Ladies and gentlemen, thank you for standing by, and welcome to the East Side Games Group First Quarter 2023 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 today, Jason Bailey, Board Chair, CEO, and Founder of East Side Games Group. Thank you. Please go ahead.
Thank you, operator. Welcome everyone to East Side Games Group's first quarter 2023 results call. On the call with me today is Jason Chan, our Interim Chief Financial Officer. We are also joined by our Chief Operating Officer, Lisa Shek, and our Chief Product Officer, Jim Wagner. I'll begin by sharing highlights from the first quarter ended March 31, 2023. I will also be giving an update on our business strategy and key events that have taken place since we last reported just a few weeks ago on March 31. Mr. Chan will go into greater detail with some financial results commentary for the period before turning it over to Lisa and Jim 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 first quarter press release and MD&A for cautionary statements relating to 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. We have a strong, growing, profitable business with an enviable IP portfolio and a broadly diversified base of games driving revenue. We have seven titles that make up almost 95% of our revenue, and no single title accounting for more than 25% of revenue. I'll pass it over to Mr. Jason Chan, our interim Chief Financial Officer for some comments.
Thank you, Jason. First off, I'd like to take a moment to thank Jim MacCallum for his service and time with us as our CFO for the past two years. It was an honor and pleasure to work with him. He's been a great mentor and teacher to me and the team. We wish him all the best in his future endeavors. As for myself, I've been with ESGG since well before the public debut, and I'm excited for this opportunity to take this company to the next level with Jason's leadership, alongside our strong and talented C-suite group in Jim Wagner, Elin Jonsson, Wally Nguyen, and Lisa Shek. Q1 was another solid quarter for us, and I was especially pleased with the strong EBITDA we posted.
We ended with CAD 24.3 million in revenue and adjusted EBITDA of CAD 2.6 million, which roughly translates to a 10.7% margin. In continuing with our trend of optimizing for profitability since Q4, we've also realized efficiencies in our UA spend. Q1 2022, our UA cost was roughly CAD 15 million. This quarter, it was closer to CAD 6 million, while at the same time, we've increased our EBITDA percentage. Our average daily active user base for the quarter was 277,000, which remained unchanged from the fourth quarter of 2022. The new IP game we launched in quarter one was Doctor Who: Lost in Time, which debuted worldwide late in the quarter.
We also launched another original IP game, Milk Farm Tycoon, which, although profitable, we don't expect to contribute to revenue materially at this time. Our cash on-hand at March 31st ended at CAD 3.1 million. This drop is mostly related to the timing and Apple payment structures. This was offset by the rise in our aged receivables, which has since been collected to bring us back to our CAD 5 million cash level. As part of our NCIB, we've purchased 393,798 shares through March 31st at an average cost of $1.12 per share, and we will continue to be active on that front. Thank you for your continued support. With that, I will now pass it off to our Chief Product Officer, Mr. Jim Wagner.
Thank you, Mr. Chan. For the rest of the year, we will have a tighter focus on large IP-driven games with cult-like followings, which is historically where we find the most success. We will be investing in our winners, as well as betting smart about what is working in the new market dynamics. We are well into development on games for 2024 with some of the strongest names in movies, television, toys, music, and sports. With these projects, we have signed development partnership deals with leading studios all over the world. The strength of our GameKit platform continues to fuel our growth as we launch more successful titles using this tool set, as well as cross-pollinate learnings from one game to all games to maximize portfolio revenue.
Four of our seven unique titles, which generate more than CAD 20,000 per day, have been launched in the past 18 months using the GameKit framework. Partners continue to clamor to be accepted into this program, and as the GameKit product gets more and more extensive, we are able to embrace more of these partnerships. Daily active users were 277,000, flat from Q4, while ARPDAU was down to CAD 0.97, down slightly from Q4, indicating that players stayed in our ecosystem but spent slightly less. This is typical of Q4 traditionally being the strongest spending quarter for consumers, but notably, Q1 2023 is still higher than Q1, Q2, and Q3 of 2022. Our mission at East Side Games Group is not just to build games and delight players. We aim to fundamentally change the way games are built and published.
We are investing heavily in our software platform. We are building a publishing infrastructure. We are building best practices playbooks. 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 that will lead the $200 billion a year game industry onto an innovative new path. We invested CAD 1.3 million in R&D in Q1. We are especially excited about our latest title, Bud Farm: Munchie Match, which is showing the best retention rates of any of our games with over 50% D1 retention and 25% D7 retention. These numbers are well above industry standards and a very exciting indicator of our coming success in the Match genre.
For the rest of the year, we have several new launches that I'm deeply confident in their success. This will continue to focus on big IP games and sports, music, toys, and celebrity will feature heavily. Over to Ms. Lisa Shek, our Chief Operating Officer, for additional comments.
As Jim mentioned, we've had a busy quarter. We've been applying our learnings from the Idle genre to unlock Match, and we're seeing very exciting early signs. We currently have multiple IP-driven Match games in development and recently announced our partnership with Jazwares to bring the first Squishmallows mobile game to market. Squishmallows has seen rapid growth since its debut in 2017, with over 200 million Squishmallows sold worldwide and a very loyal fan base in over 55 countries. We're excited to serve and expand its audience with new levels of fun and partner with the most powerful and recognized toy brands in the industry. We've been working with partners from all over the world.
In Q1, we launched Doctor Who: Lost in Time in partnership with BBC, co-developed with Bigfoot Gaming out of Argentina, Milk Farm Tycoon in partnership with No Power Up out of Vietnam, and soft launched Idle Crime Tycoon in partnership with Game Masons out of the U.S. By partnering with credible studios all over the world, we're able to go to market with double the speed and see profit much faster than developing a game in-house. East Side Games continues to be the market leader in the mobile Idle genre, specializing in working with big IPs and passionate fan bases. Our games are constantly recognized by the fans with over 4-star ratings across 100% of our titles in the U.S., tweeted about by showrunners like Mike McMahan, most recently awarded Best Storytelling for our Star Trek: Lower Decks game by Pocket Gamer. That's not all.
Our teams are hard at work gearing up to launch at least 4 more IP-based titles in the second half of 2024. Back to you, Jason.
Thank you, Lisa, Jim, and Jason for those comments. Very proud to be working with such a strong C-suite of incredible people. Thank you for your time today, now we'll turn it over to some questions from the analysts.
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press the star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. First question, we have Neal Gilmer with Haywood Securities. Please go ahead.
Yeah, thanks very much. Good afternoon. I guess my first question is whether you're, you know, willing to or provide a little bit more commentary about some of the timing of the titles to expected to be launched this year. I guess the genesis behind my question is obviously trying to get a better sense of the revenue outlook, you know, given the levels of where we're at in Q1 here compared to some of the quarters last year.
Hey, Neal, it's Jason. Yeah, I mean, you know how these things are. They're fluid. We're, you know, moving games into soft launch. We're tech launching them. You know, we want to make sure we get them absolutely right. You know, we're definitely seeing the rewards of that in Bud Farm: Munchie Match of, you know, we could have pushed this game out harder earlier, we're working hard on getting everything just right so that when we do that big push, it will be sustainable and long term. As I've always said, I will always make the choices that are best for the long term of this business instead of, you know, pushing out quickly to make numbers for a quarter. Always long term focused.
That being said, most of the titles that we have are very much weighted towards the back half of the year. You know, there's little bits and pieces of what we're doing in Q2 here, and which to be fair, Q2 is pretty much half over already. Q3 is coming quick. Yeah, they're heavily weighted towards the back half of the year, especially Q4.
Okay. Can you provide any sort of high-level commentary on how Doctor Who's been received out of the gate here?
Yeah. It's, you know, it's done what we expect, which is it's got a strong cult-like following. You know, it's doing solid revenue. It's profitable. We will make our investment in it back relatively quickly. It will continue to perform for years and years to come. It hasn't been, you know, extremely material in moving the overall numbers, especially for Q1 where, you know, it didn't launch until mid-March, so it wasn't able to do much for Q1. It is, you know, it's one of the titles that is in our 7 titles that are doing more than CAD 20,000 a day.
Okay. Thank you. A clarification, I think in the prepared remarks, the reference was ARP down the quarter was $0.97, but I have in the press release and the MD&A was $0.95. Did I miss here?
I believe. I'm not sure which one is correct off the top of my head. I believe, J.C., do you have it in front of you there? I wanna say it was 97. What's the press release says 95 and the, and the presentation says 97?
No, the press release says 95, the MD&A says 95. It was the prepared remarks sounded like was 97.
Yeah. Okay. Yeah, no. The, the press release would be right.
Okay. Okay.
Apologies.
Okay, no worries. Just maybe the last one for me, just again, trying to figure out a little bit on the expense side. The R&D investment that you did in Q1 was still notably down from Q1 of last year. What's sort of your outlook on what sort of R&D you're expecting to invest through the balance of 2023?
Yeah, it's gonna be similar. I mean, as always, you know, especially in this current market, you know, we wanna have positive EBITDA, we wanna have positive cash flow. You know, the R&D investment's gonna be similar. It's probably gonna step up a little bit later in the year as we're, you know, now in the process of ramping up games that will launch in 2024. As such, you know, investment in that will step up. You know, it might go to CAD 2 million, but it's not like it's gonna go to CAD 10 or something.
Right. Fair enough. Okay. Thanks very much. I'll pass the line.
Thanks.
Thank you. Next question comes from Adir Katzav with G.A. Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my questions here. Something that kind of caught my eye, both from the press release and your prepared remarks, was Munchie Match just being a strong performer in terms of D1 retention, D7 retention. Correct me if I'm wrong here, but the match genre is one of the newer ones for you guys. Can you kinda speak to how that success could carry over into new titles and kinda what you've brought from the idle genre into the match genre, and how all of this kind of goes into like another newer genre that you guys could potentially be looking to launch this year or later next year?
Yeah, absolutely, I can take that one. This is Jim Wagner, the Chief Product Officer. With our strategy around match is to do exactly that, is to bring our expertise of what we did with idle. Idle is a genre that when we set out to make an idle game, typically had high retention, high engagement, but very low ARPDAUs. We look to use a similar playbook to what we did with idle to take match, which is a genre that also has high engagement and lower ARPDAUs than what we see in our other titles, and bring some of those best practices to increase our ARPDAU to the levels that we like with around the Live Ops and event-driven content that we proved out in idle.
Long-term, we see this as a huge expansion to our business in terms of being able to apply, you know, major IPs to it, things that may not be the right fit for idle, but would absolutely fit with match. Then also with by cracking that code and bringing a higher ARPDAU to match, we can target more niche audiences, which has been very, very successful for us on idle.
Okay, great. You know, we are, like you said, Jason, call it halfway throughout Q2. What are you seeing from the broader environment? I mean, the macro still remains somewhat uncertain. What are you seeing from the consumer? How are they kind of, interacting with your games in terms of their spending behavior? To the extent you can speak about it.
Yeah, I think, you know, the market in general is tough. You know, inflation is a huge issue. People are worried. You know, the sky hasn't fallen yet. Here we are, halfway through May, about to be June. Summer is coming. You know, you know, we're all still alive. The zombie apocalypse didn't kick in yet. You know, we're seeing. You know, consumer spend is definitely down from where it was, you know, at the height of the pandemic and even in Q4. You know, the tool sets and advertising partners are continuing to get smarter about IDFA and targeting.
If you look at AppLovin's earnings report today, you know, they're up strong on the fact that, you know, ad spend has been increasing, as in we're finding the same thing. You know, we're slightly better able to track things, finding better ways to aggregate data to make smarter choices about our marketing spend. On the whole, I feel like things are getting better. People are feeling stronger. I think the, you know, the massive increase in interest rates, you know, while helping the broader economy, you know, some of the fallout from that is yet to be seen. You know, most of our consumer spending behavior is the kind of $4, $10, $15 margins.
It's not like going out and buying a new car or am I gonna buy a house. This is very much entertainment money. I like to refer it to it as, you know, cigarettes and beer money. It doesn't matter, how much your paycheck got cut or, you know, that your kid needs new braces. There's always money for cigarettes and beer. That's where a lot of the spend levels on mobile games happen.
Excellent. Thank you. Just one last question from me. You know, Doctor Who and some of these newer titles have kind of been launched in this once you've kind of realized the full impact of like IDFA and ATT. Can you kind of give us a sense of how your strategy has changed in this environment to kinda launch these games?
Yuen was on the call, she could speak best to this. What's most important is that we really need to focus on IPs that have strong followings and IP partners who are willing to work heavily with us to reach that audience. You know, discovery on the mobile platforms is all but annihilated. Thank you very much, Apple and Google. So now we really have to reach that audience on our own. And paid user acquisition is a big part of it, but it's also eats up a lot of margins. So we're very much looking at...
You know, for example, we have a couple of music acts that, you know, everybody knows and loves, you know, one in the hip hop genre and one in the rock country genre. Both people with, you know, multi-decade histories, massive followings, are undeniably the, you know, kings and queens of their particular genres. We're relying on them and have worked into the contracts with them to have them really heavily promote these games. Not just post a couple ads up on their Instagram, but to really be deeply involved in pushing this game, helping us create creative, doing viral campaigns, and as well as, you know, their own social media and tool sets to be able to reach that fan base. That's how you're going to win in the future of mobile, is reaching these cult-like audiences.
You know, Marvel Snap is one of the great examples over the last year of a game launch that did go very, very well. We're learning from that playbook and looking at, you know, how do we invest deeply when we do wanna do one of these IPs. It's not just the cost of game development, it's not just the cost of the agreements with the talent. It's what is everybody gonna do to make a real proper splash in a marketing campaign. Some of the titles that you'll see us launching late this year, with, you know, world-class celebrity will very much follow that playbook.
Excellent. Thanks, guys. I'll pass forward.
Thank you. Next question, comes from Neha Upadhya with Industrial Alliance.
Hey, guys. Just a quick question on the seasonality. Jason, do you continue to anticipate seasonality to continue this year and to the same extent as you saw the past couple of years? How should we think about that?
Summer sucks. Everybody goes outside, talks to their families and goes to the beach and plays golf and all that other stupid stuff instead of staying inside in the rain and playing video games all day. Yeah, we absolutely see some seasonality. Yeah, it's not only do we see. Honestly, but like, we don't necessarily see massive drops in DAU as people still play the games. We just don't see them playing the game 37 times a day. You know, they might only play it three or four times a day. You know, the players stick around, they don't churn, but their engagement isn't quite as heavy as it is during the, you know, the rainy, gray, cloudy months that we all know so well in Canada.
Gotcha. Perfect. Thank you. The other question I had was on the UA strategy. Obviously, it shifted, especially considering, I think, you launched a super marquee game. What type of changes have you made in your user acquisition strategy, and what kind of improved efficiencies do you see here?
You know, we continue to learn and get better at, you know, how we target things and how we manage our campaigns, especially in the post-IDFA world. J.C. can speak a little bit about the numbers and our spend levels.
Historically, this time last year, we had two marquee events that happened, like we launched The Office and we launched RuPaul. That coincided roughly around the same time as Apple killing IDFA. What we noticed was that during those times, the cost of acquiring user actually shot up. I think the percentage around that time usually hovered around 40%-50% UA percentage of revenue. For a mature game, we normally expect about 20%. What we're doing right now is essentially focusing on the UA campaigns that work. I know the growth team under Nancy and Wally and all are looking at it very closely to make sure that when we deploy ads, we get the maximum return on it.
I'm noticing that this trend is paying off in the last few quarters. Roughly, we've settled at around 25% in the last, two quarters. I'm finding that as a company, we are getting that return on the ad spend, more efficiently than we did before.
Perfect. Maybe one last question from my end. Obviously, IP-backed games are more successful for a variety of reasons, and I know you're always in talks with IP owners and whatnot. Can you talk about the pipeline in terms of, are you focusing more on match or idle games? How do you decide which IP you make a match or an idle game?
Lisa, do you wanna talk to that one?
Sure. As we think about it, we look for, you know, really, really loyal cult-type fan bases, ones that have tattoos on their bodies because they love the brand so much. We look at the profile of that user base, the demographics of that user base, and we look at the demographics of the genres that we look at and marry the two together that way. As we work through it with the IP partners, you know, we're looking from toy to music to real world live events, and we're looking at where those people are, what else are they doing. We're looking at their user profiles. We're making the calls that way. You know, we know that the match genres are, you know, skew a little bit more feminine.
When we marry that to the right IP that has that same kind of following, we see that success.
Gotcha. All right. Thanks, guys. I'll pass the line.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. The next question we have Scott Buck with H.C. Wainwright. Please go ahead.
Hi, guys. Thanks for taking my questions. Jason, can you talk a little bit about what the conversations are with IP owners given the macro environment? Are they, you know, is their focus elsewhere, or are they as eager as they were, you know, maybe, 12, 18 months ago?
Everybody's still eager, absolutely. Everybody is beginning to, not everyone, but most are realizing that, you know, in the new world order of discovery, you know, heavier engagement by talent is required. But yeah, we're still... Now as we go on, honestly, we're talking about, you know, even bigger and bigger IPs than we're already working with. You know, The Office, of course, is absolutely massive. And we don't always just choose an IP based on how broad its audience is. You know, like Lisa mentioned, it's really about having those fanatics, those cult-like followings that we know will decrease our user acquisition costs and increase our retention. All of these IP holders want to do deals still, but what's great for us is the structure of those deals is changing.
It's moving away from the, you know, minimum guarantee, give us $1 million upfront, go build the game, and then good luck to you. That was the typical model of 8 or 10 years ago. Now, the partnerships are much tighter. The funding models are often hybrid, where we see IP holders actually contributing to development costs and marketing partnerships, et cetera, et cetera. You know, I can't say specifics around talent, IPs, or even IP partners, but I can tell you that the landscape has shifted dramatically. And I wouldn't say in our favor because it's. Sure, the deal terms are in our favor, but because of the nature of the market, it's much more challenging. You know, the risk levels are still there.
If these were slam dunks, everybody would do it. You know, we still know that you have to launch X number of games, and some of them are gonna be complete flops, some of them are gonna get on base, and occasionally you'll get a home run. I would say we are very much due for a home run, and some of the ones in our pipeline can absolutely be that. That being said, you know, titles like RuPaul and especially The Office still have tremendous potential for growth, and we're still working very closely with those IP holders to unlock that audience, you know. The Office as an example, you ask the average Office fan on the street, they're not gonna know this mobile game exists. we need to, and they're working with us to solve for that.
All right. That's helpful. My second question, just on cash. I'm curious what you guys feel like you need to run the business in terms of cash on the balance sheet and, you know, what would cause you to get more aggressive around the buyback?
I'd love to get more aggressive around the buyback tomorrow, but the problem is the rules in the market. You know, you're only allowed to buy a certain percentage of the VWAP, and you can't buy it up, so you have to always underbid. There's so many rules it drives me crazy. We're literally buying shares absolutely as aggressively as we can, and we can barely make a scratch. If you could go ahead and talk to the FCC and the Canadian Securities Administrators about that, we'd really appreciate it.
Appreciate it, Jason. I'll see what I can do. Thanks for the time, guys.
There are no further questions.
Appreciate your time. We'll follow up with whatever calls. Unless anybody else is gonna jump in with another call, that's it. Thanks for coming out. Thanks for all of your support and can follow up with individuals later. Feel free to ping me if you have additional questions.
Ladies and gentlemen, this concludes today's conference call for today. We thank you for participating and ask that you please disconnect.