Enthusiast Gaming Holdings Inc

TSX:EGLX

Good day, and welcome to the Enthusiast Gaming Holdings Inc. First Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to JB Elliott, Chief Strategy Officer and General Counsel. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to the Enthusiast Gaming First Quarter 2025 Results Conference Call. I'm JB Elliott, Chief Strategy Officer and General Counsel. With me today is Interim Chief Executive Officer, Adrian Montgomery; and our Chief Financial Officer, Alex MacDonald. We'll begin with some prepared remarks and then open the floor to questions.

Before we begin, I'd like to remind everyone that 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 appears in the company's management discussion and analysis for the 3 months ended March 31, 2025, which are available under the company's profile on SEDAR+ as well as on the company's website at enthusiastgaming.com. You are 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 I'd like to turn the call over to Adrian Montgomery. Adrian, the call is yours.

Thanks, JB, and thank you to everyone joining us today for Enthusiast Gaming's first quarter earnings call. We began the year with a renewed and streamlined structure. We're operating leaner and more effectively monetizing our owned and operated properties than ever before. We've laid the groundwork for direct sales to rebound and we continue to invest across our portfolio with focus and discipline. Our strategy is simple: focus on what we own, operate it efficiently and extract more value from every user and every engagement.

Our goal for 2025 and beyond is to spend more time with more gamers. This mantra informs everything we do from product development to content strategy, to how we engage advertisers. We serve gamers anytime and anywhere through communities, content, creators and experiences. These four pillars form the foundation of our ecosystem. And with a leaner and more effective monetization model in place, deepening engagement across our properties is our clearest path to long-term value.

This goal is underpinned by a much more efficient business model. We've made meaningful progress across all revenue streams, higher yield in our programmatic business, growing subscriber bases and expanding events footprint and a reenergized direct sales team now regaining momentum.

While revenue was lower year-over-year, the quality of our earnings has materially improved. Our core operations are more profitable, and our refined cost structure has fundamentally reshaped our financial profile. In Q1, cash-based operating expenses were down over $3 million year-over-year, a direct result of disciplined cost control and our focused operating model.

Let us now turn to our key assets, where we continue to focus our investments in growth initiatives. Icy Veins continued its exceptional performance in Q1, emerging as one of our strongest contributors across both traffic and profitability despite the lack of any significant macro level events or releases in the quarter. Overall yield on Icy Veins has improved by more than 100% year-over-year, driven by a combination of strategic ad tech optimizations and expanded coverage of new high-demand titles such as Monster Hunter Wilds and Path of Exile 2, additions, which were carefully selected to align with existing user interest while capturing new segments of the gaming community.

We also broadened the site's editorial footprint to cover general gaming news and tools, an initiative that has helped increase session length and repeat visits. With its trusted brand, high SEO authority and a rapidly growing reach, Icy Veins is well positioned to remain a cornerstone of our content strategy in 2025 and beyond.

The Sims Resource delivered another strong quarter. TSR grew both subscription revenue and paid subscriber counts quarter-over-quarter, while also improving the quality of its subscriber base. The past year has focused on an intentional shift towards premium annual subscriptions, which carry better retention and significantly higher lifetime value, the results of which have created a stable and growing base of high-value subscribers serving as the cornerstone of the company's subscription offering.

Looking ahead, we're preparing to launch a major product update that we believe will redefine the user experience, a feature that we are calling Dress to Impress. This new feature allows users to try on custom Sims content, clothing, hair and more in browser with real-time 3D rendering, giving players the ability to engage directly with our library of over 5 million pieces of content, all while increasing time on site and driving conversion. We expect to launch this in Q2 or Q3 of this year.

With respect to U.GG, Q1 marked the beginning of a new phase of growth as we accelerate its evolution from a leading League of Legends platform to a broader category defining destination for gamers across the gaming ecosystem. We launched support for Marvel Rivals, NetEase's new competitive team shooter that surpassed 600,000 peak concurrent players during Q1, with U.GG now providing Marvel Rivals players with essential gameplay analytics, bringing the same level of performance optimization and meta analysis that has made our platform a staple in League of Legends.

We also expanded into Rainbow Six Siege launching global leaderboards, detailed player profiles and match history analytics for one of the Ubisoft's most iconic tactical shooters prior to the game shipped to a free-to-play model this summer. We plan to launch support for several additional high interest titles in the months ahead and remain focused on expanding both our audience and our high-engagement desktop app experience where user retention and monetization are particularly strong.

We continue to see strong momentum across both the consumer and event side of the Pocket Gamer brand. Pocketgamer.com more than doubled its audience year-over-year in Q1 and has significantly improved session times and engagement. The site has become a trusted authority in mobile gaming news, tier lists and guides and is rapidly scaling as a leading destination for mobile-first players.

On the events side, Pocket Gamer Connects hosted two major events in Q1. PGC London in January, which was our largest and most successful event to date by every relevant metric, and PGC San Francisco in March, the 50th event in PGC history which ran alongside GDC and delivered strong year-over-year growth in attendance, sponsorship and revenue. We also announced a major international expansion of the Pocket Gamer Connects series, with new events scheduled in Barcelona in June, Shanghai in July and Bangkok later this year. With over 55,000 industry professionals having attended PGC events globally to date, we believe this franchise has only begun to realize its full potential.

In addition to our core O&O properties, our direct sales team continues to recover and strengthen. While Q1 revenue was impacted by a lower count of fully ramped sellers, total closed dollars grew to $2.4 million, up from $2.1 million in Q4 and our 12-week trailing book dollars began to climb again in February, marking a key trend reversal. We're onboarding new sellers, increasing RFP activity and converting deals from both new and returning clients. Notable campaigns in Q1 included new campaigns with Ford and a multi-phase launch for SNK's Fatal Fury: City of the Wolves in partnership with Petrol Advertising, as well as repeat business from major brands, including Amazon, State Farm, Paramount, Lego, Nintendo, Samsung and Disney.

Additionally, our Rising Stars campaign continues to deliver high-impact results. The 2025 addition generated over 500 million live stream banner impressions, engaged over 5,800 community members in its first league and produced thousands of organic creator posts, all while serving as a compelling sponsorship vehicle, securing deals from the likes of Elgato, Cash App, Corsair and many others. It's a perfect example of our ability to execute complex creator-led campaigns efficiently and at scale and a formula we intend to repeat through our Luminosity branded events and programs as well as through our partnerships like NHL Puck 'N Play slated to launch this fall.

As we move through 2025, our priorities are clear: one, grow our audience through SEO referral partnerships, new product features and user flow optimization; two, increase monetization yield through product innovation, ad tech optimizations and promoting our most profitable offerings like our desktop applications; three, continuing to build on the momentum of our rebuilt direct sales team to deliver bespoke campaigns to the world's largest brands; four, expand our Pocket Gamer Connects event series into new geographies and markets; five, maintain our cost discipline while unlocking further efficiencies; and sixth, scale our subscription and e-commerce offerings, particularly across TSR and our other owned properties.

We have the model, the properties and the right team in place. And while external pressures remain, the foundation we've built is strong, and it's getting stronger. Thank you to our shareholders, our partners and our team of dedicated enthusiasts for your continued support.

I will now hand the call over to Alex for a deeper dive into the financials.

Thank you, Adrian. I'm happy to be back on this call to report on our first quarter. It's been an eventful start to the year, and I want to thank the team for their effort and support through it. The meaningful progress we made in 2024 has continued into 2025 and is beginning to take hold, setting us up for what will be a strong year ahead. We're operating leaner and more efficiently than ever. Our focus remains squarely on what we own and what we operate. The structure we've built is starting to show strength. The improvements made last year to streamline the business, concentrate on high-margin areas and exit lower value operations have carried forward and are reflected in our operational momentum.

Today, we have a healthy monetization foundation, higher yield and margin from our programmatic business, growing subscribers and expanding events revenue are all driving improved contribution from every part of our business. As these revenue streams grow, incremental dollars are coming in at over 70% gross margin. When combined with our low cost base, this structure positions us to unlock meaningful adjusted EBITDA gains through 2025.

In respect to our more detailed financial results, I would first note that our results are presented in Canadian dollars. 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.

Additionally, it's important to note that the historical financial results, specifically the comparative period of Q1 2024, does not fully reflect the changes in revenue mix as well as the cost reductions enacted throughout last year. And therefore, may not bear a strong resemblance to current or future 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. The seasonality is isolated to our media and content advertising revenue streams. Q1 is the slowest seasonal period.

Now let's speak about the numbers. Total revenue in Q1 was $12.2 million, down from $23.3 million in Q1 2024. The breakdown of Q1 revenue is as follows: media and content revenue was $5.6 million, down from $15.9 million in Q1 2024, primarily due to the deprioritization of the low-margin Omnia video network. Esports and entertainment revenue was $3.6 million in Q1, up from $3.4 million in Q1 2024, primarily driven by increased events revenue. Subscription revenue was $3 million, down from $4 million in Q1 2024, primarily due to the sale of certain legacy casual gaming assets under the Addicting Games portfolio.

Paid subscribers were 251,000 as of March 31, 2025, down from 259,000 as at March 31, 2024, due to the sale of the legacy assets, but up from 238,000 as at December 31, 2024. The majority of subscription revenue is sourced from The Sims Resource web property. Paid subscribers in The Sims Resource had periods of decline during 2024 but were fully recovered and up year-over-year to record highs as of March 31.

Our gross margin improved significantly to 74%, up from 60% in Q1 2024. This is largely due to the mix shift in revenue as revenues from owned and operated properties now make up the majority of media and content revenue. And events and entertainment and subscription accounts for an increased percentage of overall revenue with those two categories combined for approximately 54% of revenue in Q1. Quarterly cash-based operating expenses decreased by well over $3 million year-over-year in Q1, primarily driven by decreases of $2.2 million in salaries and wages and $1.2 million in consulting. This new cost structure in Q1 more accurately represents the go-forward operating expenses of the company with additional cost savings expected in 2025. Adjusted EBITDA loss was $2.6 million compared to a loss of $1.8 million in Q1 2024.

From a balance sheet perspective, we ended the quarter with $1.9 million in cash. Working capital, excluding current portion of long-term debt, current portion of deferred payment liability and contract liabilities or deferred revenue was a deficit of approximately $4.5 million. Current portion of long-term debt includes $20.5 million under the credit facility, amounts which are not due until July 2028, but are presented as a current liability as of March 31, 2025, due to the company not being in compliance with certain covenants under the facility.

Current portion of long-term debt also includes $17.1 million under the term and operating credit facilities, down from $18.5 million as at December 31, 2024, due to principal payments made during the quarter. These amounts are currently set to mature in June 2025. The company is working closely with its lenders to amend the terms of each of the facilities, including an intent to extend the maturity dates under the commitment letter and revise covenants to better reflect the company's current structure and 2025 outlook. Accounts payable and accrued liabilities decreased in Q1 from $15 million to $14 million.

Looking ahead for the rest of the year. We expect to maintain gross margins at or around Q1 levels for the remainder of the year. Additional cost efficiencies are expected to come from technology support, web development and content costs and salaries and wages with those savings materializing in Q2 and for the remainder of the year. We continue to build our direct sales capabilities. As of March 31, we had five unramped sellers and expect them to become fully productive through Q2 and Q3. Both dollars were up in Q1 versus Q4, a positive early signal, and we're encouraged by the opportunity ahead.

We also continue to push forward on our owned and operated properties. Our monetization engine is running efficiently, with stronger programmatic yield, higher subscription activations and lower churn. We're actively positioning for growth, and expanding game title coverage across platforms like U.GG and Icy Veins, enhancing SEO and developing new referral partnerships. These investments are designed to grow our audience and importantly, each new user acquired today can be monetized more effectively than ever.

TSR continues to hit record subscriber level, and we're excited about upcoming product improvements that we believe will help expand its reach beyond just Sims players and deeper into adjacent creator and simulation communities. We continue to be cautious about macro conditions, particularly around CPMs. While digital advertising broadly is expected to strengthen in 2025, there remains some uncertainty especially regarding potential tariff-related impacts in North America, which is our largest market.

CPMs remain an important factor in our revenue mix. Any increase in CPMs from the current levels would be an incremental tailwind. One that would be especially impactful heading to the second half of the year. We still expect a strong seasonal lift in the second half and particularly in Q4. Our focus remains on cash flow, disciplined resource allocation and improving profitability at every level of the P&L. As we pursue new growth again this year, we're doing so in ways that protect our margins and support long-term value creation.

In closing, Q1 historically are seasonally softest quarter, landed generally where we expected it to. We remain optimistic about 2025. The structural improvements made last year are in place. Our monetization is stronger and we're now well positioned to focus on audience expansion and sales growth. There's more work to do, but the building blocks are solid. With a stable high-margin foundation in place, our attention turns to growth.

Our strategy is clear scale across more game titles, roll out impactful new products, expand our reach and engage our users more deeply. Our mission is to spend more time with more gamers and each new user adds value across our monetization channels from programmatic to subscriptions, to our revitalized direct sales business, which is showing strong momentum and is well positioned to rebound from recent lows. With the structure in place, we have a clear path forward towards scaling revenue, expanding profitability and delivering long-term value for our business. And of course, ladies and gentlemen, our business is the business of gaming.

Thank you, operator. I kindly turn it back to you.

[Operator Instructions] The first question today comes from Robert Young with Canaccord Genuity.

I guess, first place to start would just be around the covenants and the current status of the debt. Can you just give us a summary of the -- I guess, there's the June maturity and there's the -- maybe just give us a summary of the near-term movements and things that you need to accomplish to keep the debt in good standing.

No problem, Rob. This is Alex. Yes, I mean, in summary, there are -- effectively, there were two facilities. One of them matures in June 2025, the other not for many years, but both are presented as current due to being offsite with certain covenants. What needs to be accomplished is we need to continue to work closely with our lenders. We are working on amendments to those facilities. We want to do a number of things. One, we want to extend the maturity date of the amounts provided under the commitment letter. That is the facility that is coming due June 2025.

We want to also amend the covenants to reflect the new kind of structure of the business and our current outlooks to bring that -- those covenants back on side. And we do expect that all of this will be done certainly in advance of the maturity date at the end of June. We've been working very closely. We're very grateful for the partnership with each of our lenders. We're working very closely with them, and we think we will have those amendments announced soon.

Okay. Now in the worst case, I mean, you have a lot of really valuable assets, probably not reflected in the current valuation. Maybe you just give us a sense of some of the things you could do in the worst case. Like are there assets which you could sell or put in some way to reduce the debt if we were needed to go down that path?

It's Adrian. I think yes -- the short answer is yes. And there are a lot of assets that are very attractive in the portfolio. And we believe that you can transact on them in the worst case. And we get inbound expressions of the interest all the time, which points to the competitive advantages that a lot of these assets have. And I would point out that there's probably a number of assets that we have in our portfolio that are not even household names to people that follow the company. And so we think we're -- from an asset mix and a worst-case scenario to answer your question directly, that we're in a very advantageous position to deal with that.

Okay. The changes you made to the Sims, I know you've mentioned some of this in the prepared remarks, but I mean, one of the areas I thought is an opportunity for growth is in the subscription business. I know the vast majority of that is TSR. So like the changes you're making to -- or this new product that you're rolling out, maybe just talk about the outlook and the opportunity around subscription, particularly with TSR and other areas.

Sure, I'd be happy to. This is Alex again. Yes, our focus has been on premium subscription packages. And the way -- what we label premium, we view it more from a -- it's a bit of a time commitment, our annual packages. And we've been trying to shift the audience into annual. We do that through pricing and packaging. We've been doing that through launching free trials, which convert into annual packages, things of that nature. And we have had a lot of success. Annual subscribers now account for more than 50% of all the subscribers. The benefits of this are they have a much longer life and also a much higher LTV. So it creates a huge store of value that can be predicted. These are customers that, on average, will stay with us for many years, and that can be predicted and creates a very stable long-term base.

So that's the one side. It also significantly reduces churn. And of course, you can probably see in the subscriber count a nice gain in Q1, I think it was 13,000 increase in Q1 alone, which is nice to see. With the new product, this is 3D rendering of custom content objects in a browser, which is very technological events. It sets us aside. Nobody else is doing this in the industry.

So it has two advantages for us. One, TSR is the biggest in the industry. But there is another half of that market for it to conquer. And this advancement will really further set it apart and allow it to capture more of that market share. Secondly, it will allow the property and that approach, that business model to expand outside of just the Sims. That application can be applied to other games, to other communities. We have teams of 3D artists there. And it's a pathway for TSR to become more than just TSR. For example, it can gamify itself, become its own Dress to Impress genre, which I would point out is one of the top 2 or sometimes top played genres on Roblox. And now we're able to do something very similar in a web browser. So I think those are the key points that we're excited for that product, and that's going to help bolster subscription further.

Okay. Look forward to trying that out. Maybe just to clarify one of your comments, Alex. I think you said that you expect to maintain gross margins at or around Q1 levels. I think also you might have said that you expect to expand previously. So I was curious about modeling gross margins for the remainder of the year. I mean, should we expect this level kind of flattish for the remainder of the year? Or should we expansion?

Stabilized. Yes, stabilized from Q1 levels. Maybe yes, in the mid-70s, right at this level is what we expect. We expect that gross margins have stabilized at this level and likely will for the remainder of the year.

The next question comes from Matthew Mas with B. Riley Securities.

This is Matthew on for Mike Crawford. I guess to start off, you said the macro remains uncertain, but have you generally seen less uncertainty as 2Q has progressed? And do you think that will lead to another sequential decline in the media business? Or will a ramp in the previously five unramped sellers offset some of that?

Matt, this is Alex. So what we've seen, yes, we do remain cautious. There is volatility, and volatility is not good for the market. Of course, digital ads are one of the most liquid traded units in the entire world. These are real-time markets that trade every day and uncertainty is not a good thing. But what we have seen this year, it actually is -- Q2 has held up reasonably well. We saw more volatility in Q1, certainly in January. I think a number of other companies, lots of large companies expressed similar on their Q1 results. So we were certainly impacted by that in Q1.

Some impact in Q2, but I'm not seeing the volatility. So that's why I said, for example, in my remarks that we are still expecting your typical seasonal lifts into Q3 and particularly into Q4, the high season for the industry, of course.

As far as the sellers, yes, we have five unramped. Now that's in addition to our ramped, of course, but that is a good, healthy pipeline. For us, the way we measure internally, of course, there's a delay, right? When we add to the sales team, it takes time for those leads to generate, for the RFPs to come in, the RFPs to convert and of course, for the campaigns to serve and revenue to be booked. We expect them to ramp into Q2 and Q3 and start contributing.

I can tell you, Q1 was interesting. Obviously a low point for direct sales, and it is seasonally the slowest, but booked dollars were actually higher than Q4. So that's a very promising indicator for me, closed dollars. And now we have these unramped sellers coming online into Q2 and to Q3. And another thing that we've been able to maintain recently is an average number of closed dollars per seller. It's a KPI that we monitor, and that's been consistent. So we do expect this pipeline of new sellers to impact direct sales positively, of course, into Q3, Q4 -- Q2, Q3 and of course, into Q4.

And I guess, similar to that. So given less volatility recently and normalization from January, do you think 1Q -- I mean not 1Q. Well, I guess, yes, do you think 1Q represents an overall trough going forward, setting aside typical seasonality, just a trough in general?

Yes. Yes, certainly.

All right. And then given -- so I mean that covers the revenue side. But on the expenses side, advertising and promo cost as well as some of the office and general expenses were a bit higher than we expected for the quarter. Could we expect these to follow a similar cadence to last year where they declined sequentially throughout the year? Or how would you sort of contextualize and project that?

Yes. They would follow a similar cadence generally. Well, OpEx will generally be consistent. So this Q1 level is generally what we expect to see is a breakdown in the structure for the remainder of the year. However, we do expect further synergies. I will point out that the NFL show was retired in Q1. So you'll notice when you do your analysis, of course, you'll see there's a big drop in, for example, prepaids.

There were a lot of noncash items that with the retirement of the show needed to be written off, of course, stages, sets, that sort of thing. As they were retired, they are taken off the books, that impacted some of the lines. But generally, and some details are in the MD&A. But generally, we expect these generally to be flat on OpEx with certain further efficiencies, particularly in tech support and content and in salaries and wages to begin materializing in Q2 and for the rest of the year.

You kind of touched on this earlier. This is my last question. But on the direct sales side, is the total closed dollars figure basically a bookings number and what's the time line you expect to recognize that as revenue?

Yes. Closed dollars in a period is -- yes, it's a booking. It's the bookings for that period, which, of course, doesn't necessarily line up with revenue recognition. With that said, those are generally throughout the rest of the year. Obviously, in Q1, we are selling some Q1, but we're also booking Q2 campaigns, Q3 and, of course, Q4. We've seen a lot of strong interest for back-to-school. We had a lot of bookings for Q3. But generally, I'd say the time line is inside the year. There are very few instances where bookings, particularly this early in the year span over the year-end. So it's between the last 3 quarters of the year is when those would expect to be fully recognized.

This concludes our question-and-answer session and also concludes the conference call today. Thank you for attending today's presentation. You may now disconnect your lines.