Overactive Media Corp

XTSX:OAM

Earnings Call Transcript 2022-Q4

[Operator]

Good day, everyone, and welcome to OverActive Media's Fourth Quarter and Year-End 2022 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 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]

Thanks, Laura, and good morning, everyone. Welcome to OverActive Media's Fourth Quarter and Year-end 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 Adam Adamou, OverActive Interim Chief Executive Officer; Alyson Walker, Chief Commercial Officer; and Rikesh Shah, Chief Financial Officer. Today, we'll review the highlights and financial results for the fourth quarter and year-end 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 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 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 a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our management discussion and analysis, 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, and good morning, everyone. I appreciate you joining us today as we share our fourth quarter and year-end 2022 earnings report. First, I would like to thank our outgoing CEO, Chris Overholt. Chris was the first-ever overactive media employee and a key component of our growth and success of the company. Thank you, Chris.

I took on the role of interim CEO during a difficult time in the economy for small and large companies alike. My first priority is to ensure the long-term sustainability of our business. On this front, in the first 30 days of the transition, we initiated an operations review and instituted significant cost reductions. We effected a restructuring to better align our costs with our resources in an environment where access to new capital is scarce. These moves and others to come will expand our runway and provide a path to sustainability with the current capital and resources that we have on hand. This is a key focus and we will monitor it closely and provide updates to investors quarterly.

When we founded overactive, we set out on an esports journey driven by a few fundamental beliefs, that esports is at the crux of gaming, media and entertainment for today's generation of fans, that owning franchise league assets in partnership with the world's best game developers will deliver a growing stream of recurring revenue to our business and that brands would support our value proposition based on the attractive demographics of our fans.

These beliefs have come or are coming to fruition. Our fans are passionate, engaged and sizable. Our league partners are invested and the franchise model delivers on the promise of multigenerational leagues driving dependable and recurring revenue streams to teams. Our business operations revenue continues to hit new highs and the return to live events has fueled the interest and passion of our fan communities. Not everything is developed according to our thesis. Our belief that as with traditional sports, media rights paid for by broadcasters would fuel the rapid monetization of the industry is not developing as we expected.

The digital world has evolved during the pandemic and the balance between the oversized market power of the incumbent platform providers relative to those distributing content on their platforms is skewed strongly in favor of the former.

Our leagues and league partners are left to choose between media monetization connected to a significantly smaller audience reach or greater reach without media rights monetization. Neither is optimal for the ecosystem. And this challenge is yet to be figured out. Because of this uncertainty, we have decided to reduce the carrying value of some of our franchise assets. While we believe the market value of our assets is substantial, the valuation models used under our accounting standards focused primarily on a discounted cash flow model that is negatively affected by higher interest rates, economic uncertainty and the perceived risks related to these cash flows.

Let me be clear. The core of our competitive advantage is the foundational role that our relationship with the world's leading publishers and game developers has on our ability to adapt. Because of these relationships, we are uniquely positioned to revisit these assumptions and to fix what's not working. We can work directly with our publisher partners to refine the monetization model to seek new sources of revenue from within the broader gaming ecosystem and to develop a revised model that is endemic to our industry and plays to our strengths as publishers developers, teams, players and fans.

This is only possible because we are directly partnered with the owners and publishers of the intellectual property that backs our esports leagues. We have the means and drive to ensure their esports ecosystem succeed. As I speak to you this morning, I can confidently say that we are executing our plan, that our business is strong, that our teams are successful and that the excitement is real.

As of December 31, 2022, we had $13.6 million in net working capital, a decline of just over $6 million relative to last year at this time. As of April '19, 2023, our financial resources are roughly at the same level as at the end of December, almost 4 months ago. This results from positive momentum in our operations, management of our working capital and the positive impact our cost reductions have on our cash burn. We feel fortunate to have a 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 leagues are underway, and our franchise teams are progressing very nicely.

With regards to our teams business, we remain focused on talent identification, player development and a coach-led system. As an organization, our goal is to build and deliver consistently top-performing teams that compete at the highest level. So far, in 2023, our MAD Lions team and League of Legends has qualified for the championship finals twice winning the LEC Spring Championship just 2 days ago. MAD Lions logged in 7.8 million hours watched by our audience of fans in just 2 months. With yesterday's victory, I'm convinced they are the most watched esports team in the Western world to date in 2023. Our Call of Duty team the Toronto Ultra won the Major III Championship in Arlington, Texas, and we'll be hosting the Major V Championship in Toronto in May in front of a sold-out crowd. With the return to a multi-platform content distribution system, the Call of Duty League viewership has doubled this season. It is now positioned to become the most prominent esports league in North America by viewership.

Our Overwatch League team the Toronto Defiant finished in fourth place at the Pro-Am tournament in March and will launch our fifth season this week. The Overwatch League will remain on an exclusive platform in 2023, where it found success in 2022 with the highest ever viewership for a grand final. We also launched our first all-female VALORANT team under the MAD Lions brand in Spain and the North American VALORANT League team under the same name.

I will now turn it over to Alyson Walker, our Chief Commercial Officer, who will speak about our commercial and business partnerships, along with some of our plans for 2023 and beyond. Alyson?

[Alyson Walker, executive]

Thank you, Adam, and good morning. As Adam highlighted, our business successes were key growth indicators for OverActive Media in 2022 from signing and renewing foundational partnerships to year-over-year audience growth and by all accounts, some of the highest quality and attended live events in the Call of Duty and Overwatch leagues in 2022. In the first half of 2022, we signed 3 critical multiyear, multimillion dollar partnerships with our founding partner, Bell, TD Bank Group and metaverse partner Zilliqa. In addition to our other partnerships in North America and Europe, these partnerships highlight our focus on creating long-term value for partners through our robust audience engagement strategy, unique activations and strong account management.

As a result, we continue to maintain top-ranked positions in our franchise leagues with respect to partnership revenue, MTX revenue and audience engagement. From an audience growth perspective, our focus on creating high-quality, channel-specific always on content and our growing roster of influencers and creators resulted in a 43% year-over-year increase from 2021 to 2022 driven in part by significant growth on TikTok in the promotion and execution of 2 major live events in Toronto in 2022. From a live event perspective, our Toronto Ultra Call of Duty Major hosted last year in June and our Toronto Defiant Summer Showdown hosted last year in September, both at Mattamy Athletic Centre, the -- the former home of Maple Leaf Gardens, drove sold out weekend crowds, top performances by our home teams, significant merchandise sales and massive engagement across social platforms and were evidence that our fans are loud, proud and eager for more.

Alongside our business growth, we focused on fiscal responsibility and expense management with the knowledge that live event and team travel expenses would return post COVID in 2022, we were disciplined in our approach to spending across all functions. And as Adam shared, we have had a solid start to 2023 with strong performances by our Toronto Ultra and Mad Lions teams, leading to further growth in followers and engagement and record ticket sales for our Call of Duty Major V coming at the end of May. We reentered the fastest-growing game in esports VALORANT in the North American VALORANT Challengers League and the VALORANT Game Changers ecosystem with an all-female Spanish roster, which we anticipate will create partnership opportunities and audience growth in the months and years to come.

Finally, we look forward to sharing more partnership news soon as we continue to focus on developing long-term premium sustainable partnerships in our markets. I will now turn it over to Rikesh Shah, our Chief Financial Officer, who will share a high-level review of our 2022 financials.

[Rikesh Shah, executive]

Thank you, Adam, and Alyson and good morning, everyone. Today, I'll review our '22 financial results, as just mentioned, and please note that the financial information discussed today is prepared in accordance with International Financial Reporting Standards and is in Canadian dollars unless otherwise indicated. For the full year 2022 ending results, we reported total revenue of $14.2 million, in line with prior year's revenue. The total revenues reflect a $1.5 million or 23% year-over-year increase in business operations revenue, which is driven by higher partnerships and event sales. A $1.3 million decline in nonrecurring team-related prize money partially offset that increase. Furthermore, for 2022, we reported an adjusted EBITDA loss of approximately $8.8 million. That's a 26% increase compared to an adjusted EBITDA loss of approximately $7 million during the comparative prior year period.

The increase is attributable to our investment in our team rosters, people and products. Our full year '22 results were in line with our adjusted EBITDA expectations and importantly, our strong and current projected liquidity with cash and cash equivalents totaling $13.6 million at year-end gives us the flexibility to pursue our short- and long-term goals.

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

[Operator]

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

[Towaki Dojima, analyst]

I have a question about the write-down. You spoke about the media rights and the difference in reach versus older ways of distribution and newer ways. But it also seems like your write-downs were mainly in the OWL and CDL and not in the LEC. So just wondering if there's any differences between the European and North American market that kind of drew those decisions?

[Adam Adamou, executive]

Yes. Thanks, Towaki. I think the way that we look at it is primarily driven by revenue share forecast going forward. And we the model that goes into it is a pretty long-term financial estimate that is frankly kind of built with a lot of uncertainty. And I would say when you take a look at all the assumptions that go into it and you discounted at a rate that is pretty significantly high, changes in those forecasts result in larger kind of present value situation. So I really don't want to get into the determination by franchise, by league and so forth. But there is a formula that is done. We have expert valuation people that basically review it. And as I said, small changes in numbers over long periods of time, discounted at high rates means that there's a lot of volatility in those valuations.

[Towaki Dojima, analyst]

Fair enough. And I also noticed that the franchise fee deferral another deferral was put on after the year-end. It seems like these are becoming more commonplace. Is there a potential for these fees to not become deferrals, but maybe a restructuring over time? Or is that something you would really want to go on?

[Adam Adamou, executive]

Well, let me say that when I talked about our league partners being heavily invested in the esports ecosystem and the industry, I really meant that. They have a very strong vested interest in the success of their leagues. They invested heavily into them. They see a very bright future for the industry going forward and quite honestly, right now is a difficult time in the economy for many of the small types of businesses, frankly, that are team organizations. And so we work closely with the publishers, the leagues that they operate and the people there in to figure out a system that basically makes the leagues viable.

And right now, the most viable action they can take is to defer those payments to a later point. So I don't really want to speak to what kind of restructuring could happen. But I will say that there has been several deferrals across all of our leagues over some periods of time right now. And I would say that is largely related to the leagues wanting to ensure the sustainability of the ecosystem that they created alongside us.

[Towaki Dojima, analyst]

And one last question for me closer looking at near-term stuff. I recall that the TD, Bell and I think Warner Media sponsorship contract renewals, they had a step-up, but they were only going to be effective in '23. Are we going to see those increases hit in Q1? Or do those renewals kind of play in later on in the year?

[Adam Adamou, executive]

Let me pass that over to Alyson and maybe Rik.

[Alyson Walker, executive]

Yes. Those -- all of those deals, I'll pass to Rik on the financials, but all of those deals, the 3 that I mentioned, TD, Bell and Zilliqa revenue from those deals -- sorry, I should say, Rik you should probably answer this, but TD and Zilliqa affected '22, Bell the new deal started in '23.

[Rikesh Shah, executive]

Yes so these are -- good morning Towaki, they are longer-term deals. They on a whole are step-ups to our existing agreements, and you'll see them reflected over the course of the term of those agreements. And so as you know, we one of the reasons for our success and, so to speak, sustainability is the fact that we enter into long-term relationships with our sponsors. So I don't want to speak specifically about the impact in this coming quarter, but rather speak to the benefit of those step-ups and the strength of the sponsorships over the course of the term of those agreements which are long term in nature.

[Towaki Dojima, analyst]

But basically, the step-up should -- maybe you might not hit all hit in Q1, but it should come through over the course of '23.

[Rikesh Shah, executive]

Yes. Yes.

[Operator]

[Operator Instructions] Your next question comes from the line of David McFadgen from Cormark Securities.

[David McFadgen, analyst]

Just a question. Just on the macroeconomic environment here. I mean, since the last time we spoke on the last quarter, has the situation gotten a little tougher with respect to advertising sponsorship revenue over the next 6 to 12 months? Or is it kind of the same compared with the last quarter.

[Adam Adamou, executive]

Let me kind of start and then maybe Alyson can talk a little bit about it. I would say, kind of fairly speaking, on a macro level, I would say it's probably gotten tougher, not only for -- certainly not only for esports, but for kind of all sponsorship-driven businesses, including media, advertising, probably professional sports teams as well. When these large, large companies are announcing layoffs of their employees. Before they do that, they probably kind of cut down on their spending everywhere else as well. So I would say that's just a cyclical component of the broader industry that we're involved in, the kind of sponsorship industry and that will ebb and flow. And right now, I would say it has ebbed.

And from our perspective, our strategy and positioning of negotiating long-term deals has really kind of assisted in kind of maintaining the growth even as the macro economy has declined. There are a number of other organizations, other kind of players in the broader industry that you will see a lot more volatility with their numbers and declines as a result of that decline in spending. But as you can see from our numbers, we've actually increased pretty well. And we feel reasonably confident in kind of our expectations for the current year. Alyson, if you could add some color, you're dealing with a lot of these sponsors directly yourself.

[Alyson Walker, executive]

David, I would say we continue to compete heavily for share of wallet in the sports and entertainment space from a sponsorship perspective. And in the media space, particularly as it pertains to esports with Twitch, with brands doing media buys on Twitch. And so we have a very strong partnerships team. It requires that we are pitching and delivering assets and demonstrating their return on investment. So that requires a lot of reporting work and work with our research partners. So I would say -- I would agree with what Adam said, it remains challenging. It has always been challenging, particularly because esports was new, and so we were having to demonstrate I would argue, even a greater return on investment than some of our traditional sports colleagues.

[Operator]

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

[Adam Adamou, executive]

Thank you very much for the call. We will continue to work hard. I think we see a brighter path ahead of us. I would say that the team here is well structured. We've got among the best leadership team in the industry. We've got a plan. We're executing against it, and we feel very confident about the future, and we will be back with an update shortly for first quarter and we can track our status at that point. So thank you very much, everybody, and good day.

[Operator]

Thank you, sir. Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.