Overactive Media Corp

XTSX:OAM

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone, and welcome to OverActive Media's Fourth 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 Mr. Babak Pedram, Investor Relations for OverActive Media for introductions and reading the safe harbor statement. Please go ahead, sir.

[Babak Pedram, executive]

Thank you, Joelle, and good morning, everyone. Welcome to OverActive Media's 2023 Fourth Quarter 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 fourth 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 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 a supplement and 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 Mr. Adam Adamou, Chief Executive Officer of OverActive Media. Adam, please go ahead.

[Adam Adamou, executive]

Thanks, Babak. Good morning, everyone. Thank you for joining today's call. 2023 marks a dynamic year of growth and transformation, and I want to start by thanking our dedicated staff for their unwavering support in our rapidly evolving industry at the center of gaming, sports, technology and social media, adaptability is key. Change happens back and opted, and it requires a particularly adaptable type of personality to excel under these circumstances. Your confidence in us and each other has been instrumental in our success, and it's an honor to have you with us on this journey. I'd also like to express my sincere appreciation to our partners and shareholders for their steadfast support. We are breaking ground in a rapidly changing landscape and your support is invaluable. We are deeply grateful for your continued trust and collaboration. 2023 was a milestone year for OverActive Media, characterized by record revenues of $15.7 million and made an economic slowdown that many others referred to as an esports winter.

Simultaneously, our focus on efficiencies saw us reduce our operating expenses in 2023 by 13%, which, along with our revenue growth culminated in a 29% year-over-year improvement in our adjusted EBITDA loss. Our operating expenses are now lower than they were in 2021. And before the impact of acquisitions, we will be moving costs to 2020 levels by the end of 2024. Our proactive fiscal management has given us a solid financial footing with our cash and cash equivalents standing at $13.9 million at year-end, with strongly positive net working capital and liabilities that are declining or in the process of being eliminated. Unlike many of our peers, we have no balloon payments or other ticking time bombs on our balance sheet. We have been disciplined stewards of our capital on a simple premise that a prerequisite to success is to stay in the game. We are in the game, and we are winning. This disciplined approach to cost management has positioned us well. We have the funding, the people, the franchises, and the audience. And with a little more time, we will turn the corner to profitability.

Our success in navigating the operating landscape was mirrored by our achievements in fostering stronger partnerships with our league and publisher partners. Last year, we finalized discussions with the Overwatch League, resulting in the elimination of entry fees totaling $8.2 million and a cash termination payment paid to OverActive of an additional $8.2 million. This significantly strengthens our balance sheet without diluting shareholders' equity. The Toronto Defiant, however, continue on winning back-to-back North American Championships in the Overwatch Champion series, the replacement for the Overwatch League.

Subsequent to year-end, we announced the transformative restructuring of our agreement with the Call of Duty League eliminating over $35 million in outstanding obligations and bolstering our balance sheet with an additional $2.8 million in cash reserves, the impact of which will be seen in our 2024 second quarter financials. This agreement not only enhances our financial position, but also unlocks new revenue streams, including direct team participation and digital in-game merchandise, support for live events and opportunities from licensed third-party tournaments.

Last month, Riot Games also announced evolutionary changes to our League of Legends esports ecosystem. Riots proposed model aims to ensure the sustainability of League of Legend esports, focusing on more predictable revenue streams for our team through enhanced partnerships and innovative in-game digital sales strategy. This performance-based approach is consistent with OverActive division for a robust and dynamic esports ecosystem, where the emphasis is on shared success with additional material upside for high-performing organizations like OverActive. We expect to finalize these discussions with Riot in 2024 and for a new agreement to be in place for the 2025 season. Stay tuned.

In March of 2024, we purchased two prominent esports enterprises, KOI, and Riders. These additions to our existing OverActive platform marked a pivotal moment in our company's journey. These acquisitions expand our reach, revenue opportunities and audience engagement, positioning us as a leader in the global esports landscape. It also brought us entry into the Valorant Champions Tour in Europe, one of the fastest-growing esports league in the world. We are well positioned in our industry.

With the best brand, the biggest audience, the highest levels of engagement and with partnerships in the most important esports leagues in the world. We are seeing the immediate impact of these combinations in our audience numbers. In terms of peak viewers, we are the most watched team in the Western world. We have among the highest levels of impressions, viewership, and engagement, and we have among the highest valuations for social media post. We are a leader in digital merchandise sales in every game that offers us that opportunity. We have also seen an increase in physical merchandise sales. We are now working hard to lock in this growth and to monetize our success.

We have leveraged our teams and our audience to add significant new brand partnerships, most notably with Telefonica's Movistar brand, the largest long-term financial partnership in our history. We've also added new partnerships with Cupra, a division of Volkswagen, Mahou, the largest beer brand in Spain and with Monster Energy, a new partner for the Toronto Ultra. We are at nearly 20 global partners across our global business unit and growing. While 2023 was a year of transformation, 2024 will be one of execution. Our business plan is clear and simple: build our brands, grow our audiences, engage with them deeply and monetize them across multiple regions and geographies. Thank you to each one of you for your support, belief, and investment in our journey.

With that, I will now turn it over to Rakesh Shah, our Chief Financial Officer, to review our fourth quarter results.

[Rikesh Shah, executive]

Thank you, Adam, and good morning, everyone. Today, I'll briefly review our fourth 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 noted. For the 12 months ended December 31, 2023, revenue increased by 11% to a record $15.7 million. That's a $1.5 million improvement relative to the prior year and driven by strong growth in our league revenues. Operating expenses decreased by 13% or $3.2 million to $22.4 million relative to the prior year. That's primarily due to reduced corporate payroll expenses and lower team operating costs. Adjusted EBITDA loss for the same 12-month period was $6.2 million. That's an improvement of 29% or $2.6 million relative to the prior year.

Adjusted EBITDA improvement was mainly due to the decisive actions taken during the year to lower costs while driving organic revenue growth. For the 3-month period ended December 31, 2023, we reported total revenue of $4.2 million, and that's an 8% improvement over the comparative period in 2022. During the quarter, we further strengthened our financial results by reducing our operating expenses by $1.3 million year-to-date.

The improvement in operating expenses reflects management's focus to lower costs in a sustainable manner or driving efficiencies and supporting our revenue growth. Adjusted EBITDA for the same period improved by 71% or $1.7 million to a loss of $0.7 million. That's versus a loss of $2.4 million in the comparative period last year.

Our cash position as of December 31, 2023, was $13.9 million and provides us with a strong balance sheet to pursue our strategy prudently, the fiscal discipline top of mind. As Adam indicated earlier, we further strengthened our balance sheet subsequent to the quarter by eliminating $35.1 million of liabilities. And in addition to the $2.8 million cash infusion as a result of the new long-term agreement we secured with the 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] First question comes from Towaki Dojima with TD Cowen.

[Towaki Dojima, analyst]

I had a clarification to start off. I think in your prepared remarks, you said that the fee -- franchise fees are in the process of being eliminated. My understanding is that Overwatch fees are gone, Call of Duty fees are gone. So the only one remaining is League of Legends and I don't think it's overly material, but that's what's left on the balance sheet. Just wondering if you meant that is also in the process of being eliminated? Or am I reading too much in that?

[Adam Adamou, executive]

We'll stick with our prepared remarks. I don't think we have anything further to say right now on that.

[Towaki Dojima, analyst]

Okay. Sounds good. And then moving on to a little longer-term outlook. You talked about 2024 being a year of execution, you laid out a couple of things. Just wondering, with the cash on hand now, your liabilities are pretty much gone. Could you outline a few areas of strategic focus where you're looking to invest that cash that you have on hand? And then what that looks like in terms of whether that focus is going to be on -- your team operations or it's going to be on looking for more brands or kind of focusing more on these in-game merchandise sales?

[Adam Adamou, executive]

Okay. Well, actually, let me just kind of welcome you to the call to Towaki. I appreciate, obviously, you support and coverage. We -- you're correct. So most of the liabilities and actually some of the short-term liabilities in our financial statements at the end of 2023 will be going away as a result of the agreements that we have in place, and that will show up in our second quarter financials for this year. The -- our focus for 2024 is, first and foremost, on integrating the two acquisitions that we made and making sure that everybody is pointing at the -- in the right direction and working together in the most efficient way possible.

So that's kind of number one. We can't do -- it can't be kind of -- growing with acquisitions without pausing every once in a while, and making sure that everybody got their marching orders -- kind of correct. In terms of our cash, I would say that we are -- very sensitive to how we and where we invest net new cash. We are always looking for opportunities. So if we look at things like additional acquisitions, we do believe there are consolidation opportunities available for us. We get calls and offers and proposals weekly, I would say, from various parties.

But we don't see ourselves as kind of venture type investors. If you haven't figured out your business model and you're suffering strong ongoing losses, we're not the ones to rescue you. I think we're looking for companies that have clear assets and near our actual profitability on that front. In terms of our priorities for the year, they come in 3 primary asset buckets as we see them. One is building our brands. We're in the process of working on a brand identity that is common among all of our teams this year.

And that, I think, is a crucial element of our strategy for the current year to get everything under one brand. That's kind of my objective for this year. We're working on that. We will have some announcements on that this year, I believe. Secondly, is building audience size for our -- across all of our teams. We have -- with the acquisitions, we have hundreds of millions of followers and fans and audience across our many channels. We want to grow that significantly. And we want to grow that in a way that continues to have our audience engaged, okay? So it's audience plus engagement that provides the value to us, not just audience alone, that's just passionate.

And so our investments when we look at them will be brand building, audience growth and engagement strategies. And of course, that can come in a number of different ways. It could come by launching new teams. It could come by launching new initiatives, and it could be through kind of other events, live events and so forth to build on those assets. And we look at them critically and we look at them against the measure of how they deliver against those priorities. And when the return is positive, we are inclined to do it.

[Towaki Dojima, analyst]

That's great color. If we could touch a little bit on the M&A comment you just made. My -- I think that you've got effectively exposure to most of the Tier 1 esport games out there and the leagues that exist. When you talk M&A, are there any other game titles where teams are available? Or are you talking more M&A to build on that brand and build on that audience, but not specifically talking about rosters or [ teams lock ]?

[Adam Adamou, executive]

Look, I don't know that we've got the ability to build teams internally. So looking at an organization that basically provides us with additional teams probably adds less value right now. We have 10 teams as it is, including the team that we acquired via the acquisition. We're in every major esport. We're in Counterstrike, -- we're in Overwatch. We're in Call of Duty. We're in Valorant, we're in league. I think those are the main ones that, frankly, are meaningful to us.

And I think we're probably the only organization that is in all of those. Most are in a few, but few are in all. But there may be some additional games that have value to us, but we would probably look first internally just to build out the teams rather than to acquire somebody that has kind of a team in a particular game. Beyond that, we continue to be interested in areas where kind of audience and engagement are kind of a component, particularly as it relates to influencers, co-streamers and partners that can deliver audience to us, right?

So right now, if you watch MAD Lions KOI, for example, our League of Legends team, with the co-streamers that we have, you will see the audience always lose up. When we're playing, there's more people watching. And then when we stop playing, the viewership declines. That's a perfect situation for us to build upon. And we would like to see that across all of our teams. And of course, that can be done organically and that could be done through acquisitions.

But I would say in terms of future growth, the area of some degree of focus that I'm starting to look at more critically is -- kind of expansion into new geographies, particularly in the -- what I refer to as the Americas, which is North America plus Latin America combined with our very strong Spanish-speaking audience, and streamers and influencers. That's an obvious area of focus for us, since we're a well-known brand in the Spanish-speaking Americas market as well. So that could be something that we would have an interest in expanding and it is possible that expanding via some tuck-in acquisition provides us the resources down there to grow more respectively.

[Towaki Dojima, analyst]

Makes sense, and I wanted to shift a little bit on these in-game digital sales. I think a lot of the leagues have talked this up a little bit. And I've read in a few media reports that some of them could be profit sharing and not revenue sharing. And so firstly, can you comment on how -- what -- if these transactions -- or sorry, the structure of these agreements have changed from more of a revenue sharing to a profit-sharing agreement, at least I'm assuming it was just for in-game sales and not related to the sponsor fits or the media rights for those that exist, but just a little bit more clarity on those terms.

[Adam Adamou, executive]

Well, to the extent that I can, the publishers and the leagues are kind of sensitive about sharing their internal kind of formulas as well. But I think broadly speaking, from our perspective, media rights in the short term are being replaced by the in-game digital items, MTX as we call it And we believe media rights may and will likely come back as the industry matures. But in the kind of interim MTX is probably a better and more direct financial contributor to the leagues in the ecosystem than media rights -- will be.

In terms of fine-tuning our agreements, I would say, broadly speaking, that the definition of what is shared has expanded, okay? So in terms of what you were referring to revenue versus profit sharing, if we were to go from revenue share into profit sharing, the definition would actually shrink, right? And so what the leagues have been doing and agreeing to in terms of our negotiations between the teams and the leagues is to expand that definition rather than shrink it.

And so that creates opportunity, obviously, because there's a larger number that could potentially be shared. Now in terms of what that number is in terms of revenue, and I would kind of point you towards -- kind of other digital ecosystems like the Apple Store or the Google store. Typically, in those models, there is a store fee that is paid if you buy something on your PlayStation or on Steam. There's just a fee that comes off of the top for that, that goes to the storefront. And then what's left after that is available per share. In other words, Sony is not going to share their store fee or Apple is not going to share their store fee with us as they don't do with anybody else.

So that definition is as large as it can be -- that we can basically get our hands around. And then typically, there's some kind of a revenue sharing model between us and the publisher. So some percentage of those fees go to the publisher, to fund the league and the balance goes to the teams, that's more or less how the formula works.

[Towaki Dojima, analyst]

Makes sense. And would you, in the future, be willing to provide a split within your business revenue? I know there's a lot of stuff in there. And if these MTXs get large enough, are you willing to break out that revenue in your reported figures.

[Adam Adamou, executive]

Again, there's sensitivity there in terms of kind of -- the leagues versus us in terms of what we want to or are able to release, the MTX numbers will be incorporated into our league revenue side. So they will -- we break down our revenues in terms of league and business revenue. That will be included in the league revenue side. And most of that number will probably be from this. I need to kind of think about where prize money -- this prize money going to league as well. Rakesh?

[Rikesh Shah, executive]

That's right.

[Adam Adamou, executive]

Yes. So I would say the best proxy is probably the league revenue side. And look, it's pretty easy to see what the prize money is. You can go to Liquipedia and take a look at our teams and see what the prize money was for the year. And if you back that out, you'd probably get a pretty good number there.

[Towaki Dojima, analyst]

Sounds good. Appreciate the answers.

[Adam Adamou, executive]

Okay. Thanks. Towaki.

[Operator]

There are no further questions at this time. I will now turn the call over to Adam for closing remarks.

[Adam Adamou, executive]

Okay. Thank you for your interest and your continuing support of OverActive Media. We look forward to talking to you again. And I think at the end of May for our first quarter results. Have a good 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.