Ladies and gentlemen, thank you for standing by, and welcome to the East Side Games Group second 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 the speaker today, Jason Bailey, Board Chair, CEO, and Founder of East Side Games Group. Thank you. Please go ahead.
Thank you, operator, and welcome everybody to East Side Games Group's Q2 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 Scheck, and our Chief Product Officer, Jim Wagner. I'm very excited to share highlights from the second quarter ending June 30, 2023. I will also be giving an update on our business strategy and key events that have taken place since we last reported in May. Mr. Chan will go into greater detail on our financial results commentary for the period before turning it over to Lisa and Jim for some 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 second quarter press release and MD&A for cautionary 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 be available on our website. Q2 was a quarter that saw us achieve our core goals. Namely, we posted CAD 2.5 million in Adjusted EBITDA, bringing our year-to-date total to over CAD 5 million. This was achieved primarily through cost reductions and smart fiscal management by our new C-suite. We have talked about this refocus extensively on the past two earnings calls, and Q2 shows the fruits of that labor.
We have a strong business that is profitable, growing, and well-financed and lean. A business with a strong pipeline of new products to layer on top of our existing strong foundation. Revenue for Q2 was CAD 21.3 million, despite having no new game launches and reducing ad spend from CAD 24 million in Q2 2022 to CAD 11.6 million in Q2 2023. This spend reduction saw revenue decline, but we feel we have re-reached a sustainable margin with our seven live ops titles. They are all running with lean and focused teams. Our new games pipeline is strong, and we continue to invest heavily in it. Lisa and Jim will speak to this more later in the call. We have a strong, growing, profitable business with an enviable IP portfolio and a broadly diversified base of games driving revenue.
We have 7 titles that make up almost 95% of our revenue and no single title accounting more, for more than 25% of revenue. I'll now pass it to Mr. Chan, our interim Chief Financial Officer, for some comments.
Thank you, Jason. As mentioned, although revenues this quarter have declined, I want to emphasize that our strategic decisions and operational efficiencies have driven higher margins and positioned us well for a sustained success. We ended Q2 with CAD 21.3 million in revenue and Adjusted EBITDA of CAD 2.5 million, roughly an 11.7% margin. This is our highest so far this year and almost twice as much as Q2 of 6.4%, and our third straight quarter of over 9% margin and CAD 2.5 million in Adjusted EBITDA. Our focus on optimizing our cost structure and refining our UA strategy has yielded remarkable results in terms of profitability. As mentioned before, for UA spend, specifically in Q2 2022 year-to-date, our expenditure was roughly CAD 24 million.
This year, it's down to CAD 11.6 million, a 52% decrease. We will continue to improve and adapt this as the market landscape changes. Our average daily users for the quarter were 273,000, which is slightly down from the first quarter, with the rate of our repeat daily users remaining strong at 28%. Our cash on hand at June 30 ended at CAD 2.8 million. This drop is mostly related to the timing and Apple payment structures and minimum IP guarantee payments. This is offset with a rise in our age receivables, which has since been collected to bring us back to CAD 5 million cash level. This included Apple, as well as CAD 1.4 million in outstanding GST returns delayed by the CRA strike.
Cash flow from our core operations before working capital changes, is strong at CAD 4.8 million, which is consistent with last year's Q2 results. In addition, we've also purchased 682,653 shares under our NCIB through June 30. This is an average cost of CAD 0.98 per share, and we'll continue to be as aggressive as we can on that front. As we navigate the road ahead, we remain steadfast in our long-term vision, and we'll continue our focus on the path of sustainable growth and profitability. Thank you for your continued support. With that, I will pass it off to our Chief Product Officer, Mr. Jim Wagner.
Thank you, Mr. Chan. Looking ahead to the remainder of the year, ESG will see major releases and continued development into new games for some of the biggest names in television, sports, music, and toys. We have a diverse set of projects we are developing that double down on our success with IP-driven idle games, as well as expanding into the idle RPG category, where we found success with RuPaul's Drag Race Superstar. The idle RPG category offers more depth and strategy for mid-core players, leading to increased stickiness, long-term engagement, and opening up more IPs in the future that map favorably to this subgenre.
With our existing portfolio of games, we'll be focusing heavily on profitability by porting successful revenue-driving features such as season passes, interstitial ad placements, and live event mechanics that have proven themselves on at least 1 other game in our portfolio and can be expanded to all of the games in our portfolio. This applies not just to engineering, but design and balance as well, where we can release a new event balance in 1 game, see the positive uplift in revenue, and turn that around in weeks to our other games. Producing and innovating on new balances is a huge focus for Q3 as we saw those initiatives as having the strongest lift in Q2.
Supplementing our idle games, our Match-3 game, Bud Farm: Munchie Match, continues to grow month-over-month in its core KPIs as we innovate on the Match-3 genre with our best-in-class LiveOps strategies that we developed and honed on our idle simulation games. Continuing on this trajectory, we are excited about the indicators of future success in the Match-3 genre and the potential product and IP pairings that open up many opportunities for the studio in the future. Over to Ms. Lisa Scheck, our Chief Operating Officer, for additional comments.
Thanks, Jim. In Q2, we've been piloting new and innovative ways to promote our games outside of traditional paid user acquisition. We are seeing support from our celebrity influencer partners, like RuPaul himself, who has a 4.4 million person following on social media. We recently signed a partnership with Voss Events to promote our exclusive RuPaul's Drag Race Superstar mobile game across all live shows around the world, as well as engage influencers through podcasts and referral codes. You can now see our game trailers on the Jumbotron at Universal Park and at the physical The Office Experience in Washington and Toronto. The landscape has changed, and we're approaching our go-to-market strategies completely differently, embracing cross-channel marketing. Towards the end of August, we will be announcing our biggest new game for 2023, which will be the best example of this approach.
We are working with an extremely supportive IP partner and planning a strategy that will span television advertisement, social media, influencers, communities, and massive physical event spaces. For our soft launch, we are expecting to reach an audience of over 300,000 people before we even touch traditional paid user acquisition. We see our celebrity partners expand their own presence outside social media, from launching pet food brands, physical products and clothing lines, embracing shows, and so on. IP partners are more interested than ever to tie in and to market all their initiatives cross-channel. With our announced Squishmallows launch in 2024, you will see a game QR code on every toy. With another partner, we will have trailers playing at every physical event. With a third unannounced celebrity partner, we will be on the packaging of their physical products.
We're looking forward to continuing innovative approaches to grow the next wave of our IP games. Back to you, Jason.
Thanks, guys. In Q3 of 2022, we made a promise to investors to focus on EBITDA over top-line growth. We have very much delivered on that promise with 3 consecutive CAD 2.5 million quarters. We have grown our margin to over 11% and plan to continue that focus and increase that margin further. Thank you for your time today, and we will now open it up to questions from the analysts.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your telephone keypad. You will hear a 3-tone prompt acknowledging your request. Questions will be taken in the order received, and should you wish to cancel your request, please press the star followed by the 2. Once again, that is star and 1 to ask your question. Your 1st question comes from the line of Neil Gilmer from Haywood Securities. Please go ahead.
Yeah, thanks very much for the questions. Wanted to see if you are able to provide any more details on the times of the timeline for the 6 titles you referenced in active development? I know you did just reference 1 that's scheduled for the end of August. Just trying to get a idea for sort of the cadence or sort of upcoming catalyst of when we might expect to see some of these new games launched.
Hey, Neil. Jason. Yeah, we can talk a little bit about them. Like we said, there's a big one coming in the end of August that we're super excited about, which will be, you know, it's already in tech launch. If you're smart and crafty enough, you'll know where to look to see exactly what it is, I'm not going to tell you. That one's coming in August. That one's going to soft launch in Europe, then in conjunction with some major in-person events, then it'll, it'll go worldwide later in the year. There's another one coming, that's, you know, soft launching again very soon, but that will be a much slower rollout, that will probably launch worldwide in Q1.
Then there's another one with a, a well-known rap star that is coming out late in the year. Then there's another one, probably Q2, Q3 of next year, that'll go worldwide. Then, of course, Bud Match, a game that we've been talking about for a long time, that continues its growth and development through soft launch. We're hoping to go, you know, do a proper worldwide marketing launch, hopefully as soon as October.
Okay, great. I appreciate you going through that.
Yeah.
A question on the gross margin. This quarter was a significant improvement, up to just over 67% from 60% last quarter. I think the last time we were up this level was Q1 of 2022. There's something unique in this quarter, or is this something that's more sustainable going forward with some of your cost reduction initiatives?
Yeah, I mean, I'm not too worried about the, the growth mark, because that fluctuates with the differences between ad-- what, how much is ad revenue and how much is IAP. Of course, with ad revenue, we don't have to pay the 30% tax to Apple and Google, so we're always trying to grow that portion. I don't think you'll see it, you know, significantly increase or decrease. It kind of fluctuates between there. We're much more focused on, you know, the kind of the bottom line, net income and, and making sure that, we're stacking cash as, as our cash position is okay right now, but it's not, what we'd like it to be. Especially in today's market, stacking cash into the hill is a primary priority.
Okay. Maybe one final one for me before I pass the line. Obviously, you did mention the, the reduction in UA spend. I saw that in the MD&A as well. Are you going to continue to reduce that from these levels, supported by some of what, you know, Lisa went through as far as your organic marketing initiatives?
The level we're at right now, we're very comfortable that all of the money we're spending is coming back and is a profitable spend. There's all of the spend that was kind of, you know, the, the old adage of, of half my marketing spend is working and half of it isn't, I just don't know what half it is. We kept the half that we know for sure is working. The half that was questionable is gone, and we have no plans of bringing it back anytime soon as the, you know, the, the user acquisition, paid growth market continues to tighten up, despite the fact that our, our friends at AppLovin put out a record quarter yesterday. I strongly encourage you to look a little deeper on that one. There's definitely shenanigans going on there.
Yeah, we're I think, I think the, as a percentage of revenue, it should remain around where it is. I don't see. I mean, honestly, that's where we've seen why we've seen that, that drop in revenue. I'd love to be able to increase it because I know that if we do increase it, it's because it's, we know it's going to be profitable and therefore will increase both ends of the spectrum. Right now, we're pretty comfortable where it is. We'll we're sure we're in the, in the, the, the right zone.
Okay, great. Thanks. I'll pass the line.
Thank you. Once again, should you have a question, please press star, then the 1 on your telephone keypad. Your next question comes from the line of Adhir Kadve from Eight Capital. Please go ahead.
Hey, guys, good evening. Thanks for taking my questions. I wanted to ask on the demand environment in gaming. You know, I know the summer months are a little bit tougher. People aren't on their phones, and, you know, that kind of carried over from, from, or that's kind of a contrast to last quarter. Broadly speaking, what are you seeing in the demand environment, for gaming and mobile gaming, more in particular?
I'm not seeing a lot of like, you know, people, people still play games even in the summer. It's just the number of sessions a day where we see the biggest difference. Come, you know, come September, when everybody's going back to school and the rain start to come, we see an uptick in, in usage. You know, Christmas is always a fun time because everybody gets a new phone and is excited to, you know, download the latest devices.
I don't think demand as a total level is changing much, but what we do see is, you know, with the new console development and the new wave of consoles finally being available, people are splitting their gaming time between multiple devices more often, and they're spending more time, you know, playing on their PlayStations and their Xboxes than just on their mobile phones. Again, you know, people tend to play both, so we're not really seeing too much change. You can see that in our, in our DAU numbers that are, you know, kind of flat quarter-over-quarter. You know, that's mostly going to be influenced by, by success of new titles to really see that take a, take a significant uptick. You know, we're holding on to the eyeballs that we got.
Understood. Then you guys mentioned that, you'll be somewhat adaptive with your UA spending. I'm just wondering, what would you need to see to really kind of push the push the pedal on that? Is it more like, what would you have to see, see in the broader environment to increase that? Is IDFA still kind of rearing its head in, in, in your UA spending?
IDFA is a, you know, a long, deep pocket of info that I don't want to get too deep into. We've covered it extensively in the past, but, you know, with the changes in fingerprinting, we'll see how that plays out. The biggest hope right now around UA and paid UA is new inventory coming into the ecosystem. You know, right now, the core source is, you know, the AppLovins and Unity ironSource of the world, Facebook, providing a lot of that inventory that we use to place our ads to get new players. You know, TikTok is really interesting in what they're doing and the game platform that they're trying to build.
That, you know, as we all know, is also a very complicated place with, with international regulations and issues around that and a slightly younger audience. But, you know, TikTok is definitely a place we're watching closely as that inventory expands and becomes more accessible. Then the other place is, you know, free advertising support of television. The, you know, the Rokus and, and, you know, there, there's, there's a 12 different kind of streaming aggregators and television aggregators out there, as well as, you know, the Netflixes and, and, Disney+s of the world. You know, Netflix is talking about their advertising supported tier. As we see that roll out, we hope there will be inventory available in those places, that would give us a spot where we can spend.
You know, right now we know we're doing a very, very good job in the existing marketplaces. New marketplaces are always dangerous. These guys, these guys will take your money all day long, and, poof! It will disappear. You need to be really smart about how, where, and what you spend in these platforms, because you can, you can evaporate millions of dollars real fast. You know, we watch those markets. We're always doing little tests in those markets. The hope is, is that over the next months, one of those opportunities comes together. That's, that's what would get us to step up spend, is, is that access.
Awesome. Thanks, guys. I'll pass it away.
Thank you. Your next question comes from the line of Scott Buck from H.C. Wainwright. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my questions. Jason, you, you've proven that the, the model can be operated profitably. With, with the new games, I guess, set to launch at the end of this month, are, are we gonna take a kind of a step back in terms of, you know, positive EBITDA as you, you market around those new launches? Or are you gonna continue to try to operate at, at this kind of profitability level?
I'm gonna try and continue to operate at this profitability level, and in fact, continue to increase it. The, you know, as this new title comes out, you know, as Lisa was saying, we're really leveraging our IP partners to allow us to reach those audiences more effectively. We will do paid UA as part of that, but we're not, you know, and to be fair, we're not in a position to do what we just saw our friends at Scopely do, which is launch the MONOPOLY GO! game, which has been a, you know, a great example of success in the mobile games market this year. But they did that by spending at least CAD 50 million, if not CAD 75 million a month, marketing the hell out of that thing.
You know, it's a great title and it's doing well, and it will make its money back, but that's not our plan for this title that we're launching at the end of the month. We're going to be much more focused on leveraging the IP partner. We will do some paid user acquisition, but I don't anticipate spending, you know, CAD 2 million, and have that come back over a longer period of time. At least not, you know, at the end of August. If, if the numbers come back and are, are absolutely fantastic and the justification is there to do it, then we'd do that in, in Q4.
Great. That's, that's helpful. I'm curious, you know, obviously, you have a, a pretty strong new game pipeline here over the next, you know, few quarters. Looking further out, what, what are your conversation with IP owners like today? Are they still as excited about, you know, the opportunities in mobile gaming as they were maybe, you know, 12, 18 months ago?
I don't think anybody's as excited about mobile gaming as they were 12, 18 months ago. As, as you know, the, the marketplace has significantly shifted and changed and definitely become a big boys game. You know, Apple and Google have, you know, changed their outlook on that ecosystem, not only by changing the App Store access and organic discovery, but also, you know, all the crackdowns around privacy. You know, console games have, have really had a bit of a renaissance in the last six, eight months, and so a lot of focus is going over there, and a lot of them are excited about that. A lot of them are excited about the transmedia stuff and, you know, everybody wants to be Barbie right now.
You know, even, even The Super Mario Bros. Movie, that movie did really well. People are looking at a lot of that, and mobile is no longer their number one focus and especially in the challenges of launching a new game right now. The conversations are ongoing and, you know, that's, that's bad news in some ways, but it's also good news because it allows us to be more aggressive on our negotiations and be more choosy about the titles we wanna work with. Also being that it has become a big boys game, the competition to build for those IPs is much less than it used to be. We're able to pick and choose much better, and that is very much our focus right now.
You know, we've done a great job in the idle market, and we feel like we, you know, really truly are the leaders in that space. Right now, our goal is to do the same in Match-3. With Bud Farm, for example, over the last 2.5 months, we've been able to dramatically increase ARPDAUs in that game. You know, the game has always had phenomenal retention rates, but the ARPDAUs have always been a little bit lower than we wanted them to be. With the features and additions that we've made to that game over the last couple of months, we've seen a well over 50% increase in ARPDAUs, and we believe we can, you know, achieve that much again, if not more, over the next few months with the features that we have planned.
If we're successful in that, which we're confident we will be, now we can take that formula and apply it to many, many other IPs and essentially do the same thing, you know, and have a Trailer Park Boys match, and a Cheech & Chong match, and a Office match, and a RuPaul match, and, and et cetera, et cetera, on down the list. That is our focus right now. We don't wanna get too far ahead of our skis, so we wanna make sure that we know Bud Farm is gonna work in that manner before we start committing to massive MGs to these IP partners. It's around the corner.
Well, that makes sense. That's it for me, guys. I appreciate the time. Thank you.
Thanks, Scott.
Thank you. Mr. Bailey, there are no further question at this time. Please proceed.
All right. Well, thanks for coming out, everybody. You know, feel free to ping me email for any follow-up or specific details. You know, the short answer here is, is really that, you know, we continue to be focused on margin, EBITDA, and, and profit growth. You know, we're gonna keep that. Neil, is kinda popped up at the last second trying to squeak in under the wire. If you wanna ask a question, buddy, you just made it. Operator, can you let Neil ask a question?
Thank you. We have another question that's on the line of Neehal Upadhyaya from Industrial Alliance. Please proceed.
Perfect. Thanks, guys. Sorry about that. Thanks for taking my question, Jason. In terms of RuPaul, obviously, you know, you mentioned you can go out and speak with individual queens and do social media promotions there, but I imagine for titles like The Office, it'd be much harder to get individual characters to market to their social media platforms. Beyond that, how are you thinking about differentiated marketing in those types of IP titles?
Yeah, it's definitely challenging working with talent, you know, especially in today's strike environment. Yeah, the working with people to push not just to their social media followings and by doing videos and more and more live in-person events happening, that's where our real push is. And as you'll see through this new title we're launching at the end of August, it is a, a, you know, a live event-based IP. We'll really be pushing out at those live events that are also televised. Having, having, you know, exposures and codes and et cetera, for our actual things going out, you know, on TV, at live events, you know, in-person events to users, we're hoping it's gonna make that significant difference. We're focused on that.
Thank you. Apologies if I misheard, but I believe you mentioned that you entered into an agreement, to promote the RuPaul game across the shows that they kind of host. Can you talk about the economics of this? Is it a one-time payment? Is it payment per show? How, how does that work?
It's, it's, you know, it's slightly different everywhere. The, you know, in, in some cases, we're able to just use up unused inventory in, in with some partners. In other cases, yes, we have to, you know, especially if they're going out on a network, then we, we, you know, we might pay to be part of that if we feel like the value is there. And, and others, it's, it's when it's going out on their social channels, et cetera. You know, we're trying to leverage all of the, all of the different things we can. I mean, you know, the, the, the being on the Jumbotron at the Universal Studios theme park is, is a great example of, playing it across the board.
I mean, we're not, we're not as big as we would all love to be, but, you know, a great marketing example for the year, of course, is Barbie. That movie was successful not only because it was a great script and a great story and an incredible acting and directing, but it was a marketing campaign unlike any other. You know, everywhere you went, things were pink and, you know, kind of hitting on multiple fronts, that's our feeling right now with the Queens. You know, it's great that it was Pride Month, but you wanna be in live events, on the TV, on the social media and in email, every, every possible place you wanna try and hit people.
Any place that we can do that affordably is, is a place we'll do it, but we always try to leverage those, you know, call them free opportunities from our IP partners, but they're not really free because, of course, we're, we're revenue, revenue sharing back to them and giving them guarantees.
Got it. Got you. Then maybe, maybe one last one from me. What is the appetite for OTT providers like Netflix to produce games like Dragon Up!? Is that something that you remain bullish on as a major catalyst for the mobile gaming industry?
Netflix. We, we continue to have ongoing discussions with all of these partners. Netflix in particular, are like active, been active in discussions with them on various titles. You know, yeah, I can't say too much. I can't say too much on that one. All I can really say is, is, is the discussions are, are ongoing. They very much are invested in that platform, as are several other OTT providers. Who's gonna win at that? Who's doing it right? All I can say is, is there's lots of people figuring out how to do it wrong, and we're helping them figure that out.
Perfect. Thanks, Jason.
Thank you. There are no further question at this time. Please proceed.
All right. Well, once again, thanks, everybody. Like I was saying earlier, you know, we're focused on increasing margins, increasing profit, making sure that, you know, we have a, a long-term sustainable business. Video games aren't going anywhere. The phone in your pocket isn't going anywhere. The marketplace is changing and evolving as all marketplaces do. The markets are a shit show, we all know that. I don't have to tell the people on, on this call that, but we are very confident that we have a strong, profitable, long-term business with a long tail, that, you know, will come out of this, and we've got a lot of swings lined up. One, if not several of those swings are going to be successful. You know, we'll keep on, on plugging away at that.
Right now, it's really important for us to stack cash into the till and to make sure that we are in a position that if we do have a, a Barbie-like product, that we have the, the marketing budget and the ability to push hard and, and do a Barbie to it. All right. Thanks, everyone.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.