Enthusiast Gaming Holdings Inc (EGLX) 2021 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Enthusiast Gaming Holdings, Inc. fiscal fourth-quarter and full-year 2021 financial results conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Eric Bernofsky, Chief Corporate Officer. Please go ahead.

Thank you, Charice. Good afternoon, everyone, and thank you for joining Enthusiast Gaming's fourth-quarter and year-end 2021 financial results call. My name is Eric Bernofsky, Chief Corporate Officer of Enthusiast Gaming. With me today is our Chief Executive Officer, Adrian Montgomery; our Chief Financial Officer, Alex Macdonald; and our Chief Operating Officer, Thamba Tharmalingam. We'll begin with some prepared remarks from Adrian and Alex before opening the floor to questions.

Before we begin, I'd like to remind everyone that today's presentation contains forward-looking information that involve 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 three- and 12-month periods ending December 31, 2021, which are available under the company's profile on SEDAR and EDGAR, as well as on the company's website, 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, my pleasure to turn the call over to Adrian Montgomery, CEO of Enthusiast Gaming. Adrian?

Thank you, Eric. Good afternoon, and welcome to our fourth-quarter and year-end 2021 financial results conference call. I'm very pleased to share with you today the details of another record quarter and fiscal year. I will also share some key operational highlights and milestones. Lastly, I'll let you in on how 2022 is going before turning it over to Alex to share more details on the financial metrics.

2021 was a pivotal year for Enthusiast Gaming. We maintained a clear focus on building the largest media and entertainment platform for video game and esports fans to connect and engage worldwide. And I'm proud to say that our team continues to deliver.

Let me share some of the highlights. First, we have been telling shareholders, the steps we took in 2020 would consistently deliver quarter-over-quarter revenue and margin growth through 2021. I'm pleased to update shareholders today and to tell you that we are delivering on this commitment.

Revenue in 2021 grew 130% to a record $167.4 million from $72.8 million in 2020. In Q4, revenue grew 34% to a record $56.9 million from $42.5 million in Q4 of 2020. Gross profit grew to a record $37.8 million in 2021, up from $18.6 million (sic - see press release, "$18.7 million") in 2020. And in Q4, gross profit reached $13.7 million, up nearly 40% sequentially. Gross margin improved in each quarter of 2021, reaching 24.1% in Q4, up more than 500 basis points from the same quarter in 2020.

We told shareholders that the investments we made in 2020 by investing and focusing on shifting the business model to an integrated entertainment company, in part by staffing and resourcing of direct sales and customer success team, would bear fruit in 2021. I'm pleased to again report that direct sales continues to make significant progress and give kudos to our incredible teams that are driving the change in conversation everyday among Fortune 100 marketers -- Fortune 100, 500, 1,000 marketers, helping them redefine their go-to-market strategies on how to reach Gen Z and millennials.

Direct sales revenue grew to a record $22.2 million in 2021, up more than four-fold from just $5 million in 2020. In Q4, direct sales grew to a record $8.8 million and accounted for 16% of total revenue compared with only 8% in Q4 last year.

I want to reiterate again that: one, by building the largest media and entertainment platform for video game and esports fans to connect and engage; two, by connecting with hundreds of millions of gamers each month; three, by being ranked by Comscore as a top 100 Internet property in the US and one of only two gaming companies to make the list, we offer more touch points to our Gen Z and millennial audiences for marketers to reach in any other gaming entertainment company. And I might be so bold as to say any company in any category targeting Gen Zs. But it now goes so much beyond offering more touch points.

Our proprietary content continues to grow and evolve. As you may recall, we have developed our own IP and custom content capabilities that, when combined with unmatched reach, really does create a sustainable competitive advantage. Some of those franchises include Gamers Greatest Talent, Rising Stars, the Luminosity Academy, Luminosity Live, EGLX, Pocket Gamer Connects, Launchpad. And all of these properties, in addition to our media reach, are all being sold directly via sponsorship or custom content integrations.

In 2021, we worked with many new partners, and I have spoken about several of them on past calls. We also noted in early 2021 that our direct sales team is going to commit itself to successfully unlock a new category for us in Hollywood studio films. This category proved to be one of our best in 2021, as we partnered with 17 film releases in the year compared to zero in the prior year. Some of the partners we work with include Amazon Originals, Disney, Elevation Pictures, Paramount Pictures, United Artists, and Universal. This is one particular category we are very bullish on for 2022.

Another point I want to focus on this quarter is the increasing success we are seeing on renewals as a percentage of overall direct sales. These are the partners that came back to us throughout the year on additional media and content activations. We often get asked about repeat business, about whether our partners are just testing the waters with us or if we are providing real sustainable value to them. So I thought I would highlight the mix of renewals versus new business as we exited 2021.

I'm particularly proud to say that in Q4, 42% of Direct Sales revenue was from renewals, from partners we had previously worked with. And further, we are seeing deal size, on average, amongst renewals to be larger than new customers. That's a very telling metric and bodes very well for our direct sales business line, as, again, it is another proof point that our flywheel of services we offer brands is winning market share.

Some of these renewal partners include AB InBev, Activision, Best Buy, Bethesda, Disney, Elevation, FX Networks, G FUEL, HBO Max, Lego, Microsoft, Nintendo, Procter & Gamble, Square Enix, State Farm Insurance, TikTok, Tracfone, Truth Initiative, Universal Pictures, and Warby Parker. And I think it goes without saying, but it bears repeating, that if you're going to win multiple rounds of business with something like Disney+ or HBO Max, it's for one reason and one reason only. It's because the solutions that we offer are converting subscribers for them.

Turning to paid subscribers, we ended the year with 220,000 subs, up 80% from a year ago. Similar to direct sales, we are seeing many of the seeds we planted in 2020 bear fruit in 2021. And despite the marked success this year, we believe we are still in the early innings of both direct sales and subscriptions.

From a combined revenue perspective, the growth areas of direct sales and subs totaled $12 million in Q4 or about 21% of total revenue compared to just $5 million or 12% in Q4 of 2020. This shift in revenue mix has helped lift margins. And we plan to continue to invest in these high-growth, high-margin areas of our business.

On the content, licensing, and distribution side, we took significant steps in 2021 in the areas of premium content; and 2022 has started off very well. We have also been encouraged with the success to date we have seen on new distribution platforms, like Snap and TikTok, that are now starting to generate real recurring revenue. While it's still a bit early to share numbers, we have and will continue to make the investments needed that I believe, in the next two-plus years, will catapult Enthusiast Gaming into a leadership position in gaming and Internet culture from a premium content perspective. I look forward to sharing more with you in the coming quarters.

Turning to Luminosity Gaming, our esports organization had a successful 2021. Luminosity is now head and shoulders above any other professional esports organization when it comes to time watch. We continue to build our roster of competitive players and content creators and remain excited about continuing to grow our market share in esports. And I would also point out that when we talk about our proprietary IP, the Rising Stars, the Gamers Greatest Talent, the Luminosity Academy that we created in partnership with Lego, Luminosity Gaming esports athletes and content creators are a fixture in all of those content activations.

In 2021, we successfully closed five acquisitions, including Addicting Games and U.GG later in the year. And they're integrating extremely well into our flywheel. In November, we acquired the U.GG, one of the largest League of Legends fan communities in the world. The team in Austin has not skipped a beat since the deal closed, and we believe there are many exciting things to come in 2022. One example is the launch of a new app last November, which, as of this week, has been downloaded over 0.5 million times and which also demonstrates the strength of offering and experiences that U.GG delivers for the League of Legends community.

Last quarter, I spoke about exploring NFT opportunities and gave some examples of flywheel integrations with Addicting Games, the casual and mobile games developer we acquired in September of last year. Subsequent to the year end, we announced a unique partnership between Enthusiast Gaming and Hut 8 Mining, one of North America's most innovative digital asset miners. This is a textbook flywheel deal.

Hut 8 becomes a sponsor of Luminosity Gaming. Their logo is proudly displayed on our jerseys. And fans should look for the Hut 8 Luminosity merch drops coming soon. It also uses our media inventory and influencer roster, which will be used to cross-promote Addicting Games's ev.io and Hut 8. But it goes even further.

While the Hut 8 deal covers the flywheel, its main component is a game called ev.io, a first-person shooter available for anyone with a web browser. You'll see our creators and esports athletes playing the game with their fans online to cross-promote ev Hut 8. Hut 8 skins, Hut 8 bosses, and Hut 8 tournaments are coming to ev through this partnership. Players will pick up Hut 8 weapons and play on Hut 8 levels.

We recently announced that we are releasing custom NFTs via partnership with the Fractal marketplace, which is led by one of the founders of Twitch, inside ev.io to engage with fans in a new way. This will enhance gameplay and drive further in-game purchases. We're plugging into Web 3.0 opportunities with the right partners at the right time because of our unique and deliberately assembled flywheel of assets.

We're the only ones capable of this type of activation. Last year, the CEO of Epic Games said the metaverse would be about car companies putting you in the car rather than advertising a picture of a car on a billboard. This is how we've designed the partnership with Hut 8 and Fractal, utilizing assets across our flywheel to produce content and experiences that lead to deeper engagement and new purchasing opportunities for fans.

So in conclusion, we delivered on our promise in 2021 of growing revenue more than 30%, while also meaningfully improving margins and continuing to invest in new growth opportunities. 2022 is off to a great start, and I see a similar pattern unfolding -- with sequential revenue and margin growth throughout the year. I am confident we have the right team and strategy in place to continue executing and to continue to drive long-term shareholder value. As you see, we've had a busy year, but we're just getting started.

I will now turn the call over to our CFO, Alex Macdonald, for further commentary on our financial results. Alex?

Thank you, Adrian. That certainly feels fantastic to finish such a big year with such a strong quarter, our fourth quarter 2021. My commentary will focus on Q4 with some additional observations on the year as a whole. However, prior to that commentary, here are my usual notes.

I note that our results are presented in Canadian dollars. 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 I note that the significant majority of our revenues are measured in US dollars and are translated into Canadian dollars for presentation in our financial statements. The exchange rate between the US dollar and our presentation currency of the Canadian dollar should be monitored and considered when analyzing our forecasting results. And now, let's talk about the business.

Growth continues. Q4 revenue was another record high of $56.9 million, up 34% from Q4 2020 revenue of $42.5 million. This increase was driven by strong growth in our media and content revenue streams, which were bolstered by direct sales. The increase was also supported by a continually growing subscription base.

Q4 revenue by source was as follows: media and content, $53.3 million; subscription, $3 million; and esports and entertainment, 0.6 million. The media and content revenue of $53.3 million compares to a $39.6 million reported in Q4 2020, an increase of 35%. The increase in media and content revenue for Q4 was mainly driven by the following.

Number one is no surprise, a significant increase in direct sales, the majority of which are recognized in media and content. Total direct sales were $8.8 million in Q4 as compared to $3.3 million in Q4 2020. Number two is a web RPM, which was 41% higher in Q4 as compared to Q4 2020. And certainly, congratulations to our yield team on that results. And number three, a video RPM, which was 24% higher in Q4 as compared to Q4 2020.

Q4 subscription revenue was $3 million, up 83% from $1.7 million in Q4 2020. The increase in subscription revenue is attributable to an increase in paid subscribers. The company had approximately 220,000 paid subscribers as at December 31, 2021, which is up substantially from approximately 122,000 paid subscribers as of December 31, 2020. The increase in paid subscribers is approximately 80% year over year, of which, approximately half came from each of organic growth and acquisitions. The company continues to grow the subscriber base on its existing subscription offerings and continues to offer additional subscription offerings on new platforms.

Q4 esports and entertainment revenue was $0.6 million as compared to $1.2 million in Q4 2020. The decrease primarily relates to the termination of a management services agreement relating to the management of the Vancouver Titans, which was terminated in Q2 2021. The company also did not host EGLX Digital in Q4 2021 as it did in prior years. Fluctuations in entertainment revenue are also caused by the scheduling and timing of live and digital events in the company's entertainment division.

Gross profit was an all-time record high of $13.7 million for Q4, up 69% from Q4 2020 gross profits of $8.1 million. As I so often repeat, our growth strategies include higher yield and higher-margin revenue streams, such as direct sales and subscription. Direct sales and subscription revenue reached all-time highs of $8.8 million and $3 million, respectively, which helped drive this record of gross profit.

Direct sales and subscription are now consistently over 20% of total revenue, which helped bring the gross margin to 24.1% in Q4, up 500 basis points from Q4 2020, which was %19.1. This reveals a compounding effect in our business model when we consider significant growth in revenue over the same period.

Operating expenses were $25.7 million in Q4, up from $12.5 million for Q4 2020. Half of this increase is from non-cash expenses of share-based compensation and amortization, which were $4.2 million and $3.9 million in Q4, respectively. A portion of the increase also relates to the registration of the company with the SEC and the Nasdaq listing.

Office and general items include items such as insurance filing and listing or sustaining fees. Many of these expenses began in Q2 of 2021, such as the required insurance, and will continue for the foreseeable future. For our analysts who may seek to forecast certain line items of operating expense, you may notice that esports player, team, and game expenses were reduced in Q4 of this year. We view this reduction as non-recurring, and this expense line is expected to return to Q3 levels, which was $1.6 million.

Net loss and comprehensive loss was $12.9 million in Q4, resulting in a net and comprehensive loss per share, both basic and diluted, of $0.10. Net cash used in operating activities was $3.4 million for Q4, which has improved year over year from [$4.3 million] for Q4 2020. And we ended the year with a cash balance of $22.7 million.

We are, more than ever, of the opinion that the results of operations and the financial condition of Enthusiast Gaming has never been stronger. We maintain a growth-oriented outlook. We are in a position where revenue continues to grow significantly.

Q4 revenue grew 34% year over year, and we expect similar trends to continue. However, the growth in revenue was far outpaced by the growth in gross profit. Q4 gross profit grew 69% year over year. And we expect gross profit to continue to outpace revenue growth, resulting in continued improvements to gross margin.

When we look at OpEx, it's important to note that we are already a business of scale. We have an audience of over 300 million monthly viewers. Those viewers consumed 40 billion pieces of content on our platforms in 2021. And this makes us, according to Comscore, one of the top 100 Internet properties in the United States.

Now, Enthusiast Gaming already sustains and maintains the costs of this scale. However, Enthusiast Gaming is only now starting to realize the benefits of this scale. We will continue to invest in the growth of this business, so we are at a pivotal time. We have proven the business's ability to scale an audience. We have proven its ability to scale revenue. And we are proving, in real time, its ability to scale gross margin.

As the higher yield and higher-margin revenue streams continue to form a larger portion of overall revenue, the scale will continue to move down the income statement, ultimately to operating margin. And these revenue streams are not slowing down. Adrian spoke earlier about the power of our direct sales offerings. And here are some stats.

Q4 direct sales grew by 167% year over year. Repeat clients accounted for 37% of all direct deals in media and content in Q4. However, repeat clients accounted for 41% of all direct sales revenue in Q4. Statistically, this suggests that a new client is likely to become a recurring client, and a recurring client is likely to spend more than a new client. Therefore, revenue scale will continue to flow. Gross margin will continue to outperform, and operating margins, which are already improving, will follow.

I wish to thank all the analysts for their continued work on the company. I also wish to thank our new credit partners who are likely listening. Thank you for your work and your confidence in us. And we look forward to continuing to build our relationship. And of course, my personal gratitude and congratulations is extended to my team, all of them, for a fantastic year. And congratulations on wrapping up year end 2021.

To our shareholders and other stakeholders, thank you for your continued trust in us as custodians of Enthusiast Gaming. Enthusiast Gaming is a hell of a business. It's a special business. It's your business, and it's our business. And of course, ladies and gentlemen, our business is the business of gaming. Operator, I kindly turn it back to you.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Robert Young, Canaccord Genuity.

Hi. Good evening. I just wanted the first question to be a clarification of something that you said. You said sequential revenue and margin growth through the year. I assume that you expect typical Q1 seasonality. And since we're pretty significantly through that quarter, maybe give us a sense how modeling the top line should be given Q1 is typically down from Q4.

Hey, Rob. This is Alex. I'll clarify quickly. Seasonality certainly effects revenue in media and content, less demand and lower CPMs, lower RPMs, for digital inventory in Q1. That can extend to direct sales as well. Advertisers spend less to advertise in Q1 than Q4, of course. However, when it comes to margin, that doesn't necessarily have a big impact because it all moves down together.

Direct sales will decrease, which are high margin, but the programmatic networks will also decrease, which are lower margin. There's a slight impact by the fact that direct sales is growing significantly at the same time. But seasonality has, certainly, an impact to revenue in Q1, less of an impact to overall margin.

Okay. So given the growth in direct, we should think maybe less of a quarter-over-quarter decline this year than, say, last year?

Yeah. I mean, last year is not necessarily representative, because we only started this eight quarters ago with direct sales. So on a percent basis, I believe that's a fair assumption, yes. Because I think last quarter was three to -- [3.3 to 1 million]. So that was partly because of the small scale at the time. So I would expect, on a percent basis, less of a decline.

Okay. And then in the release, in the commentary, you talked about maintaining a growth-oriented position and outlook. And just wondering here if you could maybe give an update on how you view the focus on revenue growth over getting towards positive EBITDA, given the talk about gross margin expansion as well. Because there -- do you have a target for when you may be positive EBITDA? Or is that something that would suffer given the growth opportunity you see?

Yeah. Rob, it's Adrian. I think from our perspective, certainly, we are growing revenue at a substantial pace. But we're also growing margin, at least last quarter, twice as fast as revenue. And as Alex said, really, if you look at the evolution, the very quick evolution of our business, step one was to scale in audience and scale ad impressions.

And we now have 300 million people a month digesting 40 billion views of content a year. So that's been achieved. The second step was to scale revenue. And now, as Alex quite accurately said, we're scaling margin in real time, going from just over 16% when we bought Omnia in August of 2020 to 24.1% to end the year. And so the margin growth in the business as the flywheel continues to move is something that we're really excited about.

And so when you are growing margin as fast as you are, effectively, we added $40 million of revenue on a pro forma basis in 2021, but lifted the margin dominator up by 8 full percentage points, which means that now that we've built that scale, that incremental revenue is coming in at north of a 50% margin. So we believe that, obviously, we're going to take full advantage of the growth opportunities that sit in front of us.

But growing as fast as we are, bringing in that incremental revenue in at north of 50%, as we continue to execute against that, we've never been on a firmer track -- a firmer short-term track to profitability.

Okay. So maybe to hold you to something, would you say that you're more positive on -- gaining towards positive EBITDA this, say, last quarter? Or would you say that you're more focused on the growth? I'm just trying to get a sense of the change in your priorities as management.

Well, I think the CEO, who has a degree in American history, just pushed the CFO out the way to grab the mic. I think we can do both, Rob. But Alex, Q4?

Yeah. Well, Rob, we -- look, nothing's going to stop our growth. It's not our style. We're still going to pursue that. We're proud of that. We're not here for small wins. We're here for a big win.

So I don't think the two are necessarily always in conflict with each other, but we are not going to prioritize anything over growth. However, as Adrian pointed out, look at the way we were moving. We created our own inventory, we created our audience, we generated significant revenue off of it. We're improving gross margin off of it.

And now, I will say the operating margin, at least on, of course, an adjusted basis, is improved this quarter. And we obviously have a sight line down the P&L. We're not stopping at gross margin. We're going to keep going, but nothing is going to stop us from growing. Nothing's going to get priority over that.

Okay, great. Thanks for all that color. Maybe this is the last question. Thinking back to when you acquired Omnia, you gave a little bit of detail around where you thought gross margins could eventually go to. The 24% that you reported today is the highest yet. And I was just curious.

As you look at the business model and where the direct sales and subscription are going to grow, where do you think the gross margins can go to over the longer term if you're thinking of a target gross margin over the next couple of years? Then, I'll pass the mic.

Well, we purposely refer to ourselves as an integrated entertainment company. And we believe that as we continue to see the margin expansion as we scale the business, we think of the possibilities as we execute in terms of traditional entertainment company margins, both from a gross perspective and EBITDA perspective. So on a terminal state basis, it is -- what, Alex?

On a terminal state, there's no reason digital media and digital integrated entertainment company could enjoy gross margins pushing to a north of 50% in a terminal basis. These would be similar P&L profiles to traditional media companies, except, of course, with the benefit of being digital. They have lower costs. And that flows down. Operating margins, certainly in a terminal basis, hypothetical, would be north of 20%, no problem, again, for the same reasons related to the profiles of traditional media companies.

Rob, it's also funny. You talked about some Omnia. I remember, of course, when you launched coverage when we had -- the margin's always been something we've spoken about when Omnia was acquired. And I think back then, we started discussing and presenting plans. How does this company get to 30%?

We're at 16% at the time. And those -- people will say, well, how is that possible? How do you double? Well, a few short quarters later, here we are. We're at 24. We are a significant amount of the way through that journey.

I also draw one more connection. If you took the difference in the net cash used in operating activities, which was $3.4 million, and divide that by the total revenue, that is 6% of revenue, which, plus 24%, of course, would be 30%. So I was actually thinking of you when I saw those numbers and we had those original conversations.

Okay. Well, thanks a lot for all the answers. I'll pass the mic.

Mike Crawford, B. Riley Securities.

Thank you. Before asking something a little bit more strategic, I was wondering if I could just nail you down to that -- do you think that there's a greater than 50% probability you have positive EBITDA in the fourth quarter of this year and also for the full year of next year?

So hey, Mike. How are you doing? It's Alex. So I think there's a solid probability. We don't have guidance. And of course, we have our priorities of growth. And of course, statements are forward looking.

But there's a couple of things I'll point at. We are approaching those margins that certainly, even mathematically, makes sense. We're getting quite close. And secondly, we have a couple of trends with us. The trend's in the high margin -- high yield, high-margin revenue streams.

We have the trends and the acquisitions flowing through for next year and, of course, seasonality in any given year. But particularly, if we look inside 2022, seasonality which will boost the back half of the year. So I think we are getting quite close, not for the year. Of course, we're not there starting the year, but by Q4 -- Q3 and Q4 and thereafter, I'm quite bullish about.

Okay. Thanks, Alex. So just regarding your business and how you're monetizing some of the content, after Twitch, what are the next most important distribution channels for some of your streamed content from athletes and, more importantly, the creators.

I'll let Thamba answer that one. Thamba?

Yeah, thanks. Thamba here. So outside of Twitch, if you look at where most of our content is, it's a huge presence in YouTube, right? Massive presence in YouTube in our content. And as Adrian alluded to in his comments earlier, we have had some great success in TikTok and Snap of late. We were extremely pleased with the growth prospects of that. So I would say outside of Twitch, those would be the video content distribution channels.

Okay, thank you. And then just given the five acquisitions last year and the way that you structure deals, there is a large portion, I think it's $48 million short and long term on the balance sheet, of deferred payments related to these acquisitions. I think many of those are slight kind of stretch-based or performance-based goals.

So I think you would prefer, rather than not, to actually pay that out. Because that would mean your acquisitions are working as well as or better than planned. Or am I -- should I be looking at that differently?

No, that's accurate. That's accurate.

Okay. Thanks, Adrian. And then with this innovative [type A] partnership that you now have, are there other verticals, groups, or categories that are just ripe for a sponsorship like that with Luminosity and/or Enthusiast?

I'll let Thamba, who also is the architect of the Hub 8 partnership, comment on the other verticals. But before we do that, I want to reiterate that there's a lot of people who put the word metaverse into a press release. There's a lot of people who talk about Web 3.0 because they think it's a cool buzzword.

We're not professing to be experts. But we've gone from mentioning NFTs to doing a multi-year partnership with one of the most innovative digital asset miners; to getting them integrated into a first-person shooter game that we own; to doing a partnership with Justin Kan, who is the founder of -- a co-founder of Twitch and owns an NFT marketplace called Fractal; to being in a position where we're about a few short days away from our first ever NFT mint.

And so this -- as these concepts, like the metaverse and Web 3.0, come to life, recognize that we're not limited to these binary, one-dimensional sponsorship deals that other esports organizations are. We're actually creating content, creating IP, and creating an end-to-end solution as we take steps into the metaverse and Web 3.0.

So I'm very proud of the team at Addicting Games, the talent division, for bringing this all to life. Because, as Alex said, or I might have said in my prepared remarks, we're also going to have Luminosity content creators playing ev.io, going on Twitch, getting their fans to play. This is a fully integrated opportunity that we're exploiting.

Having said that, as we look to more strategic partnerships in different verticals, I'll let Thamba answer that.

Sure. Thanks, Adrian. So just to add to what Adrian said, if you look at what we've done in Web 3.0, with NFT, and what we brought with our asset -- Addicting Games there, we're looking at some of our partnerships with a number of different verticals.

We're in active conversations with a number of different verticals on what that would look like. So it's not a straightforward sponsorship deal, but more strategic and innovative in the nature in which -- how we've done this Hut 8 deal or how we've entered into the NFT space.

We're looking at sports categories. We're looking at music categories. We're looking at a few CPG categories. More to come, but we're in active discussions in a number of verticals.

Okay, thank you. And then last question for me is, what progress do you have on your effort to develop more of an interactive fan community with user-generated content through projects such as GG project?

So we are making a lot of progress on the GG. Certainly, the TabStats platform that we acquired in and around the GG planning has been -- with their 10 million registered users, has been a fantastic launching ground for us. We're learning a lot in the alpha phase.

We also see an opportunity that we're not going to take a misstep on. So I'm highly encouraged sometimes. Even the geniuses and Google had GMail in beta for what was it, 10 years?

Roughly 10 years.

Roughly 10 years. So we're not going to rush something until we know we got it right. But we're learning a lot, and we're really pleased with the progress. And we're going to add more game titles, more features. We're developing that in real time. And I think that GG is also -- it's a code word within our organization for innovation. So Thamba, maybe you want to expand on that.

Sure. It's Thamba here. So just to add on that, as Adrian said, Project GG is our internal code word for a number of innovative initiatives that we're pursuing. And we're very pleased with the progress so far. We've got a couple of features that we've rolled out to our user base in terms of our alpha, and our results have been very encouraging for us.

As Adrian said, we're not going to put something out there to our gamer community where we haven't fully tested it and it hasn't been fully adopted by our community. Having said that, we have -- we're planning on launching a few features. You'll see it in a number of different properties, such as U.GG. You'll see us unlock a couple of features, such as TabStats. You'll see us unlock a couple of features, but very pleased with the progress so far and where we're -- how we're doing on that product roadmap.

All right. Thank you very much.

Thank you, Mike.

Drew McReynolds, RBC.

Yeah, thanks. Thanks very much. Good afternoon. A couple of mine have already been addressed, so a couple more here. On the M&A environment, I think in the last four or five months, it feels like just capital market's, obviously, in a different place. And tech valuations certainly come down quite a bit. I'm just wondering if that M&A environment, in terms of your pipeline, has evolved any differently as a result, whether there's more or less opportunity out there?

And then second, just in terms of the revenue outlook -- first of all, thanks for the gross margin and EBITDA commentary. It certainly helps us triangulate a little bit better on the forecast. But on the revenue side, I don't know who wants to take a crack at this.

But just -- I know there's plenty of opportunities all over the place, if you could, for 2022, 2023, just remind us where you see the deepest pockets of growth, obviously, direct sales penetration being one of them. But just curious as to how all of these things stack up in terms of where the bigger deltas are. Thank you.

Thank you, Drew. The good news, I think a lot of themes to address those couple of questions are interrelated. Certainly, from an M&A perspective, we want to continue to do M&A. We want to do it in a way that enhances value. And certainly, it's important to us, as we bring these fan communities into the fold, that they're invested.

The whole thesis about bringing U.GG into the EG flywheel -- we have lots of conversations with U.GG, as an example. We're bringing them in the pitches, direct sales, deals. So it's important for us to have our acquisition targets become invested in the EG story from an equity perspective. Because the whole thesis that we have is that one plus one equals three.

And so the more challenging the environment from a macro perspective, the more challenging it is for us to deliver on that model. And I would point out that we see so much opportunity from an M&A front. And we also believe that we have almost a secret and proprietary list of targets that have not really become known to the outside world.

So we're going to balance all those priorities. The opportunities continue to exist, but executing them in an accretive fashion is something that we're very disciplined about.

Now the good news for us is that if we can't do M&A for a couple of days, we have a business that's growing at 35% and margins growing at 70%. And we can continue to deliver on the aggressive growth assumptions that folks like you have ascribed to us purely from an organic basis.

And so as we look at the opportunity, I mean -- again, couple of things that roll up under Thamba -- subscriptions, direct sales. I'm very pleased that we're sitting at 220,000 subscribers. But I'm also reminding people, and their reminding me, that the denominator we have to work from is 300 million. So think about the ocean of growth that we can continue to pick away at on subscriptions.

And then some might ask maybe to offer some more commentary on direct sales. Certainly, the growth we're seeing is exciting. Also, the repeat business, okay -- 42% of our almost $9 million in direct sales in 2021 coming from recurring customers. And I can tell you, with two days to go in the quarter, that number will be substantially higher in Q1.

And when you think about who are our biggest customers, State Farm Insurance. H&R Block, believe it or not, is one of our more significant customers in Q1. And the reality of the situation is all these middle-aged marketing executives found out during the pandemic just exactly what their kids and nieces and nephews were doing all day.

The light bulb has gone on. And it said, we cannot engage with Gen Zs and millennials without a gaming strategy. Enter, Enthusiast Gaming that is effectively a one-stop shop.

You want esports, we got it. You want the best websites in the world, we got it. You want YouTube inventory that is offering 92%, 94% completion rates, which makes us, alongside connected TV, tops in the industry, we got it.

You want games, we got it. You want events, we got it. So we can start to customize -- you want proprietary content -- one of the things that I'm proud of, we just did a campaign for DoorDash. And within the walls of Enthusiast, we created a 4.5-minute animated program. We introduced a new character specifically for DoorDash and ran it on our owned YouTube channels. And the thing had incredible success.

Nobody can do what we're doing for our customer base. And so -- I know I asked you Thamba, and then I took all the thunder away. But perhaps you can -- direct sales is a huge growth area for us. Anything else to add?

I think maybe I'll wrap it up. With everything that Adrian said, you could just -- if you're in the room, you can see the excitement that he has as he explains the growth that's ahead of us on direct sales and subscriptions. Lastly, on direct sales, the thing that I would add is we started out with our sales focus in New York.

We expanded to Delhi. We are now in Chicago. We're now in Texas. We've just started our sales office in UK. So even from a geography perspective, we're growing. And I'm very optimistic with the progress so far.

And outside of that, I would say we're opening -- there's new verticals that are coming up to us that we haven't had access to before, right? So as much as we want to see the repeat business, in fact, selfishly, I would want to open new categories. I would want to have new customers so that we can have -- I want that formula turned upside down.

But we're very pleased. And the repeat business just shows the confidence that marketers have out there when they allocate their budgets to us. And we're going to continue to deliver on that. But at the same time, we're also going to unlock new verticals for us.

Okay. That's great color. And I certainly can feel the enthusiasm and excitement on this end of the call. So congrats.

Thank you.

Thanks, Drew.

Derek Soderberg, Colliers Securities.

Hey, guys. Thanks for taking my questions. Adrian, I wanted to start with you. Facebook recently blamed some privacy changes at Apple that are weighing on advertising revenues. I'm just curious if Enthusiast has been impacted at all by these changes and how we should think about these types of moves broadly.

Yeah. Thanks, Derek. We have not been impacted by those changes. I think as it pertains to privacy and other things, I would just offer up two points. One, we own first-party communities. We have direct relationships with our fans and with our audience members.

And there's no greater force field to protect you against privacy issues, particularly in a future where third-party data is going to become harder and harder to access, than owning the communities and the relationships on a first-party basis. So we feel that we're well positioned moving forward on that front.

And then the second thing, I would reiterate, and certainly you're getting a fair amount of enthusiasm from us, pardon the pun, on the direct sales, is that unlike Facebook, unlike IGN, unlike GameSpot, where we're starting to really resonate in the marketplace is we just don't sell straight up media. That is a component of what we sell. But we are Gen Z whisperers.

We sell customized, bespoke solutions that involve a number of different assets that we package together. Case in point, the DoorDash animated content on an owned and operated channel. Case in point, creating customized Hut 8 branding within a first-person shooter game that's available on a browser. Esports jersey sponsorships -- these are things that have nothing to do with the vagaries of straight-up media.

The beauty for us is, unlike any other esports organization, we can deliver media -- scaled media. And we can actually -- and I'll say the point again because it bears repeating. When we bought Omnia, we had a belief that this was some of the most valuable video inventory on the Internet that was being undervalued.

And today, as we sit with video inventory that consistently gets 90%-plus viewability and completion rates, I can't overstate the fact that that puts us at the top of the heap in terms of digital media. So when you put all those assets together and Thamba and Bill Drolet create these customized solutions for their clients, it's way more than just a media sale.

Got it. And then as my follow-up, Alex, I'm wondering if you could share where gross margins are for direct sales today and maybe where that can be long term. And then, can you share to what degree did direct sales contribute to gross margin expansion, either sequentially or year over year?

Sure. I'll tell you where they're at. And then I think that effectively will answer the second part of the question, too. They still are coming in around a 50% margin. There is a bit of an array. Of course, we have higher touch, things like live activations or even digital live activations with studios and presenters and anchors and all sorts of things.

Those are, right now, the lower. And then the digital media and some of the other sponsorship areas are higher. They're still averaging about 50%. Where they can go, that question -- look, as we scale them, there will be economies of scale to the margin as well.

Of course, our live entertainment or digital entertainment properties, which Adrian listed, I think, a good list of them, those can support additional sponsorships which will raise the overall margin of the sponsorships against them. So I think that number can increase. But right now, we're more working on scale and just building it. But it is coming in around 50%.

Great. Congrats on the progress. Thanks, guys.

Thank you.

Thanks, Derek.

Jeff Fan, Scotiabank.

Thanks. Good afternoon. Most of my questions were answered, just a couple of follow-ups or clarifications. One is on the OpEx. I know, Alex, you've explained a number of reasons why that number has ramped up through this past year. But it sounds like what you're saying is you're at scale.

So am I to interpret that at the [$17 million, $18 million], where you're today, is the right jump-off point for '22? And then the other question is probably for Adrian. 42% of direct sales coming from renewals. That's great to see, and the fact that these are coming at higher budget and higher campaigns.

I'm curious. When you go up on these campaigns, competing for these deals, who are you going up against? Are you going up against the other folks that bring gaming properties? Or are you going up against non-gaming who pretends or claims that they have a reach into Gen Z? I'm just curious as to who are you going up against on some of these campaigns where you're winning.

Hey, Jeff. I'll start. This is Alex, and this is probably my shortest answer ever. But yes, that's your kickoff point for the next year. I think that's a good basis point. And I think you have it right. But the bigger answer, I'm going to turn to Thamba to provide the second part of the answer.

Yeah. Go ahead, Thamba.

Hey, Jeff. It's Thamba here. Good to see -- or good to connect with you. Just to add some color on who are we competing against when we go to market with our asset mix out there, it's a number of competitors, right? First and foremost, on a straight-up media, it'll be -- on one end, we could be competing -- or we'll be taking money away from Google and Facebooks of the world, where, traditionally, marketers are to spend money directly with the Google and Facebook.

And we'll be taking that money away from them. Because our ability to deliver a targeted audience with much better completion rates or CTR, if you will, is not something that some of the larger advertisers could offer. On the other side, we would be competing with other brands out there, such as -- it could be -- just to name some of our esports brands out there, it could be -- we would be taking business away from like FaZe or 100 Thieves or what have you, right?

And part of the reason why we're very successful is, as we said, we're able to not just provide sponsorship -- direct media sponsorship, but we do a lot of custom integrated work that results in a far more -- much higher engagement metric for the marketers out there, which is why you're seeing the repeat business. Just to give an example, if there was a TBD insurance company out there that spent a test budget of six figures with us last year, and if they're very happy with the results that they got versus what they would have spent on the open market, they would come. But they're likely to come back with a seven-figure deal because they're just -- that is not a result that they can get out there with other advertisers or other open [videos] out there?

Got it. Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Adrian Montgomery for any closing remarks.

Thank you. And I just want to reiterate that -- certainly, how proud I am and how excited we are at Enthusiast. We're performing, and we're executing at a high level. We see a lot of momentum in 2022, and we're going to continue to work hard to continue to perform at a really high level.

We're going to continue to innovate. We're going to continue to break down barriers. We're going to continue to drive this business forward and drive this industry forward. And we're going to continue to play a leadership role in this industry.

Now the final point I want to make is that we are in the business of building fan communities. But it goes without saying that beyond the numbers, the most important community in our world is the one we have right here at Enthusiast Gaming.

So I'm so proud of the men and women who work in Enthusiast Gaming all over the world each and every day. I'm proud of the leaders and managers that continue to drive results and deliver exceptional performance. And I just want to say thank you for all that you do.

It certainly doesn't translate into the visibility of what we do, but the secret sauce of Enthusiast Gaming is the excitement and the obsession with this business and with the world of video games and esports. My team does 12-hour days and then goes and watches Twitch to find the next Luminosity superstar at the end of a long day, or they play ev.io.

We talk and plot and scheme on weekends and late at night. And I just want to say thank you. The employees of this great company are our secret sauce. And we should all be very proud of what we're delivering on a daily basis. And certainly, alongside the employees are the fans and the audience who keep coming back and engaging with us and making us better.

So I want to say thanks to those two groups of people. We're excited about the future. We're just getting started. And we'll be back with you soon to talk about Q1.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.