GameSquare - Q2 2024

Executive Summary

• Record quarterly revenue of $28.6M; reported YoY +151% and sequentially +61% vs Q1 reported; management also cited +24% YoY on a proforma basis and +22% QoQ, reflecting FaZe integration momentum and UEFN demand.
• Adjusted EBITDA loss improved to $(5.4)M; margin improved to -18.9% of revenue; sequential improvement of $2.5M supports a path to breakeven by Q4 2024.
• Guidance maintained: FY2024 revenue >$100M and gross margin 22.5–27.5% (proforma); management introduced H2 2024 higher-margin revenue of $55–$60M and reiterated the goal of positive adjusted EBITDA by Q4.
• Balance sheet actions: raised >$36M non-dilutive capital, added $6.5M via a paid advance, and repaid the remaining $5.7M senior secured convertible note; these steps de-risk near-term liquidity.

What Went Well and What Went Wrong

• What Went Well

  • “GameSquare delivered strong growth and record quarterly revenue…benefit from accelerating momentum across many areas of our business,” driven by UEFN world-building and FaZe Media’s reboot and new creator roster (1.2B quarterly views, +28% in three months).
  • Adjusted EBITDA improved meaningfully YoY and QoQ, with a $2.5M sequential improvement, underpinned by growth initiatives and cost reductions.
  • Cost actions advancing integration synergies: approximately $18M of annualized costs removed at FaZe, with further reductions expected in H2.

• What Went Wrong

  • GAAP net loss widened to $(12.0)M vs $(4.1)M YoY, reflecting higher operating costs and below-target gross profitability in the quarter.
  • Reported gross profit was $4.2M on $28.6M revenue, below the full-year gross margin guidance range (22.5–27.5%).
  • Adjusted EBITDA remained negative at $(5.4)M, with ongoing transaction/legal and integration-related costs still impacting results.

Transcript

Operator (participant)

Good afternoon, and thank you for joining us for the GameSquare Holdings 2024 second quarter conference call. On the call today, we have Justin Kenna, GameSquare's CEO, Lou Schwartz, President, and Mike Munoz, CFO. During the call, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session.

Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements.

For information about forward-looking statements and risk factors, please see our 10-Q for the quarter ended June 30, 2024, which will be available on the company's website or with the Securities and Exchange Commission. I would now like to turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead.

Justin Kenna (CEO)

Thank you, and good afternoon to everyone joining us on today's call. I'm extremely excited to review the progress we're making at GameSquare as we pursue strategic priorities aimed at creating a fast-growing, highly profitable and next-generation media business. Activity across our business is high, and we are making significant progress towards optimizing our business model, investing in our long-term growth, and improving profitability.

While we still have work to do, we believe our pro forma results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. On a pro forma basis, revenue was $28.6 million for the 2024 second quarter, representing a 24% increase year-over-year and a 22% increase from 2024 first quarter.

Strong revenue growth during the second quarter reflects the initial success of the actions we've taken and the strategies we are pursuing to rapidly grow our business. I'm extremely pleased with the significant improvement in profitability as our pro forma adjusted EBITDA loss for the 2024 second quarter improved to $5.4 million from $10 million for the same period last year, and $7.9 million for the 2024 first quarter.

The $2.5 million improvement in adjusted EBITDA loss over the past three months provides us with growing confidence in our efforts to reach profitability by the 2024 fourth quarter, as we expect further revenue growth, higher gross margins, and additional OpEx reductions to benefit our business in the second half of the year.

As you can see, we expect to see the same, if not greater, dollar improvements in Adjusted EBITDA in the third and fourth quarters as we approach profitability. Our operating plan for 2024 focuses on three main components. First, to complete the integration of the FaZe Clan acquisition and significantly reduce our cost structure. Second, to strengthen our balance sheet and divest non-core assets.

And third, to leverage our platform of owned and operated IP, agency and media, and SaaS technology assets to drive profitable growth. I'm pleased with the progress we have made executing our plan during the first half of the year, which I believe will result in accelerating revenue growth and significantly enhanced profitability in the second half of the year.

I'll use the rest of my time today to provide a business update before turning the call over to Mike, who will review our second quarter results in more detail. As a reminder, in March of 2024, we completed the acquisition of FaZe Clan, an all-stock transaction valued at $14 million.

FaZe Clan is comprised of two assets: FaZe Esports, which is one of the world's best and most recognized esports organizations, and FaZe Media, which is one of the largest followed gaming brands in the world. As part of our strategy for the FaZe Clan acquisition, we understood that in order for FaZe Media to be successful, FaZe's founders and creators must be at the helm, have an ownership stake in the organization, and be empowered with the creative direction.

As a result, we have completed two important transactions at FaZe Media to align GameSquare, FaZe's founders, and other key stakeholders around plans to return the brand back to its roots and reboot FaZe Media for success in 2024 and beyond. First, in May, we formed FaZe Media as a separate standalone entity that combines the FaZe creative talent roster and non-esports assets into a creator-led IP and internet media company under the leadership of CEO FaZe Banks, an original FaZe founder.

We simultaneously closed an $11 million investment in FaZe Media from Matt Kalish, a founder of DraftKings, who now serves on the board of FaZe Media. Second, in June, we agreed to sell a 25.5% interest in FaZe Media to an entity controlled by FaZe's CEO, FaZe Banks, valuing FaZe Media at $14 million.

Under the terms of the transaction, GameSquare retained voting control of the transferred shares for a period of two years, during which FaZe Media will continue to be consolidated into GameSquare's financial statements. We believe these transactions create the proper infrastructure for FaZe Media to be successful, as FaZe Media now truly is a creator-led IP and media company, supported by the leadership and expertise of Matt Kalish and full resources of GameSquare.

When we acquired FaZe Clan, the brand was suffering from significant losses, declining community engagement, and no clear strategic direction. I'm extremely proud of our efforts to turn around FaZe Clan's performance and bring the brand back to life.

This is a direct result of the return and hard work of the FaZe founders under the leadership of CEO FaZe Banks. The strength of GameSquare's platform, our history with and knowledge of the brand, and most importantly, our belief that if managed correctly, FaZe can reengage with an extremely committed community and lead to monetization opportunities in the coming months and quarters. I'd like to use this opportunity to thank everyone at GameSquare and FaZe for their hard work and dedication over the past two quarters.

Since FaZe Media's reboot in April of 2024, the reengagement of the community has been fantastic. A couple of highlights include four of FaZe's talent roster were in the top 50 most watched streamers worldwide in July. FaZe's creative roster has gained 4.5 million new followers since May and now has 173 million followers in total.

FaZe's roster garnered over 1.2 billion total views in Q2 2024, a 28% increase in three months. Finally, from April to July, FaZe Clan's weekly viewership has increased from 1.5 million hours watched to a peak of 4.8 million hours watched. An impressive 3x increase in just four months since the brand's reboot.

Driving engagement with FaZe's community is an important indicator of future growth opportunities for GameSquare, as engagement helps support a robust pipeline of brand deals and future monetization opportunities. In fact, we have multiple seven-figure deals that we expect to convert to partnerships in the coming months. In addition to GameSquare's ownership and voting control in FaZe Media, we continue to own 100% of FaZe Esports.

As one of the top esports organizations in the world, we believe there is an enormous opportunity to profitably grow FaZe Esports. Following a similar strategy that successfully grew our former esports team by over 220% in just two years. Supporting FaZe's brand overall is important for FaZe Esports, too. We're currently working on several opportunities to begin monetizing FaZe Esports with a new multiyear sponsorship and partnership deal opportunities.

As you can see, in just a short period of time, we are quickly rebuilding FaZe Clan, creating a proper foundation, and developing new monetization opportunities that we believe will support multiyear, high-margin revenue opportunities for GameSquare. We are also focused on driving efficiencies and reducing costs at FaZe Media and FaZe Esports.

When comparing the second quarter of 2024 and 2023 results of FaZe Clan, we have removed approximately $18 million of annualized costs and believe there are opportunities to remove additional costs throughout the remainder of 2024. With a more efficient operating model and a more disciplined management structure, we believe there is a lot of opportunity to drive profitable growth at FaZe Media and FaZe Esports, especially as each businesses -- as each business scales.

Our second quarter improvement in adjusted EBITDA reflects the initial benefits of our integration strategy, and we expect additional enhancements to our cost structure in the coming quarters. We are extremely excited by the opportunities the FaZe Clan acquisition represents and how the brand fits into the GameSquare ecosystem.

As part of our plan throughout 2024, we have sold non-core business assets that optimize our business and strengthen our balance sheet. Year to date, GameSquare has raised over $36 million of non-dilutive capital, raised over $16.5 million of new capital through a private placement and a prepaid advance agreement, and paid off the principal balance of our senior secured note.

As a result, we have significantly strengthened our balance sheet and capital position and have the financial resources in place to support the growth strategies we are pursuing and taking advantage of growing demand trends currently underway across our global markets. The final component of our plan in 2024 I want to review today is the opportunities we are pursuing across our owned and operated IP, agency and media, and SaaS technology assets to profitable growth and improved profitability.

Since our first quarter, our first quarter call, we've made progress growing our owned and operated IP, agency and media, and SaaS technology assets. Starting with owned and operated IP. As I mentioned previously on today's call, FaZe Media's highly successful reboot and new talent roster is driving engagement within the community, which is supporting our deal pipeline and beginning to contribute to GameSquare's revenue growth.

In addition, during the second quarter, we launched a FaZe Clan co-branded product line with SteelSeries to retailers globally, and we recently announced a partnership with the NFL to launch a new traveling creator series called NFL 4 The Fans Live. This innovative series blends the excitement of NFL fandom on game day with interactive gaming and creator-driven content, accessible for an in-person and online audience during the 2024 NFL season.

We are also starting to see growing revenue contribution from our newly created events business through GameSquare direct-to-brand experiences with partners such as Epic, owned IP, such as the recently announced NFL partnership in the creative series, programming partner opportunities such as our SEICon partnership in Las Vegas, and large-scale esports production with the FaZe Halo Championship Major.

In fact, events in the second quarter contributed over 5% of consolidated revenue. We are continuing to develop this area of the business with more partnerships and announcements, which we expect to come in the second half that will showcase this continued revenue growth and our growing expertise.

Looking towards growth in our media and agency businesses, we continue to pursue opportunities that expand our publisher relationships with major players like Epic Games and leverage the rapid success of our UEFN world-building business. Just last week, we announced over $3 million of total new brand partnerships with renowned brands, including Topgolf, 5-hour ENERGY, and Dairy MAX, as well as multiple soon-to-be-announced projects with leading global sports, media, and entertainment companies.

Our pipeline continues to grow, and we expect to announce additional new partnerships as we enter the seasonally strong second half of the year. Finally, on the SaaS and technology side of our business, we continue to combine our data and insights capabilities with our creative management and activation platform to deliver a more comprehensive solution set to game publishers and brands looking to drive targeted audiences and improve revenue performance.

In addition, we have developed an innovative AI-supported solution that leverages our data and technology stack to uncover influencers and creators based on unique search criteria. By utilizing our platform for data analysis and audience insights, companies can identify the most influential creators to partner with for their marketing efforts. We believe that this data-driven approach ensures that campaigns are effectively targeted and yield high-performing ROI and performance-based returns.

Our new AI solution is set to launch in the coming weeks with a customer that operates one of the largest online mobile games. We plan to make this capability available to other customers as part of our broader rollout plan throughout the quarter. Additionally, we are excited to announce the expansion of our managed services to include even more tailored solutions for our clients. This will include end-to-end campaign management, content creation, and performance optimization.

By offering these comprehensive services, we can now provide a one-stop shop for companies looking to enhance their marketing efforts through creator and influencer-led partnerships. As we look to the back half of the year, we are excited by the direction we are headed. We believe we will start to see the benefits of the investments we made in the first and second quarters throughout the second half of 2024.

In addition, we are already seeing positive momentum underway across several of our markets as our refined platform resonates with global brands. While 2024 has already been a busy and transformative year for GameSquare, we believe we are just getting started, and I'm optimistic about reporting on our continued success on future calls. With this overview, I'd like to turn the call over to Mike to review our second quarter financial results.

Michael Munoz (CFO)

Thanks, Justin. As a reminder, 2024's financial results include multiple corporate actions. Most significantly, the March 7, 2024, acquisition of FaZe Clan and the March 1, 2024, sale of Complexity Gaming, which has been treated as a discontinued operation in our 2024 and 2023 year-to-date results.

We also further divested non-core assets during the year on May 31, 2024. As a result, we believe it is best to look at our business on a pro forma basis, which includes a full year-to-date contribution of FaZe Clan. Comparing our 2024 second quarter pro forma results to prior year, total revenue was $28.6 million, compared to $23.1 million. The 24% year-over-year increase in revenue was primarily due to growth from FaZe Clan operations and programmatic advertising.

Gross margin on a pro forma basis for the 2024 second quarter was $4.2 million, or 14.8% of sales, compared to $4.6 million, or 20.1% of sales for the same period last year. The declining gross margin for the year reflects a less profitable mix of sales, which temporarily impacted gross margin in the second quarter.

We expect gross margin to improve going forward, supported by a more profitable revenue mix in the second half and actions underway to improve gross margin. As Justin mentioned, we have made significant strides in improving our operating cash burn figures over the last 12 months. On a pro forma basis, Adjusted EBITDA loss for the 2024 second quarter amounted to $5.4 million, compared to a loss of $10 million last year.

As a percentage of revenue, our adjusted EBITDA loss improved from 43.5% for the 2023 second quarter to 18.9% for the 2024 second quarter. We believe the integration activities between GameSquare and FaZe Clan will yield annual cost savings of approximately $18 million in 2024 when comparing GameSquare and FaZe Clan pro forma combined results in Q4 2023 to the combined results in Q4 2024. With this overview, I'll turn the call back over to Justin.

Justin Kenna (CEO)

Thanks, Mike. Before we open the call up to questions, I want to review our expectations for the remainder of the year. After a solid first half, we believe we are extremely well positioned to achieve well over $100 million in annual revenue, with an annual gross margin to range between 22.5%-27.5%.

We anticipate revenue growth to accelerate in the third and fourth quarters. In addition, we remain committed to pursuing strategies that expand gross margin, reduce SG&A expenses, and drive profitability.

As we look to the seasonally strong second half of the year, we believe we are well positioned to achieve our guidance and benefit from dramatic improvements in profitability. I believe our strong first half financial and operating performance supports our initial success in creating a fast-growing, highly profitable, and next-generation media business.

I look forward to updating investors on our success on our third quarter conference call in November. Lou, Mike, and I are happy to take questions. Operator, please open up the line to any questions. Thank you.

Operator (participant)

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause a moment as callers join the queue. Once again, if you have a question, please press star, then one. The first question comes from Sean McGowan with Roth Capital. Please go ahead.

Sean McGann (Managing Director and Senior Research Analyst)

Thank you. Thanks a lot for the time. I don't know if this is a question for Mike or Justin or Lou or anybody, but can you tell us if there were any unusual items that drove the gross margin to its level in the second quarter? As you know, 'cause it looks like your target for the year implies, you know, a pretty steep rebound in the back half of the year. So was there anything in the quarter that was unusual? And, you know, what gives you the confidence that it can rebound that much?

Justin Kenna (CEO)

Yeah, I can kick off, and Lou or Mike, feel free to add in to this. Sean, the Q2 results had a higher percentage of programmatic revenue within the mix, which is our lowest margin area, and it kind of drags the blended down.

You'll see from sort of some of the recent news, you know, the $3 million that we spoke about in recent sort of brand wins. They're from, you know, being driven from the agency side of the business, which are much higher in nature. So, you know, we do tend to see a fair spike on the agency side and the owned and operated IP side in the back half of the year.

So you will see that seasonally, we are stronger in the back half of the year than the first half of the year, and that tends to come from that higher margin revenue. So it may seem like a bigger jump just based on the numbers, but you know, for each dollar of growth within agency and owned and operated IP, you're gonna see a real increase in margins.

So we still feel very confident in being able to hit that number. We expect back half of the year margins to be far greater. We still expect revenue to grow, but I think the mix of that revenue will come more from the agency and owned and operated IP areas, rather than large sort of growth from programmatic.

Sean McGann (Managing Director and Senior Research Analyst)

Okay, thank you. And two kind of housekeeping questions. Can you remind us of where on the income statement we would see embedded, you know, things like the transaction costs and, it, you know, is stock-based comp in one line, or is that kind of spread around?

Michael Munoz (CFO)

Yeah, I can answer that. So all stock-based costs in general, administrative expense, we don't spread it between the three primary operating costs. Sorry, Sean, what was the former question?

Sean McGann (Managing Director and Senior Research Analyst)

Where, yeah, where is transaction cost embedded in the PNL?

Michael Munoz (CFO)

Transaction costs, yeah, roll up into other operating expenses.

Sean McGann (Managing Director and Senior Research Analyst)

Okay. All right, thank you. And then my last question is kind of a general question, I guess, for you, Justin. You know, we're in a weird economic times. We get good news some days, we get bad news, we've got election stuff, you know, a lot of moving parts. What's your sense among your advertising partners as to what to expect as we go into the holiday season?

Justin Kenna (CEO)

Yeah, it's certainly been tricky, Sean. I think that there was a lot of, you know, discussion earlier in the year that ad and brand spend was back, and we found that our pipeline was really growing, but brands were still quite hesitant to spend. But we're in a really strong position. I mean, that pipeline that we've been working on is starting to really resonate, and close and translate into real revenue.

You know, again, we mentioned some of the brands attached to sort of the new $3 million of agency recent wins. I think we mentioned there are a couple of sort of 7-figure deals on the FaZe side, that we're in the process of closing out, and there's real pipeline into the back half of the year.

So there's definitely mixed stories coming out of, you know, ad and brand world, but we're certainly feeling like we're breaking through, and we expect that to continue. So, you know, Q3, Q4 is looking really strong for us. You know, we talked about the growth of our events business. There's a lot of events in the back half of the year from a gaming perspective. You know, you have a lot of majors from the esports perspective.

There's TwitchCon, we have an NFL Creator series. So there's a number of real catalysts there. But from just the advertising perspective, yeah, we're closing deals right now and, you know, I think that this is certainly a space where we are starting to see those dollars finally kind of flow in.

So yeah, we feel really good about the back half of the year.

Sean McGann (Managing Director and Senior Research Analyst)

Okay, thank you.

Operator (participant)

This concludes the question and answer session. I would like to turn the conference back over to Justin Kenna for any closing remarks. Please go ahead.

Justin Kenna (CEO)

Thanks, everyone, for joining the call today. We sort of touched on the fact that we're very much looking forward to giving another update in November, and we are. You know, this is certainly, you know, we've been working tirelessly around the integration of FaZe and the cleanup on that front.

I think you've seen some of the benefits in the Adjusted EBITDA improvement, but we expect that to really continue in a material way. So we're excited to continue sort of putting runs on the board and, you know, this is sort of our first real combined, you know, set of financials, and we're very much looking forward to showing that continued improvement.

Like we talked about, getting to profitability, and we are, you know, we are very aware that that is gonna be key in these markets. So we're well on track and looking forward to catching up with everyone in November. So thanks for joining and thanks for the continued support. Cheers!

Operator (participant)

This concludes GameSquare's 2024 second quarter financial results conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.