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Ladies and gentlemen, thank you for standing by, and welcome to the East Side Games Group Fourth Quarter 2022 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker, Jason Bailey, Board Chair, CEO and Founder of East Side Games Group. Thank you. Please go ahead.
Thank you, operator, and welcome, everyone, to East Side Games Group's Fourth Quarter 2022 Results Call. On the call with me today is Jim MacCallum, our Chief Financial Officer. And also I'd like to introduce you to Lisa Shek and Jim Wagner, who I'll speak about more later in the call. I will be sharing -- I will begin by sharing highlights from the fourth quarter ended December 31, 2022. I will also be giving you an update on our business strategy and key events that have taken place since we last spoke on November 9, 2022. Jim will go into greater detail on our financial results commentary for the period before turning it back to myself for some final remarks before we open it up to analyst questions. I'd like to remind you that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call includes references to non-GAAP measures. Please refer to our second quarter press release and MD&A for the 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 on our Investors 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.
Q4 was a solid quarter, and I'm pleased with our strong finish to 2022. Q4 was $25.9 million in revenue and adjusted EBITDA of $2.5 million. This is a strong rebound from Q3 as we continue to shift away from aggressive growth at a breakeven target and towards a more focused approach. We canceled projects that were not meeting core metrics and shuffled talent to the projects with the greatest chance of success. The launch of Star Trek: Lower Decks - The Badgey Directive in September 2022 and Milk Farm Tycoon in February of '23 and Doctor Who: Lost in Time in March of 2023 as well as a strong slate of titles yet to be released, sets us up for a very strong 2023 and beyond. We finished 2022 with total revenue of $116.3 million in top line and with $7.5 million in adjusted EBITDA. This is a 25% year-over-year top line growth despite the market headwinds and challenges.
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 titles and no single title accounting for more than 25% of revenue. For 2023 and 2024, we will have a tighter focus on large IP-driven games with cult-like followings. This is where we have had the most success and believe we will continue to in the future. We will be investing in our winners as well as getting smart about what is working in the new market dynamics.
We have signed deals for new IPs and games for the next year with some of the strongest names in movies, television, toys, music and sports entertainment. We have also signed numerous development partnership deals with leading studios all over the world. The strength of our game kit platform continues to fuel our growth as we launch more successful titles using this tool set. 4 of the 7 unique titles which generate more than $20,000 per day have been launched in the last 18 months using this tech.
Partners continue to clamor to get into this program and as the Game Kit product gets more and more extensive, we are able to embrace more and more of these partnerships. Daily active users were 277,000, down slightly from 298,000 in Q3. However, ARPDAU, average revenue per daily active user, increased to $1.04 from $0.94 in Q3. Our mission in East Side Games is to not just 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 a best practices playbook, and we are building deep relationships and trust with every major IP holder. We are building talent density across all of our teams. We are building a multibillion-dollar business with a concrete foundation. We are leading the $200 billion a year game industry on an innovative new path.
Over to Jim for some comments.
Thank you, Jason, and hello, everyone. Before I get into the financial highlights, I'd like to touch on accounting adjustments we made to our financial statements, which impacted the prior years and continued into 2022. The adjustments were advised by our auditors and are fully explained in Note 2 of our financial statements.
Adjustments have required us to capitalize our guaranteed payments for intellectual property contracts and capitalize our outsourced R&D as prepaid amounts -- excuse me, as intangible assets. These costs were largely expensed previously, except where we had prepaid amounts that were recoverable. We also adjusted our accounting for our investment in Truly Social Games.
The restatements caused net and comprehensive loss for 2021 to be restated to $2.8 million from the previously reported loss of $1.9 million. But the restatements had no effect on the company's cash or revenue and in fact, improved the company's EBITDA. The 8-quarter table in our MD&A presents both as our reported numbers and as our adjusted numbers for comparability purposes. As Jason noted, we reported a strong Q4. Decisive cost cuts made during the quarter allowed us to return to profitability. And for the quarter, we generated $2.5 million in adjusted EBITDA compared to $1.3 million in the prior year quarter. Cash on hand at December 31 was $5.7 million.
We recorded strong operating cash flow of $10 million for the year. We have minimal debt with additional access to financing if required. We have purchased 386,000 shares under our NCIB through March 29 at an average cost of $1.12 per share, and we continue to be active in this program. Thank you for your continued support. And with that, I will pass it back to Jason.
Thanks, Jim. Let's take this opportunity to introduce some key members of our team. First, I would like to introduce Jim Wagner. Jim has been with East Side Games for over 10 years and has been instrumental in every title we have launched at the studio. He is currently acting as Head of Product [indiscernible] but starting tomorrow, he will be the Chief Product Officer of the East Side Games Group. Congrats, Jim, well deserved. And in a moment, we will pass it to you to make a few comments. But first, I'd like to also introduce Lisa Shek. Lisa has been with East Side Games for almost 2 years and is an unquestionable star of our industry. With deep knowledge of our products, operations, partnerships and the game development cycle, she is the ideal candidate for her new role of Chief Operating Officer. Jim, you say a few things and then pass it to Lisa.
Thank you, Jason, for that introduction. As Jason mentioned, I have been with East Side Games for over 11 years now. And during that time, I've been intimately involved with the success of our products and my knowledge of their inner workings is second to none. Moving into the Chief Product Officer role, I will be focused on improving the revenue of our 7 profitable games, setting the framework for our next big IP hits and exploring new genres of gameplay to expand our portfolio. By sharing wins across the game portfolio under one cohesive product vision, we can maximize the efficiency and success of Game Kit. Thank you, and over to you, Lisa.
Thanks, Jim. I want to start by thanking the leadership team and Board of Directors for their confidence in me and the opportunity to continue to contributing to the success of this company. As the new COO, I'm focused on driving operational excellence across the organization. This includes ensuring we have the right talent in the right roles, streamlining our operations and processes, and maximizing our efficiency and productivity. Together, we will build a stronger, more successful organization that will drive in today's competitive business landscape.
Back to you, Jason.
Thank you very much. And -- sorry, I lost where I'm on this page. Yes, that's about all we have to say about that. I'm super excited to have these people beside me as directors and officers of this company. We have an incredibly deep bench of people around them that we've built, and we will continue to rightsize that group of people to make sure we have absolutely stellar talent in place as well as the tools and systems in place to make sure we're getting the best of everybody, especially in this remote working modern world of the post-pandemic, whatever you want to call it. It's a quickly changing business landscape everywhere, and we intend to be at the leading edge of that and be the best of the best. So let's move now to some analyst questions.
[Operator Instructions] Your first question comes from the line of Neal Gilmer from Haywood Securities.
I guess two for me. The first one would be on the ARPDAU, just looking through the MD&A here and so forth, and you got that over $1 in Q4, which I think, if my memory serves as sort of one of the sort of key milestones that you're working towards. So how do you -- what do you sort of attribute your ability to accomplish that in Q4? Was there a particular game that contributed to that? And sort of how do you see that evolving as we move through 2023 here?
So a few things happen there. One is like we talked about taking our talent and having them focus on existing titles. So we were able to raise the waters pretty much across the board. Our newest title, particularly The Office: Somehow We Manage and the Star Trek: Lower Decks games both have exceptional ARPDAU, but we were able to lift the boats across the entire way. And Jim Wagner on the call now is in charge directly and has been in managing that LiveOps team to maximize for that. Jim, you want to add anything to that?
Yes. Definitely on the -- it was a concerted effort from all games. It wasn't any one game. We definitely saw an increase over Christmas, especially around the LiveOps games and that was really me stepping in there, working with that team and coordinating them to focus on the right things, moving away from big features and focusing on small wins and transferring all the learnings from our IdleKit to our Game Kit external games into our internal games. And as I said, across the board, all games were up.
Neal, you said you had 2 questions?
Yes. So my other question is, I guess it goes back to, obviously, you did that game for Netflix. And just sort of curious as to sort of where you see the landscape there. Recently actually, yesterday, I saw an article just about you talking about Netflix looking like there's some stuff in their code to allow it to be -- play games on the TV and using like a smartphone or tablet as the controller and so forth. So just sort of curious on whether that's something you still have your eyes on, you're still in discussions to have further development for a platform like that? Or just sort of your thoughts on that sort of aspect of the industry.
Yes. So we know the mobile games landscape is continuing to change and evolve. Both Google and Apple are under tremendous pressure from regulators and from mobile game developers themselves to switch up how they're deploying their platform. They very much operated as a walled garden with that 30% fee and making discovery within that ecosystem, very much controlled and curated by themselves. This has opened up opportunities for other platforms to come in and get better pricing as well as solve for discovery in other ways. And Netflix is one of these platforms. One of the great things about Apple is that they know your credit card number. One of the great things about Netflix is they also know your credit card number. So Netflix is investing billions in building out their gaming platform. Arguably, they have been unsuccessful to date.
None of their games have been exceptional. I don't even want to get started on the reasons why, but we all think we can [indiscernible]. But been talking to others across the industry, I can't give any specifics, but I can tell you that many, many others are considering that same platform play. We're moving in on Apple and Google duopoly, and we are talking to all of those people about various ways we can work together, leverage the Game Kit platform and help them become the next great player in the mobile gaming space, but that's something that's going to play out over the next 1 to 5 years. It's nothing that's going to change this quarter, that's for sure. But it is definitely a very important part of our relationship building over the next years.
Okay. I might squeeze in a small one for Jim. Just -- obviously, we haven't updated our model for all the restatements you have in prior quarters, but did notice a dip in operating expenses in Q4. I'm assuming that that's based on what you said in the restatement comments in your prepared remarks is that you're now capitalizing some of those costs instead of they were going through the expense item before. So sort of the OpEx rate that we see in Q4 is what we should be considering going forward for sort of a baseline?
Yes, I think that's accurate, Neal. We have capitalized some costs, as I mentioned. And -- but we did also reduce costs in Q4. So the run rate is lower in Q4 and going forward into 2023.
Your next question comes from the line of Adhir Kadve from Eight Capital.
Jason, last call, you kind of talked about this kind of new normal post-Apple app tracking transparency services just on user acquisition spending. I'm just kind of giving -- can you just kind of give us a sense of how you guys are kind of operating in this new normal, kind of what learnings you've had over the last 3 months and how you kind of are going to look to apply those as you kind of go forward into '23 with your more focused approach?
Sure. So over the last couple of quarters, we've significantly reduced our ad spend. But as you can see through the numbers, it hasn't had a significantly adverse effect on revenue. It's slowed our growth, but it's also increased our profitability. So we're looking at relatively short payback windows to make sure that all of our advertising spend, and I mean all of it is positive return. We're not building brand or awareness or those types of campaigns. We track everything back to results. So we are much more focused today than we ever have been on how we can measure those things. And in a post-IDFA world, it's very challenging. But we've come up with a number of strategies that we're comfortable with. We have a great user acquisition team currently being led by Nancy Huang, who's been with us for a very long time and is doing an absolutely stellar job of making sure that every dollar we spend turns into more than $1 and taking into account every possible cost and fee to make sure that we're profitable as the days of grow at all costs are long gone. We are very much focused on profitability.
Understood. And then maybe just what you noted that in 2023, it's going to be mostly about the quality of games and quality of the titles and really kind of digging into the marquee titles that have given you success. Can you kind of just give us a sense of the development pipeline and how you guys are actually thinking about those titles? I know you're probably not going to give any in terms of number of titles, but just kind of your high-level thinking about those titles as we move into '23?
Sure, sure. I'm going to let Jim Wagner and Lisa take that a little bit as they are the ones that are deep in the day-to-day. Go ahead.
All right. The way we're thinking about these titles is definitely with a focus on IP partnerships and having the IP partnerships really drive some of that organic traffic. So as we're thinking about the new deals that we've signed, the new deals that are coming online late this year, early next year, we are really incorporating kind of a new go-to-market strategy that extends outside of just paid user acquisition. That will include anything from physical spaces, physical items and really getting a lot more of that support to drive traffic into our titles.
Yes. Specific example of that being we have a deal with a toy making company that's a huge brand, very popular toy, and they will be putting QR codes onto all of their products as they go to the stores, promoting the game and [indiscernible]. So we're hopeful that, that will help boost that organic traffic. And there's a lot of initiatives like that as we, again, trying to grow in this competitive landscape. This is one of the -- how we can further leverage IP to make sure that we win. Jim, you can talk a little bit about how we look at those IP partners in general and the types of games and partnerships that we're looking for.
Yes. I think it's the same philosophy we've had, but even more doubling down on that, which is very strong IPs that have a cult status and deep, deep affinity within their fan base. So looking back at IPs, we recently launched like the Office, Star Trek, Doctor Who, those are IPs that have a deep, deep fan base, and we're able to reach those fans in other ways. And really about going forward, it's doubling down on that. We've seen the success with that, and we're going to go deeper into that. And then from the very upstream on the negotiations is negotiating those additional points of contact to the fans like Jason and Lisa alluded to. So looking at a very concerted eye with IPs that have a strong, strong fan base. Even better if they're underserved. There's not currently projects or products in the marketplace that target them and then working closely with the IP holders to bring an experience and onboarding to their fans in a way that offsets the risks in the UA ecosystem right now.
Excellent. Maybe if I could just squeeze one last one in and then I'll pass the line. Just maybe on some of the newer IP titles like Star Trek and Doctor Who [indiscernible] a couple of weeks back here. What are you kind of finding? What are you seeing with those titles? Anything to kind of call out early days here?
We can't go into too many specifics as these are confidential and with our agreements with these IP holders, we can't release a lot of that information. But I can tell you that we're very happy with these, honestly. And a lot of this is, very much thanks to Lisa and Jim and their teams. The launch of the Office, as we mentioned last year, wasn't quite perfect. We learned a lot from that process. Star Trek was a much, much better launch and we applied those learnings. And then the launch a couple of weeks ago of Doctor Who was unquestionably our best yet. We knew what we had to do, how to prepare well in advance. Technologically, the product with sound, which again plays into the Game Kit product in the history and not only the technical framework of the product, but the playbook of the product, the best practices around the product that we continue to build out are a huge advantage for us. So we expect launches to get smoother, faster and more furious in the future. Jim, do you want to talk a little bit too or Lisa about [indiscernible] because I think that's a really interesting move that we're making.
I can take that. I can quickly speak to the -- because that goes along with what I mentioned in my comments about new genres. So [indiscernible] game. Very crowded marketplace, but at the same time, we're approaching it with the same vision as we have for idle games [indiscernible] and early results, but very promising early results in the highest retention we have in any of our games at the studio. So we're definitely looking at that as a successful foray into a new genre and looking to continue that and expand on it in Q2.
We've already been able to leverage that core game play, those early metrics, sharing it with partners and have a couple of other games in development already with great IPs to build a Match-3 game, which to be fair, won't launch until next year. But again, building on those learnings that we're making now and being able to [indiscernible].
Your next question comes from the line of Scott Buck from H.C. Wainwright.
Just a couple for me. Jason, can you talk a little bit about the conversations you're having with some of the IP holders? And is the current kind of uncertain environment causing any hesitation for them to move forward with anything?
Yes. Hesitation and worry is deep within all industries right now. Nobody knows what's going to happen next, right? Just when you think the market is coming back, the banks start to fail. Like there is an election year and all this kind of stuff. It is worrisome to say the least about the amount of unknowns that are out there. But what I can tell you is the phone in your pocket is not going anywhere. The video game sure aren't going anywhere. And so this industry is changing and evolving and growing, but it's not going anywhere. And so the IP partners know that it's important, but with the maturing of the market, there is less competition for those IPs as IP holders kind of know now who the confident developers are, and obviously, we're one of them, and also the models are changing.
5 years ago, 8 years ago, the model was very clear, upfront [indiscernible], revenue share on the background, nothing is deductible, IP makes money no matter what. Those days are gone. And the -- when we go into IP partners now, we're very clear about what might look. We don't just -- you can't just find deals like that anymore. Nobody is signing deals like that anymore. And so it is very much [indiscernible]. And the people in that industry in the licensing industry who really understand they can get it and know the value of games, which I can tell you are many of the large Hollywood Studios, the structure of these deals are changing dramatically and moving much more of the risk towards them instead of all the new developers.
So yes, we're really excited, and it's unquestionably going in a positive direction for us.
Great. That's helpful. And then my second one, if you could talk a little bit about capital allocation for '23? And how are you weighing buybacks with reinvesting in game development?
Oh God, I could buy back every like the NCIB rules are very strict around when we can buy, what we can buy, under what conditions we can buy. So the number of shares, whatever it is, Jim mentioned earlier in the call, seems relatively small. But that is pretty much all we could buy. The stock price today is -- you can all see it. And I can tell you that I would buy back every single share we could get at that price, no question in my mind. There is no better value out there for the company than its own shares right now. We have cash available. We're still sitting on a lot of cash. So if blocks become available, we can buy big blocks. But otherwise, we're being as aggressive as we can with that NCIB. I wish we could buy more because it's a good value for the company, good value for shareholders too [indiscernible].
I appreciate the additional color, guys. Thanks a lot.
Your next question comes from the line of Neehal Upadhyaya from Industrial Alliance.
Just a few questions from my end. Can you provide us with a little bit more color on the decrease? I mean, the slight decrease in daily active users in Q4? Are those mostly from legacy games and, I guess, non-IP games? Would that be a fair assumption?
Actually, that is partly a residue effect from the launch of Star Trek: Lower Decks. So the first thing you launch a game, you get a big spike in the first couple of weeks, there's always a big spike in the new game launches. So -- and then, of course, the retention of that is less. So almost all of that is attributable to just the timing of the launch date.
Okay. Perfect. And then I guess -- my other question is in terms of the Game Kits. I mean look, I think you're getting solid traction with other studio partners and whatnot. What do you think the time line is to scale the Game Kits that you've developed, especially the ones that were introduced this year?
The time line to scale it into what?
To scale those partnerships so you can increase that gaming portfolio?
Right. So the product is getting there more and more and more. It's really a matter now of proving the product market [indiscernible]. Developers love it, developers see it. So now we have, like I say, the 4 recent games that have been launching with this technology. So we feel like it's proven, but we still need to prove out to the industry to get to a point where people are like, okay, we have to use this program going forward in order to do it. So it's going to be, I would say, it's a year to 3 years before it's really a true product that we could -- somebody could sign up for and your niece or nephew might be able to come and make use of it. But yes, as the market evolves and grows, we'll see how it plays out. But in the meantime, [indiscernible] revenue for us as we say, it's these partnerships and these games. We would not have been able to build Doctor Who internally with our own time frames of team and focus. But it's a huge success because I mean that product would [indiscernible].
Okay. Perfect. And then maybe one last one from my end. Look, soft macro backdrop, but a solid bounce back quarter from Q3. Would it be fair to say maybe some of the underlying economics have kind of bottomed and you're seeing light at the end of the tunnel here in terms of [indiscernible] ARPDAU metrics, especially given that ARPDAU metrics were kind of strong, albeit on the base of a couple of launches?
Yes. We're very excited about what's coming down there, like there's a ton of great games coming this year and next year. As we get better and better at launches, as we understand the nuances of all of these different genres, we're going to get stronger and stronger and stronger. I would say, unquestionably, the outlook for the business has never been stronger. The balance sheet has never been stronger. The -- everything that we need to be successful is there and not even to be successful. We are successful. We are extremely successful. We're profitable growing mobile games company. There's some big ones out there, but it's not a massive group of people, and we're proud of what we got and excited about what's coming down the pipeline.
Your next question comes from the line of David McFadgen from Cormark.
Just a couple of questions. So I was looking at the daily active users in Q4, they were down sequentially and then down year-over-year. So I was just wondering what happened there? What was driving that? And can you give us an update on how the various properties are doing like RuPaul, Office and Star Trek?
Yes. Just as I was just saying earlier, most of that fall is product launches. When you launch a new product, you get a big spike, 100,000 people install the game on a day, for example. And then, of course, the retention rates, which are everything in the mobile games industry, you see that number fall off over time. So there's always a big spike in Dow when a new game launches. But it inevitably comes down as time goes on, but then you continue to build on that base. So Star Trek got a little [indiscernible] at the end of September. That then came down a little bit, it all evens out. It's just a matter of -- as games get older and more and more people churn out, so our job is to just keep launching new games. We're off to a pretty strong start here with 3 games in the last 2 quarters.
Okay. But could you comment specifically how RuPaul, Office and Star Trek are doing relative to your expectations anyway so far?
I mean, like I said earlier as well, the -- I can't comment specifically about specific games because of the confidentiality agreements we have with all of these major IP holders. But I can tell you that we're happy with the -- where all of those [indiscernible] are 3 of our most solid games in our portfolio. They continue to have lots of potential, and I know can continue to grow. But sequentially have been better and better and better launches. Doctor Who, in particular, this was [indiscernible] IP that I was somewhat nervous about as it's very niche. It's -- [indiscernible] people that will only watch the show. But apparently, it's popular all over the world, and we're seeing the evidence of that. And so though the user base isn't massive, it is cult-like. People who love Doctor Who, love it a lot. And so we're seeing that reflected in the number of strong monetization, strong retention and a decent installs per day coming in for it, too.
Okay. So on the last conference call, you indicated more of a balanced approach, shall we say, to revenue and EBITDA. We saw the EBITDA come through this quarter. It was pretty good EBITDA. So can you -- and I know you don't like to give guidance, but I was just wondering, can you give us sort of an outlook on what we should expect for EBITDA going forward? Anything at all, ranges would be helpful.
So some estimates.
Well, maybe not some estimates, but like do you think you would -- it would make sense that you're going to keep EBITDA to less than 10% or something like that or...
Last year, I was really clear this time last year that we're going to aggressively grow this company over the next year. And my goal was to have near [indiscernible] EBITDA to essentially take all of the revenue we're making [indiscernible] to growth. Then s*** hit the fan, the world became what it is, markets went sideways. And it became more important than ever to make sure that we had a good, strong cash flow money in the bank, and we're default alive no matter what, and could survive any condition that the macro market throws upon us. So you've very much seen that in the last quarter. And as I've said all along, you want to crank it back, we can print money with this company.
Last year, we spent, and Jim has drawn out in the financial disclosure. I think it's in the press release that we spent whatever it was $9.6 million on the Game Kit platform and new game growth last year. So our development, these are -- that comes straighter to EBITDA. If we weren't working so aggressively building this platform and this pipeline for the future, we could easily be throwing off 30% margins. But it's smart to have a balance of growth and profitability. And I think you saw that really clearly in Q4, and you should continue to see something similar going forward.
But as always, I'm always going to make the right choice of this business. I'm never going to make the choice that's best for the share price today, tomorrow or next week. I'm going to make the choice that's best for shareholder value over the next years and building a long-term strong business. And so that would -- if that means investing heavily in opportunities that caused negative EBITDA, then that's what I'll do. If it means slowing it all down and maximizing for EBITDA and pushing more towards those 30% margins, then that's what I'll do.
There are no further questions at this time. I will now hand the call over to Jason Bailey. Please continue.
All right. Well, thanks for everyone for coming out, everybody. We'll have some catch-up calls with various people and as always, you know how to get hold of me, jason@eastsidegames.com, and happy to talk further and really proud of what this team has put together, how the team continues to grow and evolve. And like I said, I couldn't be more excited about the outlook for this company. I know all of you are dealing with the realities of the market. So my heart goes out to you in the chaos of the year going through, but we're just going to sit over here and build ourselves a solid rule of business. Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.