Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the East Side Games Group third quarter 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session for analysts only. I would now like to hand the conference over to your speaker for today, Jason Bailey, Board Chair, CEO, and Founder of East Side Games Group. Please go ahead, sir.
Thank you, Operator, and welcome everyone to the East Side Games Group third quarter 2022 results call. On the call today with me is Jim MacCallum, our CFO. I will begin by sharing highlights from the third quarter ended September 30, 2022, and I will also be giving an update on our business strategy and key events that have taken place since we last reported on August 11, 2022. Jim will go into greater detail on the financial results commentary for the period before turning it back to myself for some final remarks before we open it up to analyst questions. I'd like to remind you that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call includes references to non-GAAP measures.
Please refer to our third quarter press release in MD&A precautionary statements relating to the forward-looking information and reconciliations of non-GAAP measures to GAAP results. References to all figures are in Canadian dollars on an IFRS basis, unless otherwise noted. Additional materials can be found in the investor section of our website at www.eastsidegamesgroup.com under the financial information section, and an audio replay of this call will also be available on our website. Q3 was another solid quarter of year-over-year growth, but a challenging quarter overall. We generated CAD 25 million in gross revenue, a 32% increase over Q3 2021, and for the nine months ended September 30, we recorded CAD 90.4 million in revenue, up 40% over 2021.
We recorded negative EBITDA for the first time as a publicly traded company, and we are taking steps to correct this for the fourth quarter and for 2023. Saying Q3 was a challenging quarter is an obvious understatement. Rising interest rates, looming recession, rampant inflation, and consumer anxiety exacerbated the damage done to the mobile games industry by Apple with their ad tracking transparency, ATT changes, and the destruction of the App Store and Google Play Store discovery ecosystem. That being said, the phones in our pockets aren't going anywhere anytime soon, and they continue to be the primary gaming device for over a billion people. Going forward, East Side Games Group is shifting its focus away from hyper-growth and will double down on our current successes.
We have and will continue to reduce costs wherever possible, focusing on profitability and cash generation for 2023 and continue with a year-over-year growth on all fronts. The launch of Star Trek: Lower Decks - The Badgey Directive in the last few days of Q3 has us well positioned for Q4 and the end of fiscal year 2022. Doctor Who: Lost in Time will be our next major IP release, currently in soft launch and slated for worldwide launch soon. We have also soft launch titles in three new genres. Trailer Park Boys Merge, Bud Farm: Munchie Match, and Milk Farm Idle Tycoon are all showing solid engagement metrics in their soft launch periods. This will bring our total games launched for 2022 to 11 titles, one more than our goal of 10 titles. Three of East Side Games Group's top five games have launched in the past 12 months.
RuPaul's Drag Race Superstar, The Office: Somehow We Manage, and Star Trek: Lower Decks. These titles prove out the product-market fit for GameKit, our proprietary software framework that allows developers to build faster, cheaper, and with a higher chance of success. It also proves that our focus on IP-driven games is a solid model in a post-ATT world. For 2023, we will be building on our learnings from this year, and we have scaled back to have a tighter focus on large IP-driven games. This is where we have found the most success, and this is where we will continue to invest. We will also be investing in our winners as well as being smart about what is working best in the new market dynamics.
We have signed deals for many new IPs and games for next year with NBCUniversal, Creative Artists Agency, Jazwares, All Elite Wrestling, Digital Dog, and others. We have also signed numerous development partnerships with leading studios all over the world. We anticipate being EBITDA positive for 2022 while maintaining year-over-year growth. We remain focused on our goal of providing creators the tools to successfully deliver mobile gaming experiences that engage players every day. Daily active users were 298k for the quarter, up 22% year-over-year. ARPDAU increased to $0.94, and MAU was up 19% year-over-year at 1 million. Our mission at East Side Games Group is to not just build games and delight players. We aim to fundamentally change the way games are built and published. We're investing heavily in our software platform. We are building the publishing infrastructure.
We are building best practices playbooks, and we are building deep relationships and trust with every major IP holder. We are building talent density across all of our teams. We are building a multi-billion dollar business with a concrete foundation. We are leading the $200 billion a year game industry onto an innovative new path. Jim, over to you for some more comments.
Thank you, Jason, and hello, everyone. As Jason noted, in Q3, we delivered quarterly revenue of CAD 25 million, and revenue for the nine months ended September 30 was CAD 90.4 million, up 40% over the prior year. Star Trek was introduced late in the quarter, so only had a limited impact to third quarter revenue. We recorded negative adjusted EBITDA of CAD 1.0 million during the third quarter, and for the year to date, recorded positive EBITDA of CAD 2.6 million. During the fourth quarter, we have and continue to take steps to reduce costs by terminating some external development contracts and increasing talent density. These changes will improve profitability going forward. Cash on hand at September 30 was CAD 5.2 million, and our debt was CAD 800,000.
We recorded strong operating cash flow of CAD 5.6 million for the nine months ended September 30, 2022. We have minimal debt with additional access to financing if required. We purchased 98,000 shares under our NCIB through September 30th at an average cost of CAD 0.98 per share, and we continue to be active. Thank you for your continued support. With that, I will pass it back to Jason.
Thank you, Jim, and thanks everybody for the time today. Happy to open it up for some questions and hear anything the analysts might wanna know more about. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If your question has been answered and you would like to withdraw, please press star followed by two. If you are using a speakerphone, please lift the handset before entering any keys. Your first question will come from Neal Gilmer of Haywood Securities. Please go ahead.
Yeah, thanks very much. Good afternoon, guys.
Hello.
Jason, maybe it was one of your sort of first prepared remarks there, and I didn't quite catch it exactly, so this is a paraphrase. But your comment with respect to sort of moving away from hyper-growth and more focused on, you know, profitability and cash flow. You know, maybe if you could just provide a little bit more color on what you're thinking there. You know, I think previously you've talked about obviously in 2023, you're hoping to launch, you know, a number of more titles than you are in 2022. Is that sort of being sort of scaled back a little bit or any more sort of color you can on that comment you made would be appreciated.
You understood correctly, Neil. We're gonna be scaling that back to focus on the games that we think have the best chance of success. That being, you know, our experience has been, as you can see from our three of our top five games being launched in the last 12 months, being Star Trek, The Office, and let's see.
Star Trek.
Star Trek, The Office, and RuPaul. I can't believe I forgot RuPaul. How can you forget Ru? Those are our three strongest, three of our five strongest games. You know, Apple, Google, and all of the entire market of advertising have made it very, very difficult to acquire users for games. IP-driven games is that hack. You know, as I've said before, if I showed you a game about running your own midsize paper company in Scranton, I don't think you'd want to play it. When I show you, NBC's The Office and you see all of your friends and get to go hang out with Kevin and Dwight, then you do wanna play that game. We're gonna launch fewer games next year, but the games that we do launch will be the big titles.
Okay. All right. Thank you for that. And then taking a look at the ARPDAU at $0.94 compared to Q3 of last year at $0.85. That's a pretty decent, you know, improvement. Safe to say that's those three titles that you just referenced helping drive that? And then I guess, you know, maybe the sub part of that question would be, you know, as you go into 2023, if you're focused on those titles, should we assume that or not assume, but expect that metric to continue to gradually move higher?
I'm reluctant to say that it's gonna continue to move higher before I pat myself too hard on the back. One must also factor in exchange rate up and down. You know, the number has gone up and down throughout the year. Part of that is, you know, people going back to school and, you know, Christmas is always a stronger time as people spend more time inside and more time playing video games. That is a strong number. We are proud of that number.
Part of the reason that we're continuing to focus on IP-driven games for 2023 is we find that IP-driven games not only do they have lower CPIs because people are more likely to click on the ads, but they also have higher ARPDAUs because people have more affinity to the IPs.
Yep. Okay. Thanks. Maybe last one for me is, you know, obviously, you developed a game for Netflix earlier this year. You know, as you look into 2023, when you're focused on that high IP stuff, or high IP games, is that still a channel that you're gonna be taking a look at as far as something that you think is, you know, helps contribute to your profitability focus for next year or something we shouldn't be anticipating on those sorts of platforms?
I can't be too specific, obviously, for confidentiality and negotiation reasons, but the app discovery ecosystem is ripe for disruption. Both Apple and Google, their duopoly over this space is under threat from all sides, and that threat is positive for us. Somebody, several people likely, will emerge victorious in creating app distribution ecosystems that are successful. All the major players from Sony to Microsoft to Epic are aggressively pursuing this opportunity. You know, even Apple themselves through Apple Arcade, Netflix being one of them, but all of the big media and streaming companies have this opportunity. We're talking to everybody, especially when we look into 2023 and focus on profitability.
Traditionally, we can go out and spend CAD 5 million to build a game, and if it's successful, it can make CAD 100 million a year. If it's not successful, it's a big money pit. When you do a deal with a Netflix or an Apple Arcade, you're guaranteed to make a profit, but that moonshot doesn't exist. You know, it cost you CAD 5 million to make the game, but you're guaranteed to make CAD 10 million, as opposed to costing CAD 5 million to make the game, and you're either gonna make CAD 0 million or CAD 100 million.
Right. Yeah. Okay. Thanks for taking my question.
The answer is yes. Yes to all of the above.
Okay. Thanks for taking my question, guys.
Thanks, Neal.
Your next question will come from Anil Upadhyaya of Industrial Alliance. Please go ahead.
Hey, guys. Thanks for taking my questions. I just have a couple. Last quarter, you spoke about a Starter Kit that was gonna come out. Can you provide some additional color on that? If that has been released, how well was that received in the mobile gaming community, and then what are your plans around that kit in particular?
Yes. Starter Kit has been built. It is in the market. We have four developers that are onboarding to the system right now. They are all happy with what they see. There's one. Actually, to be fair, there is one of those four who we think is going to not use Starter Kit because they're a partner that have already made one game with us, and so they feel the core of what they've already built, it's easier to keep building on that than to, you know, kind of start over again with Starter Kit, which is absolutely fair and true. Yeah, we're in the onboarding process. Super happy with the product. We continue to invest in, you know, getting more and more behind it and making it more robust. It's off to a great start.
Perfect. Maybe just another one from my end. The DAU and MAU numbers fell for the first time in three quarters. Was this just because of a drop off in a specific game along with that seasonality that we spoke about in Q2 and Q3? Because like, you know, the other metrics were fairly strong. Was it just seasonality, or do you think were a number of other games impacted as well?
The entire market's impacted, to be fair. I mean
Yeah
You look across the mobile games industry in general and the games industry in general, and most people are off by about 15%. You know, we're not immune to that. The biggest challenge. Like, honestly, I don't think MAU is an interesting number. MAU is an indicator of how much money we're spending on user acquisition and growth as most of those new users bounce. When you look at the 300k DAU versus the 1 million MAU, that DAU is pretty constant, but we. You know, there's not a lot of people who play our games play it pretty much every day or at least every third or fourth day at the very least. We have very few players who come in and play once or twice a month.
It's not the types of games we have. You know, DAU is a really important metric and, you know, we're going forward because user acquisition has become prohibitively expensive. You know, although we still continue to do it and we still find ways that work, we just can't spend as much as we had been. You know, we're focusing on the growth, but as a result, we're really focusing our game teams internally on retention being the most important metric. There's two metrics we look at, retention and regularity. Retention is, you know, how many people who played their games, the game yesterday came back today. We always look at day one, day seven, day 30 retention rates. We also look at regularity, which is how often people play.
On a weekly basis, right now I believe our number in most of our games is somewhere around 75% of our players play every single day. We're trying to get that number up and up and up, and get those people who are playing only four days a week to play seven days a week, and that's going to do the most for our engagement and long-term retention.
Perfect. Thanks, Jason. That helps. Maybe just one last one. Sorry. I know you mentioned that you're planning to launch nearly about 20 games in 2023, and that's kind of being scaled back. I think you mentioned maybe that you were planning on making four to five super marquee games in 2023. Has that number gone up, and because you're trying to focus more on those IP-based games, so maybe eight or nine super marquee games and then less games as a total?
Good fishing, but I'm not giving you a number.
Fair enough.
Yeah. What we've done is we've looked at our slate of games for next year, which was fairly extensive, and we've made some hard choices about, you know, which games we should cut completely, which games we should slow down, which games we should punt out, and which games we should go all in on. The ones that we are going all in on, you know, I gave some clues earlier in the call that you can decipher and figure out what some of those might be.
Gotcha. All right. Thanks, Jason. That's for me.
Thanks, bud.
Your next question comes from Adhir Kadve of Eight Capital. Please go ahead.
Hey, good evening, guys. Thanks for taking my questions. Maybe just quickly on Star Trek. I know it just kind of launched at the back end of Q3 there, but any kind of early results you can speak to how the game is trending, anything along those lines?
You know, again, I can't say too much, but because of confidentiality and our agreements with the networks. You know, as I mentioned, it is one of our top performing games. We're very happy. We built that game in partnership with Mighty Kingdom out of Australia, who is, you know, a great company and a great bunch of people who have done a very good job. We're working with Paramount Global on that title. Again, great partners who have been incredibly supportive. The Lower Decks franchise in general is relatively new, but is building a strong following. We set that up to be able to leverage the entire Star Trek universe.
Over the last few weeks, if you've been playing the game, some of the prizes have been Captain Kirk and Spock and Khan. Or no, I don't know if we did Khan yet. I might've just let a secret out. You know, we've been able to give these. Oh, Picard. We also gave Picard away. By having these massive icons as prizes is definitely helping in the game and its success. Yeah, all of its core metrics are fantastic. We're very happy with this. I would say that this is one of the, you know, it's not the biggest launch we've ever had, but technically, it's definitely been one of the strongest and smoothest launches we've ever had.
Oh, that's very, very good to hear. Just maybe kind of talking about the partners, in the press release and in your preamble, you kind of talked about, you know, you're working. You signed deal with NBCUniversal and CAA, and those are obviously familiar names with who are the IP owners of The Office and RuPaul. Do you find that this time around, the conversation with these guys were much more simpler given that they've already kind of seen what your work is? Maybe any color around that conversation.
Simpler. Everything's been challenging because the market is changing so quickly. You know, getting large organizations like those to catch up to the times is often a challenge. Sometimes one can be a victim of their own success, you know? It was easy the first time, therefore, it's gonna be easy the second time, so I want so much more. It's like, dude, it doesn't work like that. You know, it's always a roll of the dice. It's made some things easier. It's made some things harder. The state of the market has made everything harder. The great news is, you know, these partners love us. They love to work with us. You know, we're doubling down on the ones that we like to work with.
You know, when I talk about NBCU and CAA, these are all additional IPs that we're working with. They're not just simply renewals of existing IPs. Yeah, like I say, we're building relationships with everybody. We have open dialogues with every major IP holder to pick just the right ones that fit with our frameworks.
Okay, great. One last one, and I'll pass the line. You also mentioned that you soft launched three new games, but that IP is IP that you've kind of worked with before. Let's just say, the Trailer Park Boys as an example. Do you find that the UA gets a little bit easier on these titles just simply because you've worked with the IP before? Is it kinda completely different because you're kind of changing genres from match, from idle to match and just maybe any commentary around that?
Yeah. I wouldn't say it makes UA easier. It makes a lot of things easier in the sense that we, you know, we have narrative and story, and especially we have a ton of art. So when we're creating creatives that work for idle games, you know, we're attracting a Trailer Park Boys-esque audience, you know, and those core fans. So we use a lot of the same art, and in fact, can in some cases even use the same creative that we know worked on a previous game. So it makes some things easier, but, you know, again, back to the reality of the market, it's become so much more competitive, and so much more mature, and with Apple and Google messing with the discovery ecosystem. Yes.
The short answer is yes, it does make it easier, but there are some other bastards out there that made things harder.
Fair enough. Thanks a lot, Jason.
No problem.
I'll pass the line.
Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time. Your next question will come from Scott Buck of H.C. Wainwright & Co. Please go ahead.
Hi, good afternoon, guys.
Hey, Scott.
I was curious how we should be thinking about sales and marketing expense into the fourth quarter, given Star Trek and some of the soft launches you have going on. Any color there would be helpful.
For sure. A little color on that too is, you know, as it affects Q3 is we worldwide launched Star Trek late in Q3, and that came with a big marketing push. That money was spent in Q3, but we won't see the results until Q4. Yeah, in general, we have taken our marketing spend back, not massively, but significantly. Even with the increase in spend that we have on Star Trek, we are still spending less than we were spending pre Star Trek. That gives you a sense of how much we've scaled back. We've gone away from any ad.
You know, the old adage is, you know, half of my advertising campaigns are working and half of them aren't, I just don't know which half it is. We know which half it is. For us, it wasn't even these campaigns aren't making money. We are sure these campaigns are making money, and we're not 100% sure these campaigns are making money. We're sure these ones aren't long-term when you factor in every possible cost. So scale those back, scale these back a little bit, double down on what we know is working, and those networks that we are spending with, hopefully, you know. Everybody's talking about how Christmas is canceled this year. Hopefully, that.
Normally, you know, with Christmas, there's a real push on, especially post-Black Friday, you know, the inventories become slimmer as more people are competing for them. Maybe since Christmas is canceled, there will be more inventory available for us at a reasonable price.
Great. That's helpful, Jason. Second one for me, just on the share buyback. I was curious if you guys have a specific criteria you're looking at when you repurchase or just given where, you know, where the share price is, it's tough to argue against it.
Right. Yeah, I mean, I'll buy it all back at this price. Buy it back myself. I'll sell. I'm gonna start selling my golf clubs to buy more shares. Like, it's absurd. Yeah, I mean, that's part of the plan here is let's move towards some profitability and some long-term stability. There's no world where we raise money at this rate. Let's try and produce more cash and use that cash to buy back shares if there isn't a better or smarter place to put it. I mean, with you know, interest rates where they are and, you know, the cost of borrowing being high, you know, maybe it's better to be a lender than a borrower.
You know, when you're looking at the best place to make an investment and get a, you know, whether it's a 1x, 2x, 5x return on your money over time in building video games, you know, there's a balance to be had there between building games and using that money to buy our shares back.
Yep, makes sense. Appreciate the added color, guys. Thanks again.
Yep. Thanks, Scott.
Your next question will come from David MacFadgen of Cormark. Please go ahead.
Oh, yeah. Hi. Thank you. Just a couple of questions. It seems that you're gonna have more of a balance in terms of growing the business but also generating EBITDA. Is that correct? Have I understood that correctly?
That is hopefully been made very clear. That is absolutely correct.
Okay, perfect. Given that, is there an EBITDA margin, like a percentage range that you would expect to operate in as you grow the business going forward? Can you share that with us or it's just too early on that?
I'm not gonna spit that number out to you 'cause it'll come back and bite me in the ass whether I'm right or wrong. Yeah, I mean, significant. Like, it's over the last year, we've been investing heavily in, you know, like I say, 11 games this year. You know, and that takes a lot of time and money. We've built out the IdleKit platform. We've built out three new genres. You know, just like everybody else in the tech industry, we hired like mad. Comps, you know, high comps is competition amongst employees is high. We invested incredibly heavily this year in growth, yet we're still able to remain relatively flat, which is what I said I would do in the beginning of the year.
I don't think we're too far off our EBITDA targets for the year because of that heavy investment, and we're just gonna slow that investment down a little bit, refocus which games we're working on. You know, what I've been saying to my staff is it's easier to take a game that's making $100,000 a day and get it to make $200,000 a day than it is to build a new game that makes $100,000 a day. That's where our core focus is gonna be.
Okay. Just given the macro environment that we're operating in, it seems like it's gonna be tougher going forward. There have been a number of companies that generate ad revenue that have started to see ad revenue decline. Just wondering if you could share with us what you're seeing so far into the fourth quarter on your ad revenue line. Do you see that as being a little weak here, just given what everyone else is experiencing?
We're not seeing that. It's, you know, we're seeing an increase in cost of placing ads, but in the CPMs we're getting for the ads within our games, it's hard to say, honestly, because we've been working hard on increasing that. You know, adding more networks, adding more placements. We've done a lot of work this year to increase that number. I think if the ad market wasn't where it was, you know, we would've been able to increase it even further. It's hampered our growth, but it has not shrunk.
Okay. All right. Okay, thanks, guys.
Thanks, David. I guess that, I'm gonna wrap this up.
Yes, sir. There are no other questions, so please go ahead with any closing remarks.
I just wanna say thank you for, you know, the support from everybody in coming out and listening to us. You know, you can reach out to me directly, if most of you know how to contact me, if you have any additional questions. You know, we're really proud of what we're building here. We're proud of the team we've put together. We're still extremely bullish in the opportunity around games in general, and especially games that live in your pocket, and our opportunity to change the way those games are made as this market continues to mature. I'm super bullish and excited about this company more so than I ever have been. You know, I see us making the right choices.
I see us, you know, the team around me rallying to, you know, answer to the chaos that is the market. You know, we try to put all that aside and focus on what we do best, which is make great games that people wanna play every day. Again, thank you for your support, and talk to you next quarter.
Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask that you please disconnect your lines.