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Good afternoon, and welcome to the Enthusiast Gaming Holdings, Inc. Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.I would like now to turn the conference over to Mr. Eric Bernofsky, Chief Corporate Officer of the company. You may go ahead, sir.
Thank you. Good afternoon, everyone, and thank you for joining Enthusiast Gaming's third quarter 2022 financial operating results call. My name is Eric Bernofsky, the Chief Corporate Officer of Enthusiast Gaming. With me today is our Chief Executive Officer, Adrian Montgomery; our Chief Financial Officer, Alex Macdonald; and joining us on his first quarterly conference call since becoming President is Bill Kara. We'll begin with some prepared remarks from Adrian, Bill and Alex before opening the floor to questions.Before we begin, I'd like to remind everyone today's presentation contains forward-looking information that involves known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements.A more complete discussion of the risks and uncertainties facing the company appear in the company's management discussion and analysis for the 3-month period ended September 30, 2022, which are available under the company's profile on SEDAR and EDGAR as well as on the company's website, enthusiastgaming.com. You're cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. The company disclaims any intention or obligation, except to the extent required by law, to update and revise any forward-looking statements as a result of new information, future events or for any other reason.Now with great pleasure, I'd like to turn the call over to Adrian Montgomery, CEO of Enthusiast Gaming. Adrian?
Thank you, Eric. Good afternoon, and welcome to our third quarter 2022 financial and operating results conference call. I'm pleased to share with you the details of another strong and record quarter, proving the continued strength of our diversified business model. And despite the macroeconomic headwinds we are on the cusp of reaching profitability.On today's call, I want to reiterate why our business model and strategic plan is the right one and sets us up for sustained profitability in 2023. Just 2 years ago, after completing the acquisition of Omnia Media, Enthusiast Gaming was largely a programmatic advertising revenue company with a gross profit of $4.1 million and a gross margin of 16.8% in Q3 of 2020. In just 8 quarters, we have become an integrated media and entertainment company for gamers rooted in communities, content, creators and experiences. Our flywheel model has separated us from the pack. Our diversified model makes us less reliant than ever on the price fluctuations of programmatic ad units.Today, Enthusiast Gaming owns some of the largest fan communities in the world. We own the largest gaming platform on YouTube. We own and make our own games like Little Big Snake, Mope, Apes and EV.io. We create our own desktop apps with millions of users. We sell subscriptions across a number of our properties and we create our own content that we distribute on multiple platforms like Snap, Twitch and TikTok. We also post sold out events all over the world through our Pocket Gamer brand from London to Toronto to Seattle, Helsinki, Jordan and beyond.We are the company that some of the world's largest brands turn to execute their gaming and esports strategies, names like LEGO, State Farm, HBO, Netflix, Disney, the United States Navy, Amazon, RBC, Nintendo, DoorDash, Hasbro, Fidelity, Mattel, Procter & Gamble and more. As I said, we are on the cusp of sustainable profitability. We have ample liquidity to get there, and we are a dominant player in the gaming and esports world. Despite the macroeconomic pressures on advertising prices, we have grown our gross profit over the last 8 quarters by more than 4x to a record high of $16.6 million this quarter, while nearly doubling gross margin in that same time frame to 32.7%.When you have a business with a 33% margin, you need much, much less scale to become profitable. How have we done this? We've been laser-focused on developing a diverse and sustainable model that could stand the test of time and build a leadership position within the gaming and esports entertainment industry. And so we have continued to focus on the following key strategic business priorities that have all pushed Enthusiast Gaming further and further away from being a lower yield, lower margin business focused on programmatic revenue and into that diversified media and entertainment company that again is on the cusp of profitability.These strategic priorities are: 1) invest in a direct sales team. From laying the foundation with our first direct sales hire 2 years ago, today, we have a sophisticated sales, marketing, customer success and talent team that count some of the largest companies in the world as its customers. These customers are not simply buying advertising from us. They are coming to us to solve a very important problem, which I loosely define as an age or demographic issue. They need to reach younger audiences to convert new customers, but do it in an authentic way and at scale, very, very hard for businesses to do. This is exactly what our direct sales, customer success and content teams deliver day in and day out. And when delivered right, it leads to higher conversion rates for our customers versus plain old programmatic advertising. They pay more for it, and it drives higher margins for our business.#2, grow a vibrant subscription business. We have long held the belief that video game fans will pay for content that they find valuable. And this belief has proven to be true. And so we have grown both organically and through strategic acquisitions, our subscriber base from under 100,000 in early 2020 to 260,000 at the end of this past quarter. Today, our subscription business is an annual run rate revenue business of $15 million in accounting and a meaningful driver of margin growth across the company.#3. Focus on product-based services. We know our audiences consume content in many different ways. Much of this variety underpins our flywheel strategy we have built that caters to the diverse entertainment needs and habits of our Gen Z and millennial gamer audiences. Another data point we have learned is that the retention and engagement rate on a product is far greater than on an editorial piece of content. Let me explain.Last year, we acquired U.GG, one of the largest stats and analytics communities for League of Legends players. Late last year, U.GG launched a desktop companion app for players to use while playing League of Legends. This app or what we are referring to when we say product has been downloaded over 1.2 million times and has become integrated into daily and weekly habitual use. This level of engagement extends the life cycle of our product base, our product-based services significantly beyond a written piece and in many cases, some video content. This lifecycle extension is also driving higher margins in our business. Other examples of growing high margin products within our flywheel are Addicting Games, The Sims Resource, Icy Veins and TabStats.#4, live event experiences. While we have certainly all become too familiar with living in a remote world as a result of the COVID-19 pandemic, the gaming community has never lost its desire to connect in-person. After a 2-year hiatus, we resumed running live events earlier this year within our Pocket Gamer vertical. Pocket Gamer Connects runs a series of live global gaming events in places like London, Seattle, Toronto, Helsinki, Finland and most recently, in Jordan this past weekend, a key location in the rapidly growing Middle East gaming market, showcasing how the world's largest game publishers and developers come together to learn, share and grow the business of gaming. And not only have we resumed live events, but we are seeing record attendance and increasing participation from across the gaming industry, including some of the world's largest game developers, publishers, media and investors.Our Q3 Pocket Gamer conference in Helsinki saw more than 120 industry speakers across 17 theme tracks, sharing insights and knowledge on a wide range of relevant topics. Sponsors of the event included Meta, Agora, AppsFlyer, Huawei, Xsolla, AppLovin and more. Companies represented by featured speakers and panelists included Electronic Arts, Humble Bundle, Miniclip, Unity, Square Enix and Tencent. And again, the theory holds true with events as it does with subscriptions that if you can deliver a valuable experience, gamers and in the case of these Pocket Gamer events, industry participants and experts are recognizing the inherent tremendous value.So as you can see, the above strategic priorities have meaningfully reduced the business' dependence on programmatic advertising, while shifting the revenue mix, which has had an outsized positive effect on margin growth over the past 8 quarters. We are on the right path, and we will continue to drive the financial performance of this business forward as we have always done. And despite market valuations being far from optimal, we will continue to build long-term shareholder value, while the market corrects itself over time.During Q3, we delivered strong results again with revenue increasing 17% to $50.6 million. The year-over-year increase in revenue was driven by increased direct sales, including both new and repeat customers, higher subscription revenue, the acquisitions and growth of the Addicting Games and U.GG properties as well. This quarter, revenue was impacted by the macroeconomic pressures on advertising rates. But as I highlighted in my opening remarks, our continued revenue diversification strategy pushed Q3 to a record gross profit of $16.6 million, up 64% from $10.1 million last year.Q3 gross profit was not just a record high for any Q3, but for any quarter in Enthusiast Gaming's history, and we still have the seasonally strong Q4 to come. Gross margin expanded 270 basis points to 32.7% in the quarter and expanded 930 basis points from 23.4% in Q3 of last year. The increase in gross margin continues to be driven by the strong performance of higher direct sales and subscription growth and M&A contribution.On direct sales, I am pleased to report another strong quarter. Direct sales grew almost 50% to $10.1 million in Q3 compared to $6.8 million last year. Renewals and additional business with existing customers accounted for 65% of that number. Again, a strong validation of the return on investment we are delivering to our customers. And if you remember the list that I highlighted at the beginning, these are very sophisticated customers, who have demonstrable ROI needs to validate their spend. And this has them coming back, again, despite macroeconomic pressure.Turning to subscriptions. Revenue grew 51% year-over-year to $3.8 million in Q3. The increase in subscription revenue was driven by an increase in paid subscribers and pricing optimization. Paid subscribers were 260,000 as at September 30, a 20 -- almost 26% increase versus paid subscribers of 207,000 as at September 30 of last year.I'd now like to pass it over to Bill Kara to speak -- our new President to speak to one of the most exciting parts of the quarter, our first of its kind content partnership with the National Football League as well as some other exciting trends that has us optimistic about the business.
Thanks, Adrian. First off, as this is my first quarterly conference call since being appointed President, I'd like to say hello to our shareholders, analysts and other stakeholders for joining today. Adrian is right. The NFL deal we announced in August and launched in September, called Tuesday Night Gaming is truly an exciting and transformational moment for Enthusiast Gaming. For some background, the NFL put an RFP out in 2021, looking for a partner and big idea to help execute first-of-its-kind gaming strategy. After a long, almost 18-month process, from RFP to executing an agreement, the National Football League chose Enthusiast Gaming as its partner to launch Tuesday Night Gaming. It is an exciting and new content platform for brands and agencies to connect with a younger audience through bespoke custom content, talent integrations, including owned moments, featured segments, social activations and more.It is important to recognize 2 points here. The NFL recognized that a path to a younger audience leads directly to gaming and esports. And second, the NFL chose Enthusiast Gaming as its partner to execute this crucial strategy. We want to be in business with the NFL full stop. We expect this multiyear partnership to be profitable on a standalone basis, but it has another equally powerful benefit. A large reason why we are on the cusp of profitability is that, as Adrian summarized in his remarks earlier, we created a direct sales and customer success function from scratch 2 years ago. And that this quarter contributed north of $10 million in revenue at a target 50% margin.Now alongside the NFL, we have signed new direct sales with Hulu, the Food and Drug Administration, Nickelodeon, Disney and Universal Pictures, with more to be announced in the near future. Continued growth in direct sales will underpin our sustained profitability. And the halo effect of being in the company of the National Football League is substantial. We signed a deal at the end of August, and it was important to launch in conjunction with the start of the football season, which meant we had little to no lead time to presell, but we want it to be a good partner and demonstrate that we can move quickly. Already, we have done big deals, as I mentioned a moment ago, and because of the NFL, we are speaking to brands we have never spoken before, too.We are already locking up deals in Q1 2023, with close to $2 million. We have received inbound requests from 2 other major professional sports leagues, who have reached out to us, talked about doing something similar with them, which will allow our business to scale even further. Not only are we excited about the NFL deal, we showed the business case to our lender and described the opportunity. They were incredibly supportive, seeing how this enhances our path to sustained profitability and increase the size of our debt facility by an additional $10 million.Here are some early audience metrics for the NFL Tuesday Night Gaming show. Since the September launch, we've generated 3.9 million total views on YouTube, across the P&G channel, VOD content and live streams with an additional 1 point -- sorry, a cumulative 1.4 million total hours watched. 1.7 million organic impressions on Twitter and 8.5 million views on TikTok. One other example of an activation we launched in the quarter was the work that we did with Fidelity where we created the Fidelity Minecraft Saferoom Challenge.In order to create a meaningful connection with the next generation of investors, Fidelity tapped into gaming to position the brand as a resource to help investors achieve success. A custom-made Minecraft map featured weekly challenges, if players were unable to complete them, they be taken to the Fidelity Saferoom, where they could find Fidelity tips and tools to help them complete the challenge. The program was supported and promoted by Luminosity talent and amplified through custom videos and social posts to maximize awareness and engagement.Again, another example of a high-margin flywheel activation that brings together different assets to create a custom solution for brands. Subsequent to the quarter, I'm excited about some of the recent work we started with Netflix. Netflix recently launched a live show, live animated series named, [ Deep tuned in, tune in ]. And as Netflix came to us, for advice on talent and how to promote the series across our network of TikTok channels, giving viewers a glimpse into the animated series that is set to air on Netflix.We are thrilled to partner with Netflix. This new partnership provides a unique opportunity for Netflix to reach out to their nonsubscribers on other platforms like Twitch. We are constantly striving to deliver new and quality content and experiences to our community of gamers and esports fans across the world. And this partnership marks another powerful vote of confidence in our platform of digital media assets and our unique ability to reach Gen Z audiences. It's just another unique example of the flywheel in action where sales, content and talent come together to deliver a bespoke solution to a client.And while on the topic of things subsequent to the quarter end, I'm particularly bullish on a few trends in the gaming industry that have a positive read-through for some of our fan communities in Q4. Last weekend, The League of Legends World Championship took place with record-high attendance. This demonstrates the continued strength of The League of Legends franchise, which bodes well for U.GG.Second, Electronic Arts transitioned late last month, it's long running successful franchise, The Sims to a free-to-play game, as owners of the largest fans, Sims fan community, The Sims Resource, we have seen a marked increase in activity, both in free and subscription offerings. Finally, World of Warcraft will be releasing its next expansion pack Dragonflight later this month. The latest expansion, the last expansion pack, Shadowlands saw engagement numbers rise on our site, Icy Veins, and you're watching for a similar impact with the release of this next pack.I will now turn it back to Adrian, for additional remarks.
Thank you, Bill. Now that we've discussed the quarter, I do want to reiterate, that the search for a new CEO continues and remains a top priority of the company. Immediately following the AGM in July of this year, the Board struck a committee of Independent Directors and hired a fabulous firm, Russell Reynolds, an LA-based executive search firm with the mandate being run by the head of their CEO practice based in California. We have an excellent list of candidates, and we're confident we'll have a new CEO shortly, who will take this business to the next level and carry the momentum, we have established.In closing, I do want to reiterate, that we do not need to raise additional capital on our road to profitability. We have substantial liquidity to achieve sustainable profitability in 2023 with close to $21 million on the balance sheet by virtue of the increased facility and untapped line of credit with our lender. Additionally, we also seized an opportunity in the quarter to sell a small cluster of legacy fan communities, which were not profitable for a sale multiple of 4.5x revenue.Think about that in the context of our current valuation. We sold a small cluster of money-losing communities, representing almost half of 1% of our revenue for close to CAD7 million. The combination of these 2 moves bolstered the balance sheet and gave management and the Board unanimous confidence to proceed with our NFL partnership, which we expect will further drive the business towards increased profitability in 2023 and beyond.I will now turn the call over to our CFO, Alex Macdonald, for further commentary on our financial results. Alex?
Thank you, Adrian. Certainly, it was a dynamic quarter, our third quarter of 2022, which I'll speak to shortly. But briefly, here are my usual notes. I note that our results are presented in Canadian dollars. I note that the significant majority of our revenues and expenses are measured in U.S. dollars and are translated into Canadian dollars for presentation in our financial statements. The exchange rate between the U.S. dollar and our presentation currency of the Canadian dollar should be monitored and considered when analyzing our forecasting results.And I note that our business is affected by seasonal trends in digital advertising with sequential increases each quarter throughout the year, driven by increasing ad prices and demand, which peaks in Q4. This seasonality is isolated to our media and content revenue streams. And now back to the quarter.Q3 revenue was $50.6 million, up 17% from Q3 2021 revenue of $43.3 million. Q3 revenue by source was as follows: media and content, $44.5 million; subscription, $3.8 million; and esports and entertainment, $2.2 million. The Q3 media and content revenue of $44.5 million compares to a $38.7 million reported in Q3 2021, an increase of 15%. The increase was driven largely by the following: #1 was more direct sales. Direct sales were $10.1 million in Q3 versus $6.8 million in Q3 last year, with the majority of direct sales being recognized in media and content. And #2 was the continued strong performance in our 2 larger acquisitions in 2021, being Addicting Games and U.GG. These increases in media and content revenue were offset by a decrease in CPMs with a resulting impact on our [ RPM ].Our web RPM was 12% lower in Q3 2022 as compared to Q3 2021 caused by macro headwinds and digital ad prices, particularly in the second half of Q3. Q3 subscription revenue was an all-time record high of $3.8 million, up 52% from $2.5 million in Q3 last year. The increase was largely driven by an increase in paid subscribers, which were 260,000 as at September 30, 2022, compared to 207,000 as at September 30, 2021. This was also paired with a higher yield on a per subscriber basis.Q3 esports and entertainment revenue was $2.3 million, up 8% from $2.1 million in Q3 last year. The company's entertainment division continues to benefit from the return of live events. In Q3, an inaugural Pocket Gamer Connects Toronto event was held along with a very successful return of Pocket Gamer Connects, Helsinki. Entertainment revenue accounts for $1.5 million of the $2.3 million esports and entertainment bucket with esports accounting for the remaining $800,000.Certainly, for the first time, the company's business model is being tested against macro headwinds, particularly in the digital advertising market. For over 2 years, we have been diversifying our revenue with our focus being on higher-margin revenue streams, including direct sales, subscription and more recently, our product portfolio, including U.GG and Addicting Games. The higher margins of these revenue streams make them inherently better positioned to absorb pricing fluctuations, and this is enabling the business to succeed despite the macro headwinds. This is most evident in gross profit.Gross profit was an all-time high of $16.6 million in Q3, up 63% from $10.1 million in Q3 last year. This propelled the gross margin to an all-time high of 32.7%, which is up 930 basis points from 23.4% in Q3 last year. And we are hyper focused on that gross profit number of $16.6 million, particularly when comparing it to the cash operating expenses of the business.Total operating expenses were $26.6 million, up from $21.3 million in Q3 of last year. Operating expenses in Q3 include noncash items of amortization and depreciation of $4.1 million, share-based compensation of $0.8 million, and a nonrecurring expense for AGM legal and advisory costs of $1.1 million as well as a foreign exchange gain of $0.5 million. Also included in Q3 content expense is $2 million of investments into our NFL partnership, which Adrian and Bill spoke of earlier. The remaining $19.1 million of operating expenses are the recurring cash-based expenses of the core business and are down approximately $900,000 from Q2.And while gross profit continues to rise, we've taken additional steps to propel the convergence of these 2 numbers. At the end of Q3, in September, we sold a number of legacy editorial properties for gross consideration of $6.8 million, which will result in a net annual savings of approximately $2 million, most of which is in the first half of the year. Also subsequent to the quarter end, we eliminated additional OpEx while exceeding $1 million per year, and we expect further efficiencies and OpEx will be found it in the quarter.The remaining convergence of gross profit and cash-based OpEx being our path to profitability will be driven by: #1 is the continued success of our high-margin revenue streams, leading to increasing gross profit. #2 was the sale of the editorial assets and the net savings realized. #3, are the efficiencies found in OpEx; and #4 is our NFL partnership, which has signed material amounts of revenue to be recognized over the coming quarters.In summary, gross profits are increasing, costs are decreasing, and this combined will lead us into a profitable 2023 and beyond. And we have the resources to make it happen. During Q3, we expanded our credit facilities by $10 million, resulting in cash of $15.8 million as at September 30, 2022. In addition to that, we have a line of credit available to us for $5 million for total available cash of $20.8 million as at September 30, 2022.There are 2 other material income statement amounts, which are notable in calculating net loss and comprehensive loss in Q3 due to a combination of rising interest rates, high inflation and contracting equity valuations. Indicators of impairment were present and the company performed interim impairment testing across its 7 CGUs. The results of this testing were a goodwill impairment charge across 2 of the company's CGUs for a total of $31.3 million. This is a noncash adjustment and the details and assumptions surrounding this expense are disclosed in Note 10s of the financial statements.In addition, as I mentioned earlier, the company has sold certain legacy editorial web assets for a gross consideration of $6.8 million. The company derecognized a $2 million carrying value relating to these intangible assets in connection with the sale. This resulted in a gain on sale of intangible assets of approximately $4.8 million. These items had a material impact on net loss and comprehensive loss, which was $30.2 million in Q3, resulting in a net loss per share, both basic and diluted of $0.25.I remain grateful to the analysts for their continued work on the company. I also wish to thank my team for their hard work on this busy quarter led by the VP Finance, Nathan Teal. And to our shareholders and other stakeholders, including our lending partners, thank you for your continued trust in us as custodians of Enthusiast Gaming.Finally, to the members, of the Enthusiast Gaming family, my fellow employees, thank you for your continued hard work. And they remain in my judgment, our most valuable asset. We take pride in this quarter because our model has been tested, and it is standing strong and there is continued success both now and in the future, to be found in our business. And of course, ladies and gentlemen, our business is the business of gaming.Operator, I kindly turn it back to you.
[Operator Instructions] The first question comes with Robert Young with Canaccord Genuity.
I just wanted to dig a little more into the seasonality for the next couple of quarters. Q4, as you noted, typically stronger Q1, a little bit of weaker sequentially. If you could just talk about what you see given maybe some heightened headwinds. I think you said in the prepared remarks that you've seen a larger impact from the macro later in the Q3. And so how does that trending into Q4 and then Q1?
Rob, this is Alex. Certainly, there -- so the typical seasonality, as we know, would be increasing ad prices and demand peaking in Q4. I still remain fully confident that prices will continue to rise. Most of that seasonality is still ahead of us. The Black Friday weekend, Cyber Monday, leading into the holiday season and the flushing of the annual budgets that occurs in the back end of December. That will still cause an increase per my judgment. The question will be how much of an increase will we see this year? Will it be a little muted in comparison to a normal year. Similar to, yes, how we saw a muted seasonality in the back half of Q3 because these types of patterns also exist within quarters.I think that what this quarter is showing, though, is we are seeing an example of the P&L and the business model being stress tested and the gross profit is holding up strong. I would want a stronger seasonality, we still derive gross profit from the programmatic channels. However, they are much lower margin. So there is some insulation there and gross profits is more and more fueled by the higher margins with streams, which are less affected. It remains to be seen, though. The big movements are still ahead of us in the quarter and the results remain to be seen.
Okay. And is there an argument for a tightening macro lean the average ad Q3 budget so that they have more to deploy in Q4 because that's such an important period.
Yes. This is Adrian. Anecdotally, I would agree with you. And we saw some shifts on the direct side even from Q3 to Q4. So I would agree with you. There's obviously big, big events in Q4. Think about Hollywood studios, think about, as Alex said, Black Friday and Cyber Monday. And so that is an encouraging trend, I think for us quarter-over-quarter.
Okay. And then I wanted to ask the same seasonality question around your expectation of breaking through EBITDA profitability. I'm not sure if that's still possible in Q4. But I'm just curious if you still expect it to improve in Q4 and then weaken a bit in Q1?
We have a shot at EBITDA profitability in Q4 despite macroeconomic pressure. And it's because we're really growing our higher-margin diversified revenue stream. So certainly, the world has changed from an external perspective, we still do have a shot at it, and that bolsters our confidence. I think that we expect to have substantial sustainable profitability in 2023 as well. So we really, in many ways, remain on track for that. And I think it's a result of the business that we've built since the purchase of Omnia Media. And again, being able to double gross margin in only 8 quarters has us on that cusp of profitability.
The next question comes with Scott Buck with H.C. Wainwright.
First one for me. I'm just curious if you could give us a little color on who the incremental subscriber is and how you grow that business from a $15 million run rate business to a $30 million or $50 million run rate business?
This is Bill. I'll take this call. I think the biggest growth that we've had has largely been organic on our subscription base. And going forward, it's going to be a continuation of how to optimize that organic growth, but also layering it onto it a user acquisition strategy that's typically found in other gaming companies. So we have a lot of area of expansion that hasn't been tapped into. User acquisition is a major one. And of course, continued organic optimization is going to get us there as well, but primarily through user acquisition, and that will be a major effort of our teams in 2023.
Great. That's helpful. And my second question, curious as you look across the business, whether it's any other potential divestitures that you're looking at.
Not at the present time.
Okay. And just one more quick one. Should the macro environment continued to deteriorate, what kind of leverage do you have on the OpEx side to help offset that?
Well, we've -- we have a number of levers on the OpEx side. And I think that really our commencement of cost-cutting initiatives started really in Q1, the back part of Q1 and Q2 of this year. And we've made substantial reductions, as you can see, without affecting the gross profit line. So certainly, there have been some headcount reduction. Certainly, we've eliminated a number of positions in an advantageous way through the sale of our editorial sites. And then really -- and Bill has done a tremendous job with this. We've really started to get aggressive on our tech costs, our engineering costs. And so we are very, very focused on the cost line. As Alex said, OpEx went down almost $1 million quarter-over-quarter, while at the same time, margin grew substantially. So costs are going down. They're going to continue to go down. We expect sequential margin improvement, but really no stone is being left unturned on the cost side. And we're benefiting from the fact that we got out in front of this starting in March of 2022.
[Operator Instructions] The next question comes with Gianluca Tucci with Haywood Securities.
I just want to ask in terms of Q4, given that the World Cup is in Q4 for the first time ever, how your customers are positioned for that incremental ad spend? And how exposed is the company to capturing a portion of that incremental ad spend that's caused by the World Cup every 4 years?
This is Alex. I mean, exposure is a good thing in that circumstance. And certainly, we have a number of places for us to capture it. To come to mind immediately. One is, you may recall, in April, we acquired FFS, Fantasy Football Scout. So we see a convergence between sports lifestyle and gaming lifestyle and FFS was an entry point for us into that football or soccer world, and we do have partnerships with the Premier League and there are campaigns coming out of the EMEA region, which is a region we've established a sales team in at the beginning of this year and not to mention, of course, our NFL partnership. So we're fairly well positioned. Adrian often looks at markets and industries. He spoken about the movie industry and other industries we've targeted. Sports is clearly something we're after as a next big driver for direct sales. And I think particularly on properties such as FFS and on NFL, we're likely going to be benefited in Q4 from that spend.
Okay. That's great. And I'm impressed by the continued gross margin uplift there. How much of that is caused by direct sales growth? And how much of it is other, I guess, optimization efforts that you guys are working on?
The large part of it is direct sales growth. Effectively, direct sales is a 50% margin business that we created from scratch in 2020, and it's now turning over meaningful, meaningful volume and gross profit and continues to grow. And it's really the great outward example of how we stitch these assets together and make the whole greater than the sum of the parts and it results in this high-margin vertical. So direct sales plays a substantial role as we've taken the business, again, away from that programmatic heavy business to this almost 33% margin integrated entertainment company.And again, when we create these campaigns through the direct sales channel, Bill talked about Fidelity Investments, Netflix, Disney, Adidas, et cetera, et cetera, we're not just selling media, we're selling bespoke solutions that drive specific KPIs and ROI criteria of these sophisticated companies. So it is a huge part of the profitable growth of our business, and it's driving a lot of that margin. And again, other examples, subscription and the continued growth of subscription through number of subscribers added and pricing optimization has driven margin expansion as well. Our desktop app on U.GG, which now has over 1.2 million downloads and generates meaningful revenue on a weekly basis. That's another example of us branching it into products.The new game titles that we have through Addicting Games, the in-game advertising that we sell, the integrated sponsorships that involve those game titles, increased subscription on the AG profile or platform. These are all levers. And then don't forget, Pocket Gamer. Look, we were growing this business substantially during COVID, and we lost that left hand, which was our live events business. It's now back in full force. Helsinki was a massive success for Pocket Gamer. We're in Jordan in the Middle East. We're going to Saudi Arabia at the end of the month. London, which is our flagship event, highly profitable is coming in January. So that live event business is back in full force. Pocket Gamer is selling out all over the globe, and that's yet another lever to drive substantial margin improvement.
Okay. That's great. So it sounds like you guys continue to expect gross profit growth to outpace overall sales growth. Is that fair to assume?
Yes.
The next question comes with Drew McReynolds with RBC Capital Markets.
Yes. Just 2 for me. I guess, first, maybe for you, Alex, just on FX, what kind of dynamic there was in terms of gross margin in the quarter on that one? And then maybe one for you, Adrian, just bigger picture. Every company is obviously going to revisit some strategic initiatives or cost structure at this juncture, and it sounds like you're fully on top of that. Do you feel that you are constrained at all in terms of still continuing and tackling the real important strategic priorities for the company, given the uncertainty in the environment? Or are you pretty comfortable you can kind of trim costs, deal with a choppy macro environment, but still obviously invest where you want to invest.
I'll let Alex handle the FX first, and then I'll answer the second part, Drew. Go ahead.
So FX gave us, in particular in the gross property, it did give a small bump. I think the average FX rate Q3-over-Q2 was up about $0.025. So you can imagine that multiplied over north of $16 million. Although there was an offsetting factor to that, and that's in the GBP. The GBP versus CAD declined. And this quarter, we -- with Helsinki event out of our steel media subsidiary, which has a functional currency of GBP in the books of GBP that we lost some FX on. So there's an offsetting. So it helps. I enjoy the rise in -- the strength in the U.S. dollar, but there were offsetting factors. And in the end, it didn't have a huge net material impact because we also have a lot of expenses in U.S. dollars. So not too material, but there was a little bit of an impact there from those movements.
Okay. Got it.
And then as it pertains to being constrained in the environment, I think we were very disciplined about what our growth drivers are, and our growth drivers are increased direct sales, increased subscription, increased growth through products. And that's really where we've been focused on, and those teams are intact and those teams continue to deliver. As I said earlier in the call, we started attacking the cost structure in February and March of this year with some [ upcomer ], redundancies and other headcount reductions that we made quite effectively early. We've gotten more and more aggressive in terms of cost reductions. And we're also in a situation where OpEx is going down. It will continue to be attacked and margin is growing at the same time.And so really, we got out in front of this. We continue in this world to be very, very judicious about our spend. The teams that are driving the organic growth are intact and don't need expansion. And at the same time, we had a lender that was sufficiently impressed in supportive of the growth profile of the business to give us $10 million of additional debt financing. And I think one of the things, particularly in this environment, Drew, that the team deserves a lot of credit for was a very, very advantageous sale of some money-losing web communities to the tune of almost CAD7 million. And so the impact -- the cumulative impact of all of that has put us in a position where we continue to grow where we need to grow. But again, we will continue to turn over every rock in the cost structure, the times warranted. And I think we got on top of it early, and we continue to stay on top of it.
It seems we've got no further questions. So I will be handing back to the management for closing remarks.
Thank you very much. Thank you very much, and thanks to everyone for coming in to this call. The team remains resolved as we stay very, very focused, very disciplined on our path to sustain profitability. The delta is shrinking, costs are going down. They will continue to go down. Margin is going up. It will continue to go up. The delta is shrinking. We are very, very focused on the task at hand to build that sustainable profitable business, which we are on the doorstep of, and I would be remiss if in my last parting comments here, I wouldn't, again, to echo what Alex said, reveal who is entirely responsible for all that hard work and all those results, particularly in a very tough environment, and that is the hard-working Enthusiast that show up every day that give their all that obsess over this business that share their passion and their love for all things gaming and esports. And they truly are and you Enthusiasts who are listening on the call, you truly are responsible for our ability to continue to show resiliency in growth, particularly at a time like this. So hats off to all of you. Thank you for everything that you do. Thanks to our shareholders. Thanks to our analysts. Thanks to everyone who is part of the Enthusiast Gaming story. And as always, we'll continue heads down to deliver for you. Thank you.
Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.