Good morning, ladies and gentlemen, and welcome to the Rivalry Q2 2024 conference call. At this time, all lines on the listen-only mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 29, twenty twenty-four. I will now like to turn the conference over to John Vincic. Please go ahead.
Thank you, operator, and good morning, everyone. Our speakers on today's call will be Steven Salz, Co-Founder and Chief Executive Officer of Rivalry Corp, and Demi Abidogun- Benson, Interim Chief Financial Officer. Before we begin, I would like to remind listeners that certain statements made during this conference call presentation may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Rivalry Corp and its subsidiary entities or the industry in which it operates, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. When used in this conference call presentation, such statements use words such as may, will, expect, believe, plan, and other similar terminology.
These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this presentation. These statements involve known and unknown risks, uncertainties, and other factors, including those risk factors identified in the company's MD&A, dated August 29, 2024, under the heading Risk Factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The company undertakes no obligation to update or revise any forward-looking statements, whether a result of new information, future events, or otherwise, other than as required under securities legislation. And now, I would like to turn the call over to Steven Salz. Steven?
Yep. Thank you, John, and thank you, everyone, for joining us today. We're pleased to have posted the strongest net revenue margin in company history at 62.5%, which supported 22% year-over-year growth in net revenue in the quarter and 3% sequential growth. We also included news in the earnings release about how Rivalry Token is already driving results, including CAD 1.7 million in revenue generated subsequent to the end of Q2, and we expect this to remain a revenue stream for the business throughout the rest of the third quarter and into the fourth quarter. This is an important development that I will come back to later. As we've made margin growth an area of focus over the past several quarters, we are happy to see it deliver.
However, to some extent, this involves a trade-off with handle growth, which did see declines year-over-year, but we believe long term we are taking the right steps, and this supports our path to profitability in the immediate term. We first identified margin as a priority one year ago on our Q2, 2023 investor call. We recognized that Rivalry's margin was below the industry average and that this would hamper our efforts to achieve profitability. In response, we made adjustments to our offering and launched new higher-margin products like Same Game combos and pre-made parlays, which have become increasingly popular with our players. Since its release in January 2024 , we've accepted over 500,000 pre-made parlay bets, improving sportsbook hold and driving net revenue.
The impact can be seen in our financial results, where we have now set new all-time highs for net revenue margin in two consecutive quarters. Our margin for the first half of 2024 at 60.5% is a full 15% above the full year 2023 margin of 45.5%, and we believe there's more upside to go. I mentioned that the pursuit of a higher margin affects handle. Parlays are high entertainment value products, but on average, players end up with a bit less of their wallet available to place the next bet, as odds of winning a parlay are lower than single bets. However, the potential winning payout for the parlay is much larger. So on average, our margin goes up, but aggregate handle can be negatively impacted.
We accept that trade-off and will continue to ride that line of driving margin while engaging and supporting player retention for continued play. As mentioned in our earnings release this morning, we are narrowing our focus on two key areas that we believe are showing the highest potential for growth in our history. The first is channeling resources to acquire, engage, and retain VIP players, and the second is expanding into the crypto segment through Rivalry Token and incorporating Web3 technology across our product suite. We've made a substantial amount of progress on these initiatives over the past two quarters with an exciting roadmap ahead that I'm keen to share.
Before I speak to these two core initiatives further and how we expect them to strengthen our business, I want to state that we acknowledge recent share price performance is not where our investors nor our team wants it to be. With respect to that, I'd like to detail what we believe our business has delivered exceedingly well up until now, what is and isn't advancing our business objectives to the next phase of growth, and how we're moving forward to deliver that. Since we founded the company, Rivalry's vision has been and remains to create the de facto online betting product, brand, and experience for digitally native consumers.
As we've communicated many times, this is a demographic reshaping how consumers interact with technology, products, and media, and it's impossible to overstate the difference in behavior, consumption, and entertainment preferences between a generation that grew up on the Internet and prior ones. Finding success among them requires a unique and tailored strategy that Rivalry has been trailblazing, and we believe there is uncapped upside in delivering this experience to the user correctly. In hindsight, however, we made some strategic missteps along the way relative to supporting VIP or high-value players. We over-indexed on creating value for the high volume of players who would be considered low value by industry standards, meaning they do not place a high dollar value of bets. In online gambling, the ratio is typically 10%-20% of players will drive 80%-90% of revenue.
This is not unlike other consumer sectors, such as mobile games or even products like language learning app Duolingo, who recently noted that about 10% of its users drive more than 80% of their revenue. Up until recently at Rivalry, however, we spent a great deal of effort delivering a world-class experience to the inverse, the 80%-90% of players who deliver a smaller percentage of the revenue, and this was core to our thesis on the space and where we believed we could create outsized value, and we did. However, in hindsight, this has elongated our path to reaching critical mass and therefore profitability, as the relative scale required to hit that tipping point is much higher, so this lens and framework around focusing on this segment of our player population permeated how we built an online gambling product.
Additionally, in an effort to establish customer trust and transparency, we were overly conservative on player management and risk profiles. We've adjusted the risk profile while maintaining compliance, but it now puts us in a far more competitive position, reducing friction for users onboarding into Rivalry and creating a better experience for VIPs, which we are now relentlessly focused on serving with the same obsessive dedication to their success as we had been up until now on the other side of the player base. That said, it's not all for naught, as all of these decisions still built a very positive experience for the vast majority of our player base.
This has driven outperformance as compared to our peers in engagement, retention rates, and cost to customer acquisition, and I'm certain these features will create value for VIP players as we rapidly backfill the other missing pieces of enabling their experience. Despite the need to push along this course correction, we have still managed to increase our net revenue more than 7x and our underlying margin by 50% since our IPO in 2021. Over multiple quarters, we've shown a consistent stabilization in our operating expenses and continue to cut spend while driving net revenue growth and hitting record customer KPIs. Internally, we have maintained and strengthened our operational excellence, performance, culture, output, and ability to drive outcomes, allowing us to seize new opportunities and iterate quickly.
Beyond VIP, we are also demonstrating this today through a rapid expansion into crypto, which has yielded very motivating early results. I have extreme conviction in the direction we are headed and the team responsible for getting us to the next stage of growth. Before I go any further, I'm going to ask Demi Abidogun- Benson to review our Q2 2024 financial results in greater detail. As I'm sure everyone saw, Demi was recently appointed Interim CFO at Rivalry, and I'd like to welcome her to her first inaugural quarterly investor call. Demi is a financial leader with over a decade of experience in corporate reporting, auditing, and strategic planning, and prior to joining Rivalry in February of 2022, Demi was the Director of Finance at Swash Digital and spent more than ten years with Deloitte Canada, working across the U.K., Southeast Europe, and Canada.
Now, Demi, over to you.
Thank you, Steven. Betting handle was CAD 87.8 million in the second quarter, representing a year-over-year increase of 22% from CAD 112.2 million in quarter two of 2023. As Steven described in his remarks, our emphasis on margin improvement has had an impact on overall betting activity. However, we believe our growth initiatives will begin to offset this without an increase in overall expenditure. Gross gaming revenue of CAD 7.4 million declined year-over-year by 12%. The rate of decrease was less pronounced than handle, consistent with our trend of holding an increasing amount of GGR as a percentage of handle. Despite handle pressure, net revenue of CAD 4.7 million was up by CAD 0.8 million, or 22%, from quarter two of 2023.
As a percentage of GGR, our net revenue margin was 62.5%, a record result for Rivalry, eclipsing the previous record of 58.5% established just last quarter. For comparison, our margin was approximately 45%-46% throughout 2023. Steven described some of the factors contributing to margin improvement, led by the popularity of a number of higher-margin products introduced in the past several quarters. Looking at our two segments, gaming generated 60% of handle, with sportsbook accounting for 40%. This split is consistent with what we have seen over the past several quarters and compares to a 50/50 split a year ago. The sportsbook segment generated a larger share of gross gaming revenue, accounting for approximately three-quarters of GGR. The gaming segment, at one quarter of GGR, was at the high end of its historical range.
I will now turn to operating expenses. Total operating expenses decreased by CAD 0.5 million, or 5%, compared to quarter two of 2023. Marketing, advertising, and promotion expenses was the only operating expense item to increase year-over-year, up modestly by 12%. This was more than offset by decreases in the other two major items, with general and administrative down 8% and technology and content down 31% compared to quarter two of last year. And I would like to note that in the third quarter, the company has continued to make select cuts to its marketing expenses and rationalize teams where possible as part of narrowing our focus around VIP and Rivalry Token initiatives.
The combination of higher net revenue and lower operating expenses led to a CAD 1.3 million year-over-year improvement in loss from operations, which was our narrowest of the past five quarters of CAD 4.8 million. Net loss of CAD 5.8 million represented a smaller improvement of CAD 0.9 million from quarter two of 2023. This quarter, we recognized CAD 0.5 million of interest expense on the convertible debenture, which was not applicable a year ago. This is a non-cash expense, as interest will be accrued until the end of 2025. Lastly, I will briefly touch on our financial resources. We ended quarter two 2024 with CAD 4.6 million of cash.
Subsequent to quarter end, Rivalry Token has generated CAD 1.7 million in additional revenue, and we anticipate this to continue to be a revenue stream throughout the rest of quarter three and into quarter four. With our current cash position, new revenue streams, tight working capital management, and cost structure adjustments that we have initiated in the third quarter, as noted earlier, we remain confident in our liquidity position. I will now turn the call back to Steven.
Thank you, Demi. We are deeply focused on advancing the priorities I've outlined earlier. One, developing our VIP customer base, and two, expanding into the crypto segment. Starting with the latter, we believe our movement to incorporate Web3 technology and extend our brand into the crypto market will be one of the more significant catalysts in our history. Industry estimates suggest that crypto gambling accounts for up to one quarter of betting handle globally now. This figure is poised to grow as digital natives age further into the industry's Goldilocks zone and seek out crypto compatibility in their products. The world of crypto overlaps neatly with our existing user base, deepening our already strong product market fit among digitally native users, while unlocking a new audience of bettors that is more engaged with higher revenue potential, aligning closely with our VIP strategy.
In addition to releasing a more fulsome crypto wallet and payment experience last quarter, we also announced Rivalry Token. Rivalry Token will be our native cryptocurrency, integrated across our platform to elevate the user experience, from retention to loyalty and engagement, with plans to launch the product later this year, subject to market and product-related considerations. While Rivalry Token hasn't fully launched yet, customers have been able to engage with it by connecting their digital wallets, earning rewards through site activity, and most recently, a new web-based product we deployed in August. Since then, users have been able to opt in to receive NUTZ, which will later convert into Rivalry Token for their sports wagers, casino activity, and other actions to be performed on the site. The first phase of this project has marked the most successful reactivation campaign in Rivalry's history.
More than half of the opted-in customers were churned users, while another 15% were new. In roughly 90 days, Rivalry Token has attracted a geographically diverse audience that is twice as valuable as our average user in terms of revenue potential and lifetime deposits. Opted-in users are exhibiting more activity and engaged behavior than our average customer, playing all days of the week and spending 2/3 of betting handle on casino. These upward trends in revenue and player engagement are by design and closely connected to the utility and value created for users through the token. Subsequent to quarter end, Rivalry Token drove CAD 1.7 million in revenue, validating our crypto strategy and product potential. This is expected to remain a revenue stream for the business throughout the remainder of the third quarter and into the fourth quarter.
We have an extensive roadmap ahead for Rivalry Token and intend to build on our early momentum. Soon, we'll be releasing new social-based products and games to drive connected wallets, acquire users, and capture market share in the crypto gambling segment. Later in the year, again, subject to market conditions and product considerations, Rivalry Token is expected to launch, which is called the Token Generation Event, or TGE, where opted-in players will claim tokens to be deposited directly into their crypto wallets that they can then use to interact with the site and our offerings in a variety of ways we will detail in the coming months. As seen in the early KPIs for Rivalry Token, our crypto strategy supports our focus on high-value players, but it will not end there.
We recently kicked off a large and highly focused effort across multiple departments to better acquire, engage, and retain VIP players on our platform. On the product side, we're working hard to rapidly enhance our payment speeds, limits, and overall experience, and we will also be adding greater depth to our sports book and casino content. We've already optimized our onboarding experience to streamline and reduce unnecessary friction for users that want to play on Rivalry, and we'll be shifting our attention to the rest of the customer journey. This includes the development of high-value player loyalty programs, tailored CRM efforts, onboarding additional VIP managers as needed, and adjusting our marketing funnel to optimize for high-potential LTV players that we've built a robust business intelligence engine and tools to detect early in their journey.
The efforts I just noted are only the high-level buckets, which fan out into various other efforts that are underway. We have delivered well above market success on the 80%-90% of players that, in an online gambling business, typically drives 10%-20% of the revenue. We're now going to be applying that same deliberate and thoughtful effort to the inverse. I'm confident this can unlock a significant change in our business scale. Additionally, we are nearing licensing agreements for our original casino content and plan to kickstart our B2B business in the coming months.
Apart from opening up a new line of revenue for the company, we believe the interest expressed in our in-house casino game IP is very validating of our game development strategy, which we have also seen internally based on the performance of Cash & Dash, which is our most recent game, released late last year. As Demi noted in her remarks, we will continue to manage our working capital very tightly. All the initiatives I've described are not capital intensive, but more a matter of redeploying organizational resources around these new priorities. We recently undertook some workforce rationalization, consistent with the need to pivot towards new skill sets. We feel confident we have rebalanced our teams to support these focused initiatives. So with all that said, we do expect our expenses to remain flat or trend down over the coming quarters.
The growth signal we are seeing in these initiatives, and as demonstrated by some of the early figures provided today, is extremely motivating for us and represents just the beginning of the growth potential we believe both VIP and the token hold for our business. With that said, and at this point, we'll open up the call for Q&A. So operator, you can provide the instructions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one. To withdraw your question, press star two. Again, if you'd like to ask a question, press star one. One moment, please, for your first question. Your first question comes from Jack Vander Aarde from Maxim Group. Please go ahead.
Great.
Okay, great. Good morning, Steven, and welcome aboard to Demi as well. Congratulations. So I appreciate the update, and thanks, thanks for taking my questions. Steven, can we just maybe touch on the Rivalry Token a bit further? It's definitely a key focus of yours now, and you're already seeing sounds like some tangible results. So that CAD 1.7 million of additional revenue in the third quarter, just trying to understand a bit, was that? Is that gross gaming revenue? Is that net revenue? Just from an accounting maybe perspective, how do we think of that? And then how do we expect that to ramp throughout the rest of the year, based on where you are? I know it's early stage. Thanks.
Yeah. The exact accounting treatment, I can't specify at this stage. I mean, this is... but this is revenue that is, you know, right kind of into our hands and cash in the bank. Like, it's, you know, accessible for us. So it is essentially users, or let's say, various groups that have pre-purchased the token ahead of its release, which they would want to do for various different reasons and different benefits. You think of it as, you know, pre-ordering, a book that an author is releasing in the future, and then the author has to deliver you the book. People have pre-purchased the token, and then we have to deliver them the token, and again, there would be various reasons why they would want to do that.
Yeah, this is in addition to just like our ongoing, let's say, gaming business, but obviously is tied to it because the token is going to interface and be a key piece of utility within that business. So, yeah, in terms of the actual ramp, we do expect to show more than the $1.7 million within Q3, and then, yeah, without giving kind of guidance, but another number that we expect to be kind of as meaningful in Q4 as well. So it will continue to be kind of a core part of, I guess, our revenue profile, certainly for the remainder of this year.
Okay, great, and then, you know, the B2B licensing update, that's an exciting opportunity. I think that'd be a completely new revenue stream for you guys, which I'd imagine be higher margin as well.
Yeah.
Any additional color there? I mean, you mentioned one opportunity in the near term here. Is that an exclusive opportunity? Do you expect more B2B opportunities? Just any more kind of bigger picture, full color of what the B2B strategy is and your view of it?
Yeah.
If it relates to any new markets?
Yeah.
Thanks.
Kind of appreciate we've been talking about this one for a little bit. It just turns out it's not operationally the easiest thing in the world to take a business that's B2C and built original casino games for itself, and then turn around and start servicing other people with that content, which also requires, depending on the jurisdiction, licenses, because you have to become a supplier of gaming content, right? Let alone then contracts and all the kind of things you need to do. We essentially right now are zeroing in on a relationship that will distribute the games across the world, I would say kind of more gray markets. So this is like an aggregator-type product where we would be a participant in a casino aggregator.
And then another would be we are zeroing in also on a potential opportunity in a very, very large regulated geography with, yes, like an individual operator that is going to look a little bit more like an exclusive relationship. And again, they both have their different kind of quirks in terms of timing. The larger, call it gray market aggregator, is a little quicker and easier. The regulated market one is a little challenging because, yes, it’s not just the being able to service that specific provider, but also being able to legally, within a regulated market, be a supplier of licensed casino games.
Meaning even the existing content that we have and our existing gaming content, along with a bunch of other new games that we're developing and are going to be released, needs certification. We've got certification in terms of obviously the way we're offering it on our current product, but it may not exactly meet the spec of specific regulators in specific markets that will have slightly different specs for the licensing of casino content that can be supplied. So that's just what has made this take a little longer and why we've been talking about it for, I guess, two quarters now. But yeah, we're in the process of closing those. There's been no deviation from those happening. It's just yeah, it's just honestly purely a timing thing at this point.
Okay. Got it. And, yeah, I do want to get on. I want to revisit your profitability guidance for the back half of the year.
Sure.
And just kind of understand the levers a little bit, just given you know, the focus on VIP users and the crypto token, but also keeping in mind the handle. It's come more efficient spend for maybe lower handle.
Yeah.
But you're converting a lot of it. So how do we get there? What's your view of how you get to profitability? What are those levers? Is it largely cost cuts? Is it margin improvement? Is it incremental revenues? Help paint the picture.
Yeah, so the same levers we've spoken about in the past, which is we're driving margin as hard as we possibly can, which you can kind of see in the results, obviously. So that, that's gonna help a lot of the, let's say, some of the rationalization and changes that we made around workforce and even marketing spend, we initiated effectively right at the start of Q3. So a little bit of that, some of that's obviously gonna be shown therefore, like in the Q3 results, but none of it was shown in Q2 in terms of, some of those OpEx reductions. So that will help.
And we're, as we said in the remarks, we're looking to make additional cuts around, you know, certain areas of, let's say, marketing spend, where we could find even more efficiency in terms of what we're doing without materially deviating the ongoing profile of the business. So being able to push margin, continue to push margin higher, continue to cut costs. Again, there was some cost cutting that was done earlier in the quarter and not reflected in Q2. Potentially more that would therefore offset some of the overall operating expenses within Q3 and then Q4 and beyond. We've got net new revenue stream in the form of Rivalry Token. That is not insignificant, right? If you look at $1.7 million relative to, let's say, as a percentage of net revenue we even put up in this quarter, it's fairly decent.
We're also expecting to show more than the $1.7 million in Q3, and then again, something similar in Q4. This is, like, quite additive. You know, you're talking like a 30%-40% increase, right, in revenue profile. So the combination of those three things alone give us confidence in terms of just like managing our liquidity profile and our ability to push toward profitability. And then, yes, like the last one is driving margin as hard as we possibly can. Sorry, driving the VIP business as hard as we possibly can, obviously. So this is a part of the industry, as I said in my remarks, that we, we've always obviously known existed. We weren't naive to the fact that VIP and high-value players is an important driver for the industry.
We just had a very specific thesis that did not really have the lens of the company turning its attention towards that type of player. They, they obviously exist within our database. We've seen them come through. Are they as successful as, let's say, the lower-value player that retains extraordinarily well relative to industry? No, they're not, because we just we did not focus on them. So, you know, the ratio of how many VIP players you need relative to, let's say, a typical lower-value player is massive. So you need to just satisfy and make a few of those players successful to equate to a fairly decent amount of growth. So yes, we do expect that initiative is gonna start bearing fruit probably September, but then pushing much harder in October, November, December, meaning Q4.
So that is like another kind of layer then on top of everything I said earlier, that just gives us confidence still in our overall positioning and the direction we're going. And then the last one would be, but it's just a little bit more of an unknown, because, again, we can't perfectly nail down the timing of when the token gets released just because there's things out of our control. You know, one of them is, like, exchange listings. Like, you list your token on crypto exchanges. Getting listed on crypto exchanges is not some, you know, one, two, three, simple step process. It's a. There's lots of different factors, and it's not a thing you again perfectly control, but is a thing that we need. That's not even included anything I mentioned.
And then, releasing the token in terms of what we've seen for precedent of what releasing a token to a user base and attracting the kind of, let's say, crypto gamblers that come in to receive tokens and participate in that kind of economy, that is another additive growth factor. Again, we're currently expecting to contain that also within 2024. At this point, with what we're seeing, I'm just qualifying that there's some unknowns that may push it further, but if we see that also in 2024, then that becomes like another lever. So yeah, there's a lot, like, at our disposal obviously, right now, and clearly, we feel we have enough tools to be able to deliver.
Okay, that's really helpful color, Steven. I appreciate that. Maybe just one more question. Thoughts on just kind of the overall new major regulated gaming markets. Any, what's your perspective on the Brazil market? Is Rivalry actively pursuing that market? How does this impact you? I think it's on track to be, you know, one of the third largest regulated markets in the world, but I think it's on track to open sports in 2025 early . So is there a place for Rivalry expansion opportunities in Brazil or anywhere else that you want to touch on?
Yeah, it's hard to say. Like, all these markets look different in terms of how they transform into a local licensed market. So we're not 100% sure at this point. Like, I think we're expecting the Brazilian market to look a lot like other markets in LatAm and in other geographies, where, given the nature of how the licensing regime has come together, there's just a high degree of uncertainty in terms of what's going to be economic and who will be economic by participating with a local license versus not. So I think at this point, like, we're still obviously in the evaluation phase and haven't really pushed too hard in that direction at this point.
Yeah, and then in terms of other global markets, you know, not anything I can really comment on and not something we're really looking at right now. We're quite satisfied with the geographies that we're in, and the availability of markets within our Isle of Man license is a priority for us, just given we see a higher return on invested capital through that regime than we do through others right now.
Okay, great. Well, hey, it's great to see the margin improvement, and you're on track for profitability. So I look forward to tracking that and your, your crypto developments as well as those ramp. That's it for me. Thanks.
All right. Thanks.
Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one. And there are no further questions at this time. I will turn the call back over to Steven for closing comments.
Yep. Thanks, operator. Thanks, everyone, for joining the call. As always, you can shoot me a note offline, and we can continue the conversation there. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.