areas to reduce costs without impacting the quality of our overall experience for fans or sponsors or sacrificing our growth. These changes are yielding incremental benefits in the quarter and into the future.

Turning to our team. In Europe, our MAD Lions, League of Legends team, competed in the LEC 2023 final, placing third in front of a live audience of over 10,000. The team also qualified for the League of Legends World Championship for a record fifth consecutive year. The World Championship just wrapped up this weekend with record viewership in every playoff round, including the grand final. While the official numbers are not yet in, on an unofficial basis, we can say with confidence that this event realizes the highest peak viewership of any eSports event and impressive results that surpassed even the highs of the COVID era.

Our Call of Duty team, the Toronto Ultra is in market gearing up for the 2024 Call of Duty League season, which launches on December 8. In July, we signed Call of Duty Champion and All-Star team member, Dylan "Envoy" Hannon to our 2024 roster. We have finished as runners up in the CDL championship twice out of the last 3 years. And we are hopeful that this season, we can break through with the World Championship title. We also announced that OverActive will host the Call of Duty League major 3 tournament in Toronto from May 16 to 19, 2024. We're thrilled to host this event for the third consecutive year.

We wrapped up the 2023 Overwatch League season by hosting the Overwatch League Grand Finals in Toronto from September 28 to October 1. The first championship event of its kind in Canada closed out the season and the current league format in front of a sold-out crowd. We expect to be a key force in competitive overwatch in 2024 and beyond with more information coming soon.

Live events will always be an important complement to our business. We are eager to host more events here in Toronto and in our markets in Spain, where the demand is incredibly strong. We are also making progress on our venue projects. We expect more information on that in the first quarter of 2024.

Finally, let me congratulate our staff on exceeding expectations with everything we touch. In the last 3 months, we have delivered an impactful grand final to the Overwatch League, to our fans and partners in Toronto. We brought home a gold at the 2023 sponsorship marketing awards, our second in 3 years. We unleashed an exclusive first-of-its-kind loyalty program for MAD Lions, which is already exceeding expectations for membership. We restructured League partnership agreements to vastly improve our cash position, and we reduced cost and overhead while on track to achieve record revenue through fully organic growth and reached operating profitability for the first time as a public company. This is a testament to the quality of this team and your dedication to our values. Thank you. My appreciation for your hard work is boundless.

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

[Rikesh Shah, executive]

Thank you, Adam, and good morning, everyone. Today, I'll briefly review our third quarter financial results. Please note that 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 3-month period ended September 30, 2023, we reported total revenue of $6 million and an adjusted EBITDA increase of $1.2 million to positive $0.8 million versus a loss in the prior quarter or point in the comparative prior quarter for $0.4 million. Our Q3 results are further strengthened by decisive actions that we have we have taken to reduce operating expenses by $1.9 million year-to-date, and we expect the savings trend to continue in the remaining quarter. Further, as Adam noted, our cash position as of quarter ended September 30, 2023, is $9.7 million. 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 up the call for questions. Operator, please go ahead.

[Operator]

[Operator Instructions] And your first question comes from the line of Towaki Dojima from TD Securities.

[Towaki Dojima, analyst]

Congratulations on the promotions up. So let's start with the understanding that the current iteration of Overwatch is now nonexistent anymore. It sounds like based on your commentary that the competitive scene will continue. But there's no announcement on that, and I don't think you can provide any more detail. But when we think about -- what happens on the revenue call, let's say, the sponsorship agreement that you had for the Overwatch teams and lead revenue share how does that look going forward or at least for 2024, while the competitive scene in flux? And are there any cost reductions that can offset any potential revenue reductions from the OWL?

[Adam Adamou, executive]

Well, look, I don't want to get into the specifics of the contract and partnership discussions and so forth here. But as we've mentioned, we believe Overwatch eSports will be stronger than ever next year and then into the future beyond that. So from our perspective, the name of the League may have changed, but we believe that the competitive scene and viewership will be improved year-over-year based on what we have seen and have been informed so far. So from our perspective, we're in a position where we will be able to deliver on the assets to our partners and to our fans. And we also be very happy to provide an additional live event in overwatching in 2024.

So I see this as a bit of a transition. But the name of the League is not is not the competitive scene, and we believe that the competitive scene will be improved as a result of this change.

[Towaki Dojima, analyst]

All right, that makes sense. So it's fair to assume that Overwatch revenues aren't just going to follow-up, quip and evaporate. It's a fair assumption that some sort of ecosystem will exist in where both sponsors can exist and maybe a lead revenue share, but it's not going to go to 0 in '24?

[Adam Adamou, executive]

That's not my expectation. No, I expect that the -- I expect that in '24 we are going to have a better experience than in '23. That's what I can tell you. And we'll see how that turns out. But my view is that the current version of the Overwatch lead had to be terminated. Okay? There were things that were holding us back in the TPA that required -- were very difficult to change. And so by eliminating the TPA, we've basically opened up the ecosystem now to changes that. But I think can improve the experience for both fans and players and partners and teams.

So if I sound excited about it is because I am. And it's not yet completed or announced, but those are my expectations at this point.

[Towaki Dojima, analyst]

Good to hear. And so I guess kind of related to that, based on the notes on the statements, I think even after the reduction in franchise payables related to the Overwatch, I think in the next year, there's around $7 million to $8 million of franchise payables to be paid. You can clearly cover that with your cash on hand, especially with the $7 million or $8 million coming in, in Q4. But I guess are there -- have there been any conversations related to the CDL or in League of Legends where a similar, call it, a delay, an extinguishment of franchise fees? Have those discussions been had, I guess, is the question? I know you can't comment on specifics. Or is it fair to assume that, that whatever is in the next 12 months are going to cash out the door 100%?

[Adam Adamou, executive]

Sure. Look, I don't -- these are forward-looking statements. So these are my opinion, okay? And this is -- you can take this as our position more than as any kind of agreement that has been in place, but we do not expect to make any payment on any of those franchises in 2024. So we -- they are there and they're reported. And of course, there's the standards and the obligations and so forth. But my expectation is that we will not have to make it.

[Towaki Dojima, analyst]

And that's based on the conversations you've had with the game developers and the League operator?

[Rikesh Shah, executive]

So it's Rikesh. We've just had a strong history of deferring and extinguishing payments over the past years. And I think our expectation is that we -- that trend is going to continue.

[Towaki Dojima, analyst]

Got it. And I guess a little bit more fun question, broad level, had a new CEO in place. I guess there's been a few changes to leadership and senior management. Can you just comment kind of on your mid- to long-term outlook. Again, -- have there been any material shift in strategy? Or is it no change in the strategy, kind of keep your head down and do what you've been doing? Or is there other places of focus that you want to shift in the coming years?

[Adam Adamou, executive]

Well, look, we are -- we've been doing this, I guess, the current iteration of esports for 5 years. And certainly, five years is a long time in fast moving industry. And so there are pivots that take place, and we are pivoting kind of as required.

With respect to reductions and so forth, they're never easy. And anybody that is -- has left or is no longer with us, is -- they're not -- they're missed. The rest of us are picking up the slack and so it makes it harder for the people that stay. But the industry, I think, as a whole needs to rightsize. And the expenses, I would say, industry-wide were higher than what was sustainable. Maybe the expectations were too high as well. So I think we rightsized. I think the restructuring process is generally complete for us. I think we're kind of at the right cost base here. And the focus going forward is to drive revenue. You can't grow a business by just cutting costs, right? And while we've done that over the course of the year, we are on track to also hit record revenue. And it hasn't been the easiest macro environment, but the fact that we can grow while cutting is, I think, a great tribute to the team and everything that we've done.

With respect to strategic kind of pivots and shifts, there's things that are ongoing. I think I'll leave that maybe for the next conference call, but we do see some kind of changes, and we also see many opportunities that have evolved over the period of time that we've been looking out there. And being in a position where we have probably among the strongest balance sheet of companies in our sector positions us, I think, very well.

[Towaki Dojima, analyst]

Makes sense. And sorry, just to tack on one more. You mentioned your -- the venue project, which hasn't come up in a little while. Understanding that you said you're going to give more information in the future -- is [it fair] to expected that there won't be a huge cash outlay in order to fund that new project, and there will be some sort of agreement with a third party that minimizes the cash needs to fund that project?

[Adam Adamou, executive]

Well, if I was to answer that, then I wouldn't have said that there's going to be more information in the first quarter. The projects, we're still excited about the project. We're working on it. These things take time. And like I said, we believe it is -- we believe there's a place for that in this market. We believe there's a big opportunity in this market, and we're excited to provide more information in the first quarter.

[Towaki Dojima, analyst]

Fair enough, then we'll be waiting patiently.

[Operator]

And I show no further questions in the queue. At this time, I'd like to turn the call over to Mr. Adam Adamou, Chief Executive Officer, for closing remarks.

[Adam Adamou, executive]

Okay. Thank you all for attending and listening. And we're very excited about our prospects, our future and our presence. So looking forward to providing our next update at the end of the fiscal year. Thank you.

[Operator]

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