Rivalry Corp

XTSX:RVLY

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen and welcome to the Rivalry Corp. Second Quarter 2023 Financial Results Conference. [Operator Instructions]. This call is being recorded on Tuesday, August 29, 2023 I'd now like to turn the conference over to John Vincic. Please go ahead.

[John Vincic, executive]

Thank you, operator, and good morning, everyone. Our speakers on today's call will be Steven Salz, Co-Founder and Chief Executive Officer of Rivalry Corp. and Kejda Qorri, Chief Financial Officer. Before we begin, I would like to remind listeners that certain statements made during this conference call presentation may constitute forward-looking information and forward-looking statements within the meaning of applicable securities laws. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Rivalry Corp. and its subsidiary entities or the industry in which it operates to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this conference call presentation, such statements use words such as may, will, expect, believe, plan and other similar terminology.

These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this presentation. These statements involve known and unknown risks, uncertainties and other factors, including those risk factors identified in the company's annual information form dated May 1, 2023 under the heading Risk Factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required under securities legislation. I'd now like to turn the call over to Stephen Salz. Stephen?

[Steven Salz, executive]

Thank you, John, and thank you, everyone, for joining us today. Q2 represented another successful quarter for Rivalry, consisting of continued product innovation, brand maturity and growth. Our betting handle grew nearly threefold from the previous year. Revenue was $8.5 million, a 60% year-over-year increase in all-time record for the second quarter. Gross profit increased by 86% year-over-year to $3.8 million increased marketing sophistication and brand resonance was notable in the quarter, given our ability to achieve this quarter's year-over-year growth rates while decreasing marketing spend by 6% year-over-year.

Despite that decrease absolute spend, we acquired 44% more new customers at a 41% lower cost of customer acquisition in Q2 of this year versus last. Additionally, enhancements to our core product led to operational improvements, driving increased player wallet share and platform engagement with average betting handle per customer increasing 63% year-over-year, positioning us well in the coming quarters. Generally, we believe this validates that our product road map is delivering increased customer value, and we expect it to continue doing so.

In terms of innovation, we have delivered several meaningful new products and enhancements across our sportsbooking casino. Just last week, we became the first operator in history -- sorry, the industry to introduce same-game combos for esports. This is our own proprietary version of Same-Game Parlays, Rock and Rivalry's signature creative touch to further elevate the on-site entertainment experience. Not only are we bringing one of the most popular bet types on the board to esports fans for the first time, we expect this offer to also increase our overall sportsbook margins, an important initiative to be touched on shortly.

We also launched our mobile app back in Ontario, allowing residents to access a bet on the region's most extensive catalog of esports titles, as well as traditional stores from their phones. We built on the significant expansion of our casino product suite, adding a number of additional titles and we will have more exciting new product releases to discuss as Q3 continues to progress. On the marketing side, Rivalry's social media presence and content strategy continues to be central to engaging our digitally native target customers and grew steadily throughout the quarter. In Q2, we saw an average 25% sequential increase in followers across all our channels and a 180% increase in engagement year-over-year.

By all metrics, Rivalry's brand engagement as measured by its social and content reach as by orders of magnitude, the largest brand in the esports betting category globally, and in many cases, has the most engaged social property in our markets for any betting brand period. This is a testament to not only our deep Gen Z and young millennials demographic understanding in the better category but the consumer product category as a whole. In May, we signed a group of Counter Strike creators, which grew our reach across social media and live streaming platforms by an additional 2.7 million fans. Counter Strike has been one of the top 3 most bet on esports on Rivalry, since our launch and generally is one of the most unique sport all over the world for well over a decade. We also debuted a new esport-centric show in August with one of our top partners, which has already generated more than 2 million views in just a few weeks. This media strategy further entrenches our brand around our target customers' favorite entertainment and provides us with reliable touch points to engage them around key e-sports events approaching in H2.

And these are just a few of the highlights with our marketing and creative teams delivering incredible work consistently across all our markets. Overall, we are pleased with the continued momentum of the business that we delivered throughout Q2. And now we would like to provide some forward-looking guidance. On the back of the consistent year-over-year growth trends we've experienced and handled revenue and gross profit over the last few years, our growing customer base and consistent product enhancements Alongside the stabilization in operating expenses over the past 4 quarters, proving out the operating leverage of the business has given us the confidence to introduce guidance on profitability. We are pleased to say that we expect to reach profitability in the first half of next year.

On the path to getting there, we have some operational tuning to do that has been underway for some time as it relates to stabilizing sportsbook margins, which represents the majority of Rivalry's [ roughly ] base at approximately 80% of our revenue in Q2 and H1 '23 as a whole with the balance being casino revenue. When comparing Q2 to Q1 of this year, we saw only -- really saw a relatively modest 7% sequential decline in betting handle.

In the past, we've seen a bigger slowdown during the second quarter attributable to the seasonal dip in esports events during that time. That said, an increasingly diversified handle mix with casino and steadily growing base of traditional sports betting is resulting in greater monthly betting handle stabilization. This is a trend that we began to impact this quarter and something we are encouraged by. It is not to say all seasonality has gone, but the peaks and troughs are narrowing from where the business sits today in terms of geographic mix and weight and product mix and weight. As the business continues to scale geographically and product diversification increases meaningfully year-over-year, we will continue to watch for any further moderation of historical seasonal trends, just as they had in Q2 this year. Circling back against that 7% betting handle decline versus Q1 this year.

Investors will note that revenue declined from $12 million in Q1 to $8.5 million in Q2. That's a decrease of 29%, outpacing the 7% decrease in handle. Casino revenue was up marginally, so the decrease is due to the Sportsbook segment. This sequential Sportsbook revenue decrease contributed to a net loss expansion in the quarter, Q2 also saw or just generally seeing our annual salary increases driving an increase in overhead, which is our largest expense, along with a few onetime expenses.

These two factors expanded Q2 net loss greater than would have been expected against a sequential 7% decline in handle. The Sportsbook margin challenges in Q2 is a subject we would like to spend a minute addressing. Rivalry's distinct approach in the space centered around millennials, Gen Z and their unique entertainment preferences as one of our key business differentiators but it also presents unique challenges regarding betting behaviors and player margins that we're only able to learn as we scale at a quarterly work to address in real time. Generally, we've experienced higher margin volatility within the sportsbook amounts demographic, which alongside a select number of low probability e-sports and sports outcomes in Q2 negatively impacted our revenue.

It is worth noting that our consistent industry average margins, Rivalry would have been profitable in Q1 and Q2 this year against the betting handle we generated. This points to the latent profitability available to be realized at the business' current level of handle, let alone in the future as we continue to deliver growth. In the immediate term, we've been turning our operational additions to address normalizing and stabilizing margin and see early positive results.

This includes an increase in higher-margin product mix through the release of Same-Game Parlays, marketing higher-margin verticals through our media channels. selective posted margin increases where Rivalry is below market and beefing up our internal sportsbook operational team to provide greater real-time feedback loops to enhance those efforts. Ultimately, this is just the nature of building a business that delivers triple-digit growth on a year-over-year basis, multiple years in a row as Rivalry has. Intrinsic to rapid growth in any venture or field is rapid learning and an ever-expanding opportunity set on the back of that. Our sophisticated understanding of this highly competed millennial Gen Z consumer is our biggest competitive advantage. And as the industry's traditional demographic starts aging out, we'll be even more sought after a customer cohort. We have a significant head start on understanding and operationalizing the customer experience and success of this demographic, which has given us a proprietary ability to acquire, engage and retain them while many of our peers cannot.

Capturing this elusive customer is only possible innovative and engaging products, some stopping marketing and a brand steep and internet culture around their favorite entertainment category. Most importantly, these ingredients are not easily replicated their benefits continue to materialize within the business and contribute towards the operating leverage we speak to so often in a number of the metrics that I provided at the start of this call. We believe our unique position and the adjustments being made to improve margin alongside continued operating expense stability will positively impact bottom line results and allow us to reach profitability during the first half of next year. At this point, I'd like to turn the call over to our CFO, Kejda Qorri, to review our financial results in greater detail.

[Kejda Qorri, executive]

Thank you, Steven. Rivalry delivered strong year-over-year growth in the second quarter. Betting handle of $112.2 million was up by $73.8 million or 192% from the second quarter of 2022. Handle was once again split relatively evenly between the Sportsbook and Gaming segments. Note, gaming is the segment of the business represented by casino, and we may use these words interchangeably. And on that, Rivalry is pleased to have delivered an increase of nearly $57 million of gaming handle year-over-year.

This is a testament to the growth we're capable of generating purely from enhancing our product suite and something we expect to continue demonstrating as we execute our deep product road map quarter after quarter. Sportsbook also contributed to the growth with a $54.6 million of Handle, up $16.7 million or 44% from Q2 2022. The increase reflects the continued expansion of our customer base. On a sequential basis, sportsbook handle was down 7% from the record quarter in Q1 2023. As Steven mentioned, Q2 has historically been a slightly seasonally slower quarter for our Sportsbook business due to the timing of major esports events throughout the year.

As we have diversified our revenue base, particularly with the addition of the Casino.exe platform, the seasonality has been reduced, but it is still present. Second quarter revenue of $8.5 million reflects a similar pattern to Betting handle. Strong year-over-year growth of $3.2 million or 60%. At segment level, revenue was weighted 80% Sportsbook and 20% Casino. While Handle was more evenly split, in general, we generate higher margins on sportsbook betting, given the inherent volatility associated with this product. However, it is this exact volatility that can also create some uneven margins quarter-to-quarter on the sportsbook.

As Steven mentioned, we're undertaking a number of efforts to reduce volatility and deliver more consistent sportsbook margin and is betting handle on the sports book in general scales. This will help as well. Casino segment margins on Rivalry are lower due to both the more stable margin mechanics of casino games and the decision we've made from a branding and customer experience standpoint to offer casino games with higher RTP or return to player, which we believe is better suited for our unique audience.

Sportsbook revenue of $6.8 million was up 28% from Q2 2022, while casino revenue of $1.7 million compares to a very modest figure in the prior year quarter given the launch of Casino.exe at the start of Q3 last year. This also means that year-over-year percentage increases in the business may become less pronounced at the start of Q3 as we're now lapping the Casino.exe launch. Gross profit was $3.8 million in the second quarter compared to $2.1 million in Q2 2022. On a year-over-year basis, 86% growth in gross profit outpaced the 60% growth in revenue for the quarter. This resulted in a 45% gross margin in Q2, well above 38.8% a year earlier and similar to 45.5% in Q1 2023. We remain pleased with our gross margin trend. I'll turn now to operating expenses. The $1.7 million year-over-year increase in OpEx largely offset a similar increase in gross profit, resulting in a 1% increase in net loss to $6.3 million. General and administrative expense of $5 million was up $1.2 million from last year due to increased staffing to support the scaling of the business.

Compared to Q1, when staffing levels were similar, General and administrative expenses were up 500,000 due to the timing of certain onetime expenses and our annual salary increase. Increases that we implement across the organization in early Q2. marketing, advertising and promotion expense of $3.2 million was down $200,000 from last year. We're very pleased to have driven a much higher volume of betting handle on a lower marketing spend. Technology and content expense of $1.5 million more than doubled from last year due to the growing betting volume in the business, which drove higher fees for adds providers and technology support that, in most cases, are variable based on activity. These three line items represented 96% of our OpEx in Q2 2023. When we account for the factors I just described, onetime items and timing of expenses, our OpEx has remained relatively flat over the past 4 quarters. Over the same time frame, we have delivered triple-digit year-over-year growth in betting handle each quarter. While we may see further growth in some expense lines to support the ongoing scaling of the business, we're confident that expenses will continue to increase at a much lower rate than betting handle and revenue. We will continue to manage expenses in a disciplined manner.

Lastly, I will comment on our balance sheet. We ended the second quarter with $14 million of cash inclusive of $5 million restricted cash, and we remain debt free. Consistent with the outlook we have provided on reaching profitability in the first [indiscernible] of next year, we are confident we have sufficient liquidity to fund our continued growth. At this point, I'll turn the call back to Steven to discuss our outlook.

[Steven Salz, executive]

Thank you, Kejda. We are well positioned for a strong second half of 2023 as seen in our preliminary July results which marks a new record monthly betting handle of $46.6 million, a 99% increase from the year prior. As our peers are gearing up for the football season, Rivalry is well equipped for its own esport Super Bowls in October with legal budgets world's championship and Dota 2 in The International. The further product enhancements to deepen the customer experience while betting on these events. We are also keen to share a number of additional project releases in Q3, which will further our position at the edge of technical and product innovation in betting and entertainment and more broadly, our vision to create an on-site experience, specifically for young millenial's, Gen Z's unique consumption habits. In similar to the prior releases, we expect these products to drive increased betting handle, improved player margins and continue to demonstrate the operating leverage within the business. Our bespoke product, creative marketing and brand entrenchment all contribute to our overarching strategy and goal within this demographic. Each of these core pillars are set to see continued enhancements throughout the coming quarter, including a new original casino game that we've developed in-house, increased depth and variety to our casino product and campaigns that further [indiscernible] at the intersection of gaming, sports and Internet culture.

We're looking forward to another quarter of meaningful product suite enhancements and growth that will collectively contribute to reaching profitability in the second -- in the first half of next year. I will stop there and open up the call for Q&A. Operator, can you please provide the instructions?

[Operator]

[Operator Instructions]. Now first question comes from Adhir Kadve from Eight Capital.

[Adhir Kadve, analyst]

Thank you for taking my questions. Congrats on the results. Just really solid improvements in the business this quarter. I wanted to unpack the profitability guidance a bit. So obviously, great to see, especially since you noted that it's going to be on the back of consistent growth. So we're not losing anything there. But I just wanted to unpack where the leverage is coming from. I know you guys are doing a great job on the marketing front. So it seems it's going to be largely driven by margin improvements in H1 next year. So what sort of levers do you really have that you can pull to really smooth out that sportsbook margin as we think about modeling this into H1 next year?

[Steven Salz, executive]

Yes. I mean, it's a few things. It's also new product releases. So we -- at the end of the script, I was talking about some new stuff coming from casino. Casino is obviously like 50% of handle now. As we talked about, when we put out Casino.exe late last year, we saw that instant within the first quarter, it was, I think, 30% or 40% of handle with literally $0 of marketing spend. And even to this day, it's kind of just organically injected into our existing spend rather than necessarily having some of that new spend out there. So we're going to get just an absolute lift from new products the same way, maybe not necessarily same quantum, but certainly the same way that we saw a lift from casino and other things that we put out. So that's one piece of it. It's just driving growth while still managing, I'd say, like overall spend and marketing spend.

But in terms of margin specifically, what is with volume. We talked about this a lot over probably like the last few years, it's just the math of -- and the nature of this business is as you drive more sports portfolio, just mathematically or probability of having more consistent margin over time increases just because your ability on average to balance or find closer to your post to margin in your sportsbook for every market increases, just naturally even the volume. So again, it's why you would find much more mature operators with billions of handle driving lower variability in our margin because there is just kind of like a law of large numbers of the math as the whole thing. The other is definitely stuff like same-game combos, like our Same-Game Parlay esports. So that is just a higher-margin product. Casino's parlay are generally. So again, margin mix through parlays and same-name combos will also help and we're increasingly tuning marketing and even the way that we run, let's say, our CRM are offering efforts, incentive efforts and a way to drive and cross-sell higher-margin products.

So that's one, which again is not like a thing that requires that new increases in spend, just how we operationally focus ourselves. Sub selected post the margin increases, which basically just means that we've been very competitive in margins for a long time. It's not -- we're not the most competitive. It's not the thing that necessarily is driving users to Rivalry, but there's all small opportunities here and there. It's a modest increase in selected post margin without degrading customer interest in Rivalry. And those are probably the big efforts. So it's really like net new product to drive growth without faster new spend, really just overhead at our own R&D to get it out and then a variety of different margin efforts while simultaneously, yes, like we make operating expenses mostly stable and not expecting massive jumps or leaps and OpEx at this point. So it's really the combination of all those things that we feel will get us there.

And then the last point is we said it earlier in the script, is if you look at the margin mix of, again, like talking super mature operators looking like an antique or like a [ flutter in english ], which has massive portfolios of multiple brands, 10, 15-plus brands. You'll feel like industry margin now is 10%, 11%, 12%, even mid-teens for some operators in certain geographies. So there is a market precedent and product mix precedent that we're gearing to where, again, even at current levels of [ analysts ], let's say, the 120 in Q1 or the 112 that we did just now in Q2 at even the midrange of those numbers that I gave would exceed the OpEx of the company. So yes, we're feeling like pretty strong directionally, all these efforts for sure.

[Adhir Kadve, analyst]

Okay. Excellent. And then just on the casino margins, I know you guys have been taking a little bit of money off the table just to kind of run -- or sorry, get more users into the ecosystem and have more favorable results for them? And do you see that kind of continuing? Or do you think you're reaching like a scale with the casino handle that maybe you can pull back on that a little bit. Just any color around that would be helpful.

[Steven Salz, executive]

Yes. The people will see with some of the stuff that we're expecting to put out in September, that the margin might get a little bit better? I'm talking like super modestly. Like at the end of the day, like if you just look at the current set of games, you've obviously got Rushlane, our original game and we're going to have another original game that we're just waiting for some kind of finalization of testing, but expecting that in September as well. But outside of that, we're like Evolution, table games like Black Jack, Black rat, stuff that you would find on other operators. So there are some very like classic game types that exist on Rivalry that are not manned atypical and that really is just like the existing, let's say, posted margin or RTP that exists within those games. So we're not like super odd trends with some of the game set. But yes, I think like some of the stuff we're putting out in September, I'm just thinking like the RTP is a little bit lower, which means that inversely our margin is a little bit higher, but I don't think we're going to be making super dramatic changes there, to be honest.

[Adhir Kadve, analyst]

Okay. Got it. Maybe just changing gears a little bit here to the back half of the year. Obviously, massive events coming with Dota 2 and The International coming up. What goes into preparing for those events? Like from an activation perspective, I know you know last year, you just drove massive growth from those events. Just give us a sense of what you guys are doing to kind of get ready for those events as well.

[Steven Salz, executive]

Yes. There's a ton of internal operational stuff like we talked about it internally the same way that like a retail company would think about Christmas where they hire a bunch of part-time workers to work in the retail store, whatever maybe -- or Amazon does the same time, right, where they like the math -- they spike the warehouse employee base to manage like the peak of the season. I think every business, depending on its seasonality or whatever it may be, has their version of equivalents of that. So for us, it's making sure we're providing real-time world-class customer support and that we're like populated effectively staff there and making sure we're moving money in and out super fluidly. So there are certain things you do with your payment providers and your internal payments solution to make sure money is moving in and out as fluid as possible. there's technical things you do. You want to make sure that the site is stable, so there's operational infrastructure-related items, tons site stability and like quality of the offering, same thing with your odds provider, like there's all this kind of stuff.

And then from a marketing perspective, yes, I mean, we -- the same as retail companies will plan many, many months in advance for their Christmas. We try to do the same thing as early as we possibly can for these events in October, which is build pretty deep, very Rivalry flavored bespoke marketing and activation is around all of our biggest creators for TI, being Dota and world League of Legends across all of our markets, and we've got a lot of very kind of quirky and fun stuff, I'd say, plan for that. The kind of beauty of it is like we built a lot of really great reputation in our markets and our partners are our partners and [indiscernible] around these deals. And a lot of the value proposition of Rivalry for you is like exactly this kind of stuff is like if you work with the traditional brand in, frankly, any consumer category, they probably don't go to the length that Rivalry does terms of the types of activations we do. So we also just get like a lot of organic and natural excitement and buy-in from all of our marketing channels around world to TI because now they're like creatively expecting really big things for us that are really fun that can deliver unique value to their communities.

So we're getting like this very organic as flywheel style effect now every time we come to this time of the year where there's like almost a community but that starts to build just because of the types of things that we do. So, yes, it's just across the board is everything. We become like a bit of a well oiled. And I'd like to think at least to become a bit well-oiled machine around these bonds or that month in particular. So, yes, we're expecting to save this loss for sure.

[Adhir Kadve, analyst]

Awesome. That's good to hear. And looking forward to the results in Q3 when we talk next. And then my last question, and I'll pass the line here is just on some of the newer initiative, especially like the app, I think that was a pretty big undertaking. How is it being received by customers in the Ontario market? Are you seeing, from a unit economics perspective, a lift from what you were seeing before when you were traditionally mobile web based. Just give us any color around how that has been received by the Ontario market.

[Steven Salz, executive]

Yes. We can see like, I think, double-digit month-over-month growth in Ontario generally since the launch. We've seen that trend for a while in that mobile plus casino definitely has helped that. And now we're going to have anything other release soon around the mobile app and Ontario that I think we'll just continue to bolster activity. So definitely, we're seeing an increasing percentage of the overall activity in Ontario shifting to the mobile app. It was something we talked about under like a quarter or so ago where because of many of our other markets, it's not really possible to have mobile app whereas in the regulated market in Ontario, you can, being one of the few operators at the launch that did not have one was certainly didn't help us. So in many ways, like the mobile app was like a prerequisite to continuing to like exist to grow in this market because it's just expected from customers, and I don't really blame them.

So, yes, it's been like a completely like natural boost and affinity and people are finding it very easy to use, very straightforward, very clean UX. And again, there's some stuff we're going to talk about I think soon in September around additional releases and things we've done to bolster the mobile app. So yes, we're feeling good about that. The other benefit is, like the work that we did on the mobile app and just generally in the mobile team that we built around it to support it and continue to develop it is giving us some like interesting opportunities to potentially lead on and do more with mobile in other markets. So that's something that we're pouring also that could probably or potentially happen before the end of this year and the more that we can deliver like a great vote of product to better. But I guess the one caveat is the vast majority of our traffic generally right now, a couple of mobile, it always has. So even like the design of the website from the beginning at the UX, everything was built to be mobile first. So like using Rivalry on your mobile browser is the main way most people around the world use Rivalry.

So even though it's not clicking in [ Appalonia ], which has a lot of different convenience factors for sure, the mobile experience is already like quite attuned. So yes, we had a lot of intuition, I guess, you can say in terms of like what was going to work, what was going to make sense, and we're going to see if we can pull more of that experience and success from Ontario and to other markets potentially.

[Adhir Kadve, analyst]

Okay. Excellent. Maybe I might sneak one more in. I just wanted to ask about the cross-sell. Are you seeing a significant cross-sell from the sports book into the casino or vice versa? Like how are you seeing the cross-sell now that the casino is kind of, call it, 50-50 with the sportsbook. Can you talk about that a little bit?

[Steven Salz, executive]

Yes. I mean look, the approach of the business is the same from the pitch that I gave investors in 2017, we are closing -- raising our first money and applying for a license, which is using -- giving the sports Internet culture to build the brand and marketing and creative approach as a top of funnel to a demographics of sports betting as a whole and then ultimately being able to offer that sports better in that demo, the full kind of [indiscernible] options, which includes casino. So -- but that continues to be our top of funnel, meaning that like the way that we market, which is certainly more Sportsbook centric, more around gaming or out esports betting not necessarily casino although certainly, we do leverage our creator sometimes to discuss it when there's not a lot going on in sports, and we try to balance the seasonality off of it. But we are also sure seeing that there is a very clear correlation right now between people that are coming in esports, potentially traditional sports and then cross-selling to casino and continuing to play it. I suspect other operators do similar things. But yes, maybe among our demo, it's a little more pronounced.

So the cross-sell is like quite high, and we see that when there's a lot going on in the esports calendar, we definitely see an even bigger boost in casino, like it just adds kind of fuel on the fire in terms of like overall activity. So, yes, that has definitely been a trend that we've been observing. I would say there's like a focused strategy, around with at least currently exists around just going for like casino customers and in a super targeted way. We continue with our general brand approach, which has worked so far. And I think, resulted in this operating leverage we [indiscernible].

[Adhir Kadve, analyst]

Awesome. Congrats on the quarter. Looking forward to H2. It looks like it's going to be a really big one. I'll leave it there for questions.

[Steven Salz, executive]

Appreciate it. And that was it actually. So yes, thank you, operator. Thank you everyone for joining us and always happy to continue the conversation offline. So the that should be an e-mail or reach out to our Investor Relations, and we'll field any additional questions. Thanks, everyone.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation and I ask that you please disconnect your lines.