Enthusiast Gaming Holdings Inc (EGLX) 2020 Q3 法說會逐字稿

Greetings, and welcome to the Enthusiast Gaming Holdings Inc third quarter 2020 earnings results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I will now turn the conference over to your host, Eric Bernofsky, Chief Corporate Officer. You may begin.

Thank you, operator. Good afternoon, everyone, and welcome to Enthusiast Gaming's third quarter earnings call. We'll start with a presentation by our Chief Executive Officer, Adrian Montgomery, and to be followed by our Chief Financial Officer, Alex Macdonald, who'll recap the company's third quarter results, the recently completed acquisition of Omnia Media, and our outlook, before opening the floor to questions.

Before we begin, I'd like to remind you 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 & Analysis for the three and nine-month periods ending September 30, 2020, which are available under the company's profile on SEDAR as well as on the company's website.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. Company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking statements as a result of new information, future events, or for any other reason. I'm making this cautionary statement on behalf of each speaker on this call.

And now, I will turn the call over to Adrian Montgomery, CEO of Enthusiast Gaming. Adrian?

Thank you, Eric. Good afternoon, and welcome to our inaugural conference call for earnings. My name is Adrian, and as Eric said, I'm the CEO of EGLX. We believe that following the close of our transformational acquisition of Omnia Media in August and in light of our announcement last week that we are preparing to uplist to the Nasdaq. This quarter is the appropriate time to begin conducting regular earnings calls to communicate the progress we have made and to share our vision for building the company and creating shareholder value.

Enthusiast Gaming is building communities and creating content and experiences for video game and eSports fans. We are the largest gaming platform in North America and the United Kingdom, where gamers can consume great content across more offerings than any other media company. We connect with 300 million gamers around the world on a monthly basis, 65 million in the US alone. Almost half of every American male between the ages of 18 and 34 visits at least one of our properties each and every month. These gamers are part of a sought-after but highly elusive, hard-to-reach demographic.

Who are these 300 million games and what are their habits, preferences, and consumption behavior?

Well, 70% of our audience is Gen Z and millennials, generally defined as people between the ages of 8 and 38. 65% of our audience spends more than 15-hours a week gaming. 67% or two in every three people on our platform buy more than seven games per year. 63% say that their purchase decisions are influenced by online advertisements. And finally, an amazing 48%, almost half of our audience, does not use Facebook.

Think about that for a second. As a marketer, if you wanted to reach this demographic two years ago or even 12 months ago, if you advertise on Facebook, you could feel confident that you were finding this important target audience. But today, if you want to reach this demo, nearly half of them are not on Facebook.

So where are they? They are increasingly on the new social network that is being built every day as we speak. This network is the video games that people play and the ecosystem that exists around these games like the social platform and network of communities that Enthusiast Gaming has built and continues to build. Gen Zs and millennials spend more time-consuming gaming content than they do any other form of entertainment. In fact, gaming is now twice as big as the movie and music industries combined.

Gaming is not just a hobby for young people, it's their lifestyle. Two thirds of Gen Z males say that gaming is a core component of their identity as human beings. Gaming is their favorites sport. Gaming is their favorite hobby. Gaming is how they spend their and their parents' money. Gaming is their method of self-expression. Gaming is their social circle. Gaming has permeated almost every facet of their lives.

And additionally, according to a Pew Research Center study released last year, millennial households now earn more than young adult households did at nearly any time in the last 50 years. The Brookings Institute recently released a study indicating that 51% of the US population, or 166 million people, are under the age of 40.

Since the 1950s companies have aggressively targeted young people because they're at the front end of their lifetime journey as consumers. This is the time for companies to appeal to young people, to bring them into their fold, and to garner that lifelong brand loyalty that so many of us have for so many different products.

But today, as a marketer, you need a strategy to be able to identify and speak to Gen Zs and millennials, they're not on traditional media. As we've discussed, they're not on Facebook. To do that you need a video game strategy. And so, Enthusiast today has built one of the most complete video game and eSports fan experiences as evidenced by the millions and millions of fans engaging with our content and participating in our communities on a monthly basis. And that message is already gaining quite a bit of traction among marketers and advertisers, which I will talk about a bit later on.

On the flip side, to continually attract and retain this highly sought-after audience, we are laser focused as a company on owning the video game and eSports fan experience. We own that experience from the moment a video game controller is put down. So what does that fan experience look like? So let me walk you through an example of what we mean.

Take a Call of Duty fan or take a Fortnite fan. When they're playing Call of Duty or Fortnite, they're playing that game, they're on the Activision servers, they're on the Epic servers. But after they finish playing online with their friends, they're not done being a Fortnite fan or a Call of Duty fan.

As they continue on their journey of indulging in their fandom, they can, one, read unique content or join a forum on one of our 100 gaming websites; two, watch a YouTube video on one of our 1,000 channels, one of which happens to be the largest Fortnite community on YouTube; number three, follow our Call of Duty franchise, the Seattle Surge, or our professional Fortnite team, which plays in the top leagues around the world.

Four, watch live stream content from one of our many influencers on our Twitch channel; five, attend a live or virtual event to connect with other fans like, at our most recent EGLX show which ran last week for four consecutive days on Twitch and featured live-streaming content tournaments, fashion shows, and much more. And finally, they can watch other gaming content from our library of 1,000 YouTube channels.

Our fan experience takes them through the Enthusiast Gaming ecosystem offering more points of contact, more points of connections, and a deeper cross platform relationship than any other company. This creates loyalty, this creates stickiness, and this creates a better fan experience. So our vision, which admittedly sometimes might not be the easiest thing to grasp off the [hoff], to build a lateral approach across the fan experience, while others in the industry have a very narrow, not to be critical, vertical focus.

So now that I have provided some color on the market opportunity, I'll take you through our Enthusiast Gaming strategy. Phase one, which we've been building for the better part of the last five years, is to gain scale and own the fan experience in the video game and eSports space, which globally encompasses 2.5 billion gamers, while eSports has over 450 million fans around the world and is growing at a 15% compound annual growth rate.

We initially focused on the web experience. Menashe started with one Nintendo community five years ago. And today, we've grown to over 100 communities comprised of PC, console, mobile, eSports fans, generating nearly 1 billion views of content a month. But we recognized an opportunity to significantly enhance the fan experience for our viewers which led us to the acquisition of Omnia Media in this past third quarter.

Omnia, which is based in Los Angeles, California, is the largest gaming platform on YouTube. Through both its owned and operated as well as its affiliated network, it has approximately 1,000 channels creating gaming-related content by some of today's biggest stars. The channel's reach approximately 90 million unique viewers, and they generate over 3.2 billion views of content a month.

So following this transaction, Enthusiast Gaming now reaches 300 million gamers through 1,000 YouTube channels; 100 websites; internal production and ownership of 30 unique content shows which we package each and every week on YouTube; 30 eSports and entertainment events around the world, including EGLX in Canada and Pocket Gamer Connects, which we hosted at the same -- simultaneously last week; seven eSports teams and nearly 50 players and content creators with an additional 7 million fans and followers housed under our Luminosity Gaming eSports brand.

I would note that over the last six months, we've completely rebuilt the roster of players and influencers. And today, our stable includes some of the biggest celebrities in the gaming world that wear the Luminosity jersey, including xQc, one of the largest content creators on Twitch by audience gaming this year; gaming icons like Muselk; new gaming superstars like Fresh, Nick Eh 30, Anomaly and Chica, to name a few.

So for those of you on this call who are not gamers, these names may not mean a lot to you, but to our core Gen Z and millennial audience these are the LeBron James's, the Tom Brady's, the Sidney Crosby's of the gaming world. And they play for us.

And finally, on our YouTube network and on our YouTube MCN, we have an additional 500 gaming influencers. So this scale and breadth differentiates Enthusiast Gaming from our competitors and other companies, often used as comps, by allowing us to engage fans across multiple channels, while other companies only engage through one vertical.

So now that we've acquired scale, which we believe is the most difficult part, what comes next phase? Phase two. Phase two is the meaningful growth phase where we start to optimize our monetization efforts to increase average revenue per user or ARPU.

First, earlier in the year, we established a direct sales group, bringing on talented digital sales professionals in New York and Los Angeles to ramp and grow this piece of the business. Direct selling agencies and clients can command a premium of 10 to 20 times the rate that an ad can earn through a programmatic exchange. And with Omnia, we now have a more premium offering for advertisers in the form of high value video advertising inventory.

So we started this direct sales focus in January of this -- or in October, November of 2019, and a year later we can say that we have launched meaningful advertising and custom content campaigns with brands like Gillette, Facebook, Microsoft, SpiderTech, G Fuel, Activision, (inaudible), TikTok, Pizza Hut, GoDaddy, Global Citizen, the National Hockey League, Popeyes Louisiana [Chicken], Disney, PartyCasino, Grubhub, State Farm Insurance, and the United States Airforce.

This line of business has grown from less than $100,000 in Q1 to about $1 million in Q3 and Q4 is shaping up to be a multiple of that. In fact, one of the deals that most validates the power of our platform within the Gen Z and millennial demographics is the work we did subsequent to quarter end with the Biden-Harris Presidential Campaign. We worked with them to help drive voter turnout, including targeting specific ZIP codes of interest in certain states with our advertising technology.

Further, we leveraged our talent roster of celebrity gamers and influencers to drive voter engagement via a custom Fortnite map, which for those not too familiar with Fortnite, we partnered with the campaign to create custom campaign slogans within the game itself. So this demonstrates our true competitive advantage in being able to sell an integrated offering by combining our media assets, our influencers and content creators, together with our event activations and experiences.

Again, we believe that lateral strategy is building across the fan experience. It's resonating extremely well among advertisers and sponsors and does not have a competitor who can offer that integrated package as we speak today.

As we move into 2021, we will continue to invest in both ad tech to optimize our programmatic advertising and in our direct sales efforts. And we expect these investments will help drive double digit percentage growth in the value of our advertising inventory, and ultimately, the average revenue per user.

The next phase of growth will come in the form of paid subscriptions and content licensing. We have a head start already in this area with over 110,000 paying subscribers, which has grown nearly 50% year-to-date. We launched new subscription services this year with early signs of success. And we plan to continue to invest in this high-growth, high-margin area to leverage our influencers and other assets to create new premium content that will be available exclusively to subscribers.

On the content licensing and distribution side, we recently launched BCC Gaming as a new over-the-top channel on Samsung TV Plus. As a direct benefit of our acquisition of Omnia, we will now produce and distribute premium original content to millions and millions of Samsung TV Plus homes, enabling us to reach a whole new audience. In addition, we've been working with other platforms such as Snap and Amazon to distribute content and are excited about the opportunities ahead for content distribution.

I don't want to get too far ahead of ourselves, but as we look beyond 2021, we will move into the further phases of our growth strategy which will seek to create more value per user through additional revenue streams. But we'll get to that in due course.

Lastly, I want to talk about our two flagship entertainment events that happened simultaneously just last week, EGLX and Pocket Gamer Connects. On the consumer side, we just finished our fifth EGLX, except this year we went virtual.

For four days last week, from November 10 to 13, EGLX brought gamers together online through a fusion of video games, eSports, music, fashion, and lifestyle content and events. It was supported by key sponsors, including SpiderTech, G Fuel, and TikTok. And the event featured world premieres, unique performances, and thrilling competitions, live streamed to a total audience of more than 12 million viewers.

We also announced our latest content creator signing, Nick Eh 30, a good Canadian I might add, who has over 5 million subscribers on YouTube. The event was capped off by the finale of our Rising Stars competition, where we crowned the next great content creator and awarded a $100,000 prize to the winner.

On the mobile game side, we hosted our fourth digital event since April for our fantastic B2B audience. Because of its unique position at the crossroads in the mobile games industry, Pocket Gamer Connects attracts an A list of sponsors and industry supporters, including Microsoft, Facebook Gaming, and Unity, to name but a few. y

The five-day event last week welcomed over 1,500 attendees who tuned in to hear over 200 expert speakers, delivering panel discussions and keynote addresses on 16 different tracks and topics, industry trends, monetization, game development, publishing, and more. Since its inception in 2014, more than 26,000 mobile games industry professionals have attended the PG Connects international conference series in places like the UK, Canada, United States, Finland, Hong Kong, Jordan, India, as well as our ongoing online series.

As you can see, we have a lot of exciting opportunities ahead of us and we are focused and disciplined on monetizing our assets to drive strong growth in 2021 and beyond.

Thank you very much for attending our first conference call. And now, I'd like to turn the call over to our CFO, Alex.

Thank you, Adrian. It is absolutely my distinct pleasure to provide commentary on a transformative period for the company as well as to discuss a strong financial performance in Q3.

As Adrian discussed, the closing of the acquisition of Omnia Media has a significant impact on our business, including our financial reporting. The acquisition occurred on August 30, 2020. Enthusiast Gaming was the acquirer in the transaction, and accordingly, the financial statements are in continuation of those of Enthusiast Gaming with approximately one month of Omnia results being included.

Any references to pro forma figures in our commentary will assume that the acquisition of Omnia Media occurred on the first day of the respective period. For convenience and for future comparisons, we have provided pro forma metrics in a supplemental table in today's press release. The acquisition of Omnia Media has adjusted the way we view the business, including our revenue segments. Therefore, we have changed our segmented reporting to better reflect our current and future operations.

The new revenue segments are as follows. Number one is media and content, which comprises of advertising revenues and other content related revenue streams such as content licensing. Number two is subscription, which consists of revenues generated from paid subscribers for the company's web and video properties, the majority of which currently reside in thesimsresource.com, but also includes subscribers to our new subscription offerings launched this year, including the Escapist Magazine and Siliconera.

And finally, number three is eSports and entertainment, which comprises of revenue generated by our flagship eSports brand, Luminosity Gaming, as well as revenue from our entertainment brands, including EGLX and Pocket Gamer.

Management is aware that our analysts and investors have built financial models using our former revenue segments. For increased transparency and to facilitate a transition period for financial modeling purposes, we will continue to provide revenue segmentation under both the new and old reporting segments for Q3 as well as when we report Q4 early next year.

I also wish to 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. Also, we note that our results are presented in Canadian dollars.

With that said, I would like to turn my attention to the third quarter financial results.

Reported revenue was $16.3 million for Q3 2020. Reported revenue under the new segments in the quarter was as follows: media and content, $13.6 million; subscription, $1.6 million; and eSports and entertainment, $1.1 million.

Under the old segmenting, these amounts were: media, $15.2 million; eSports, $0.6 million; and entertainment, $0.5 million.

Pro forma revenue was $31.7 million for Q3 2020, up 17% sequentially over Q2. The increase was largely due to strong results from our video networks, including good retention of the viewers and engagement gained in Q2 as well as significant increases in CPM video ad inventory and our web properties caused by both market conditions as well as internal optimization efforts. In addition, our recently established sales team continued their progress, bringing in several new clients in the quarter and increasing direct sales revenue by 67% versus Q2 to approximately $1 million.

Pro forma revenue for Q3 under the new revenue segments was media and content, $29 million; subscription, $1.6 million; and eSports and entertainment, $1.1. Pro forma revenue for Q3 under the old revenue segments was media, $30.6 million; eSports, $0.6 million; and entertainment, $0.5 million.

Reported gross profit was $4.1 million for Q3, up 28% from Q2, primarily due to higher reported revenue from the Omnia acquisition. Pro forma gross profit was $5.3 million, an 18% increase from Q2, slightly ahead of the 17% growth in pro forma revenue over the same periods.

Reported operating expenses were $8.2 million in Q3, up 9% from Q2 as a result of one month of Omnia expenses being recognized. Pro forma operating expenses were $9.3 million in Q3, up 4% from Q2, mostly as a result of approximately $700,000 in additional operating expenses incurred relating to the Omnia acquisition and the concurrent financing. Net loss and comprehensive loss for Q3 was $8 million, resulting in a net and comprehensive loss per share both, basic and diluted, of $0.10 in Q3.

Looking forward to Q4, we are very optimistic. Our engagement remains very strong. The demand for ad units on our web and video platforms is high, and we saw strong CPMs in October. For example, CPMs on our web platform were 20% higher in October as compared to September. In addition, we expect continued progress on our direct sales efforts expecting no less than a 100% increase in Q4 direct sales as compared to Q3.

We have also entered into new content licensing deals and invested in staff dedicated to drive growth in our subscription offerings. All of this, combined with the natural seasonal boost in Q4, makes us very confident that Q4 2020 will be a record quarter for Enthusiast Gaming, and we expect over 20% revenue growth versus Q3's pro forma revenue.

We view ourselves as a growth company and we are operating and investing accordingly. For fiscal 2021, we currently expect at least 20% revenue growth compared to our full-year pro forma 2020 revenue. We also expect continued growth in our higher margin revenue streams. We are more focused on subscription than we have ever been.

We are expanding the distribution channels of our internally produced content, including additional content being deployed to Snapchat, TikTok, and even on linear TV through, our BCC Gaming brand, which is available on Samsung TV Plus in the United States. And we will continue to invest in our operations while maintaining our goal of maximizing the allocation of operating expenses towards revenue-generating activities.

As more and more people make our content a part of their daily entertainment routines and when combined with the organic growth of consumption in gaming media, we expect to see strong growth in our base revenue streams, such as our programmatic advertising and our YouTube MCN in 2021, both of which contribute positively towards operating income. An additional 2021 milestone is expected to be a Nasdaq listing, which we have targeted for early in the new year.

In conclusion, we are in the early stages of substantial revenue growth and are putting in place the infrastructure for significant margin expansion over the next few years. Ultimately, we have a vision to execute and demonstrate the earnings power of our ecosystem of 300 million gamers monthly that visit our properties.

I would like to thank our shareholders and other stakeholders, our analysts, and members of the public, who have joined us on this call today. And with that said, I would like to turn it back to the operator for questions.

(Operator Instructions) Neal Gilmer, Haywood Securities.

Good afternoon. Thanks very much. And congrats on the quarter. Maybe a couple of questions and then I'll pass the line here. But maybe towards some of the prepared remarks with respect to the phased approach, and obviously phase 1 was the more lengthy timeframe to build the base business and as you scale. So how do you look forward as far as evaluating that as we move through those phases like, phase 2 that you talked about? And do you think that -- does that sort of encompass the 2021 timeframe before you move into really ramping up the subscriptions for -- I know Alex's comments, in his comments there about when we focus on subscriptions. So you sort of tackle phase 2 and phase 3 at similar timeframes. Maybe if you could just sort of dive a little bit further into that, that'd be helpful.

Yes. Thank you. We're definitely well underway in terms of the initiatives for phase 2 and phase 3. And obviously, those would be growth and subscription offerings, packaging up this fabulous content that we have, and creating more subscriptions, premium offerings. And also, licensing and selling our content.

And so we're very much not finishing one phase and then starting another, we're well down the road. We have 115,000 subscribers, primarily on The Sims right now. We've hired a number of people who are focused on customer acquisition, retention, et cetera. So, and we're actively selling content, putting our BCC channel on Samsung Smart TVs. We've done deals with Amazon. We've done deals with TikTok. So we're well underway on those. Those will really hit their stride in 2021.

And then down the road, we have more focus on e-commerce and creating a marketplace as well as developing a social network, which we're pretty excited about. And again, we want to break this up into phases because when you start talking about things like e-commerce and social networks, some people might might say, well, geez, that's less certain than selling your ads for higher CPM rate. So I'm going to focus on that.

But again, the reason we talk about this phased approach is that we have done what the Facebooks and the Twitters had done, which positioned themselves so well for success. We built an audience first. We're not coming for investors with a fabulous presentation and a fabulous concept and convincing them that if we execute and we get the capital to execute (inaudible) [finish well] and get an audience, we have an audience.

We have one of every two American males visiting our sites every month. And so the potential that you have to build a transformational business with a number of revenue streams is limitless really when you have that [broad] connect and repeat audience of a size and scale that we do.

And the one thing we're quite proud to say. And I don't think there's many people on the planet that can say this, there's a lot of information in our financials, a lot of information in our prospectuses, and all the things that we file, what you won't find is you won't find a juicy line item that's a cost item dedicated to the money we spend to drive traffic to our properties. It doesn't exist.

Those 300 million people come to us out of pure volition, word of mouth, purely organically. And so when you have built that, you have something truly special to launch a number of incredible business units off of.

Yeah. And I guess that would help basically your whole direct sales platform as far as that whole pitch, right, when you basically have that captive audience. And I guess, with Alex's comments with what Q4 direct sales is expected to be, that's part of what's driving that forward.

And maybe on that 20% revenue growth that you mentioned, Alex, that you're expecting in Q4, do you -- not every company gives guidance and various different levels of it. But is that sort of evenly split across those revenue segments you talked about or is there one segment that you're expecting to drive the bulk of your revenue growth in Q4?

Yes, sure. Certainly, a lot of the growth will fall in media and content, the new revenue segments there.

(Multiple Speakers) part of segment. Yeah.

Yes. Well, but also on a percentage basis as well. Subscription is typically more of a straight-line growth. The seasonality affects media and content. And we had -- just had some big initiatives there, which Adrian has been speaking to. So subscription, we are very bullish on it. We're hyper-focused on it now, but it's a longer -- it's a incremental growth period-over-period, which leads to alternately significant recurring returns.

So we do want to see growth in subscription. The new I referenced, they're fantastic. They've already made great progress through October and November. But that's a longer approach. I'd expect most of it in media and content. It is going to be driven, we've kept that great engagement, we kept and -- we got in Q2. CPMs are doing well. We are optimizing quite nicely on the web. Combined with, of course, we've got Black Friday and Christmas coming around the corner and a number of campaigns launched against that.

So I'd expect most of the growth for Q4, that I referenced, to be in media and content. A lot of it around advertising, both programmatic and direct sales. And then for next year, we do want significant growth in content licensing, subscription, and again, in direct sales. So that's how we expect the distribution.

Thanks for that. Maybe one last one for me. The pro forma gross margins in around 17%, and obviously Enthusiast prior to Omnia had sort of different gross margin profile. So as you look forward, how do you sort of balance your view on moving those gross margins slightly higher versus your comments of investing in the growth of the business? How should we sort of be thinking about that from your perspective?

Okay. Well, let's think about Enthusiast a couple of years ago, was very similar in profile, perhaps less on the revenue side than Omnia, it was a 15% gross margin business. And in the first two quarters of 2020, it was a 45% gross margin business. We see similar potential to replicate that success with Omnia. Again, Omnia has many similarities to where Enthusiast was a couple of years ago and the fact that most of its ads are sold programmatically.

And again, we keep saying this, Omnia has what we believe to be some of the most valuable inventory anywhere on the Internet. It targets gamers, which as we discussed in the prepared remarks today, are -- is the obsession of Gen Zs and millennials. It targets the United States. It is brand safe, corporate compliant. It has all the advantages that can command outsized premiums.

And so bringing that in and filling our direct sales teams' quivers with all this premium video inventory. We see such huge potential to grow the margins. And then again, like we're talking about content licensing, we're talking about subscription, these are, if executed properly, extremely high margin businesses. Because again, the content that we're selling is content that we create and that we own.

So if you look at what we've done in the past week with EGLX, a huge congratulations to our fabulous team, Corey, Menashe, and all the guys that put that together, the men and women that put that together. We created, what was it, 50 hours of content -- 53 hours of content at Sims Resource fashion show. We own the Sims Resource. We took all [pro cornerback area slate] and created a program. We created Rising Stars, which is the American Idol of gaming. This is content that our revenue team and our sales team is now packaging up and selling. We've already sold parts of EGLX to an over-the-top provider in Europe.

And so when you start to repurpose into a different revenue stream content that you own and that you created, there's huge margin growth potential there. So again, we're very bullish about our ability to enhance the margins and return you back to how we took Enthusiast from 15% gross margin to 45% in less than two years.

That's great. Thanks very much. Appreciate your time, guys.

Thanks, Neal.

Robert Young, Canaccord.

Hi, good evening. I wanted to dig a little more into the direct sales opportunity. I think you said that you're seeing pricing around 20 times the pricing of programmatic. And I just wondered if you could explain the differential there. And if you could also -- maybe just following on the previous comment around margins. Maybe if you could talk about the relative contribution of growth on the direct sales effort to gross margins in the bottom line, that'd be helpful.

Yes. Hi, Rob. So when we're talking about -- so as we've said, there's really no one in the market right now that is packaging up the touch points and the assets that we're packaging up to execute on brand campaigns with. If you look at what we've done for G Fuel, what we've done for Gillette, what we've done for the Biden-Harris Presidential Campaign, it's a mixture of banner ads, skyscraper ads on the web, video inventory as well as engagement with our influencers and content creators.

And that is, the influencer marketing, when we bring you back to that first point I made, 63% of our audience are highly influenced in their purchasing decisions by the people that they follow on social media. And the biggest stars on social media today are gamers. And so it's a very unique content offering that, in certain places, can command those 10 to 20 times premium.

If you're buying a banner ad on one of our websites programmatically, historically, it's been at a very, very low CPM. It's quite a commoditized product. But if you're buying video inventory on Omnia and you're engaging directly with the customer, you can get, and we have gotten north of $20 to $25 CPMs for that video inventory because it is, like I said, focused on young American gamers.

And the other massive advantage that generate those higher CPMs on that video is the fact that we can guarantee brand safety, whereas if you bought video inventory on YouTube, you couldn't get brand safety guarantees from Google. And the reason, and no doubt you know is, that YouTube is loading 500 to 1,000 hours of content each and every minute.

So if you're Kellogg's or you're Lego, you have to satisfy yourself with the risk. However, although it might be that your product might be on a site or might be on an influencer's channel that you don't want it to be associated with. We have a walled garden, and in fact, on YouTube, we can guarantee the Kellogg's and the Lego's brand safety and they're willing to pay up for that.

Rob, hey, this is Alex. I can address the second half of your question to the -- you mentioned the contribution of direct sales. I'll point out some basis which you'd be aware of. But direct sales, most of them are included in the media and content segments with the exception of eSports sponsorships, when they're sold, they're classified as eSports and entertainment.

But you can see like, in Q3, pro forma basis, $29 million direct sales, as I said, approximately one. We've always said, we're going to move 10% of our inventory at 10 times the CPM to direct sales that mathematically would double approximately the media that was formerly the media revenue as a media content revenue.

But what we did in the meantime is, of course, we picked up Omnia. You can see in some of the supplemental tables today, we've added well over 30 billion pieces of inventory. Our ad units, our digital ad units are inventory, and we just added over 32 billion of them a year. So that mountain that we have to climb, became a lot bigger.

So when we think about contribution, if you excluded the Omnia -- we also mentioned, we expect the 1 million to become a multiple of that in Q4. If you compare that to the web property, which our sales team was established to selling against, we would have been well down the road, over that -- around or just over that kind of 5% mark of our inventory being moved to direct channels. Our short to medium-term target was always 10% from back in the original transaction, now we've added 32 billion, 10%, absolutely still our target. We kind of hit the reset button now, right? So as we more than quadrupled our inventory, our sales team needs to ultimately move.

So with that said, the contributions right now still remains relatively low, but this is high margin stuff and we're very proud of them. But compared to the media and content revenues of $29 million, it is low. But we do expect it to take a material and significant role in the revenue and the gross margin profile next year and we expect it to continue to grow. The only place I would be cautiously optimistic would be, we also cannot completely control and we wouldn't want to control the growth of the programmatic network or the viewership or the YouTube networks or MCN or other channels.

And I guess what I'm saying there is, this inventory builds faster than we can sell it, but it's not necessarily a bad thing. It still produces gross profits, our programmatic networks and our MCNs still contribute to operating income. So that's how we view it right now.

Okay. And then in your -- in one of the filings, there's a spot where you say that as the number of brand customers increases this in turn is expected to drive more influencers. And so I know you've talked a little bit about a flywheel effect in the business. As you add brands, you're going to attract more influencers, which drives more brands. So maybe just talk of whether you're starting to see that if there's some excitement out there that's starting to kick-off that flywheel effect for you.

So certainly, the bigger the star, the bigger the brand they want as a sponsor and the bigger the brand, the bigger the star they want. So if we divide them up to -- I think that there is no correlation. I think there is a correlation. You look at some of our signings, xQc. You look at some of our recent partnerships, Samsung, Amazon, other names that Adrian mentioned, I wouldn't say that those two things are completely independent of each other. There is a relationship there.

Sponsorships are important to these influencers, and they are important to the brands. And I think there is a relationship. The deals are struck independently of one another, but I do think they're related. And the more brands we can attract, the more talent we can attract. And the better our talent, the bigger brand we can attract.

Yes, look, Luminosity is a hot, hot eSports organization right now. And the slew of signings that Menashe and Corey and team have effected has gotten a lot of buzz in the marketplace and that has helped like, any sports operation, attract talent. And to your point, yes, there is a flywheel. We're consciously building one. And again, we're going to our influencers with cool stuff, which makes us a cool organization to be affiliated with. We're going to them and saying, hey, would you like to be involved in a presidential campaign?

We did a merch collab between Fresh [Asian] and Lil Tecca, who's one of the biggest emerging hiphop superstars in the world. When we went to Fresh and said, hey, have you ever heard of Lil Tecca, first of all, he said, he's my favorite artist and I can't believe I've got an opportunity to do a merch drop with him. So it's very symbiotic. The brand deals put money in the [jeans] of the influencers and help build their brands, the strength of the influencers, and all that kind of stuff has a halo effect on Luminosity, which makes the sales team's job easier. And so that flywheel is starting to move rather nicely.

And you've always had a bit of a pipeline of tuck-in M&A. Now that you've brought Omnia on, does that -- or you slowed down M&A a little bit or do you still expect to continue to add on content sources and some web properties in the same [pages] in the past?

I expect that that will continue. That pipeline is very important to us. It is a very fragmented industry. There are people creating, who own YouTube channels and websites in various dark corners of the world, the rest of the corporate world doesn't know where they are, but we do, and we know how to carry fan sites. So it's our secret sauce. It's very hard, as you well know, to run a successful user-generated content business.

And the results for us, in terms of the viewership, the size, the audience, speaks for itself. We do that well. Menashe does that exceptionally well. And so in a fragmented industry with a lot of opportunity, this is prime real estate before the boom. And so we're going to continue to be as acquisitive as we possibly can.

Okay. And last question, and I'll pass the line, just around the subscription. I think maybe going a little bit slower than I thought originally, but maybe you've derisked the strategy a little bit now that you're out of -- [crossed] a few properties. Have you derisked that enough that you can go quicker now? Or are you pretty much -- or you've been rolling that out pretty much along the timelines you originally expected? And I'll pass the line.

Yes. No, thank you. Obviously, it's been predominantly concentrated on The Sims. Yes, we've rolled out two, one on the Escapist, one on Siliconera. But we've spent a lot of time planning, focused group testing, the types of subscription offerings that would work, as well as hiring some real ninjas from telcos, people who live and breathe customer acquisition, customer retention, pricing, packaging. So we've loaded up because we see this as a transformational growth area for the business.

What I would say to the comment that we might have rolled it out a little slower, which is a fair comment and a fair perspective. However, we actually might see more opportunity in an Enthusiast subscription offering than we do in incrementally rolling them out across individual properties. And so that's really where the bulk of the research, the focus group testing, the beta testing has gone into.

And so this is going to be a huge priority, it's one of the reasons we hired Thamba, our new COO, who's spent 10 years at Rogers and knows more about subscriptions and acquiring customers than any of us. And so that's a huge priority area for us. But it may not take the form of that. Okay, now we're going to do one on this side and now we're going to do one on that side. It's probably going to be a lot more expansive and a lot bigger than that.

Okay. Great color. Thanks for taking the questions.

Thanks, Rob.

Mike Crawford, B. Riley FBR.

Thanks. B. Riley Securities. So why wouldn't you [just] do a Luminosity subscription offer? It seems that's a no-brainer.

We might. Yes, we might. There's a couple of -- our eSports competitors who have launched that type of offering in the past couple of weeks. And so we very well might do it. But again, a lot of the work that we've been doing on subscription is a lot more expansive and bigger than just one property here, one property there. But again, we could -- you could very well see a Luminosity subscription offering in the near future.

Okay. And then I know each deal is going to be different, but is there something that might approximate a typical deal or direct sales like, how much of a spend the brand is going to commit will go towards impressions versus I don't know like, video time with one of these influencers?

It's different. Again, the easy answer -- unfortunately, in this case, Mike, the true answer, the wishy-washy political answer depends on the client. But it's true like, in Gillette, we did a fantastic deal with -- we've done a number of deals with Gillette, and they seem to prefer the video inventory right now. SpiderTech prefers the influencers and G Fuel prefers the event activations and the influencers a lot more than the media.

So we haven't yet stumbled upon a median average or something like that. What I can tell you though is that each and every one of them loves the fact that they can dip their toe in or go all in on a number of these different engagements and touch points. So yeah, it's really different based on the client.

Okay. And I know you talked about some potential investments from ad tech, but what about campaign effectiveness in your walled gardens or otherwise?

Look, a lot of those metric are proprietary information and competitive information that we would not want to discuss on a conference call. Having said that, I think the metric as a pretty simple sales guide for the past 20-plus years. The simple metric that we should have every one of you on the call focused on is repeat business.

Gillette has come back to us two or three times. SpiderTech has looked to increase their investment. We've done a number of different things from the original G Fuel deal. So the indications are that they're liking what they're getting out of the relationship and are wanting to do more and spend more. But we should definitely track that and hopefully bump our chest about it in subsequent quarters. That would be the metric that I think is probably the most powerful.

Okay. Fair enough. And then just final question, is there such thing as a long-term financial model if we ever get towards something that approaches more of a steady-state operating environment versus the growth environment like you're in the midst of now?

Well, sure. A long term like, we talk in the five-year range -- look, I think that the gross profit margin can be back 50%-plus easily like, on a long, long-term basis traditionally -- similar to traditional businesses. Operating margins should be very high, similar to traditional businesses like, north of 30%. We aren't -- we do not have a lot of variable or high fixed costs or high step costs. A lot of what we are doing in our OpEx building this out and growing our scale, we can add incrementally with very little impact to OpEx.

So with that said, I think that's the long-term model. Like, look to the heyday of traditional media companies and telcos like, subscribers and high margin media deals, content licensing and content distribution, everything similar to traditional media and traditional telco companies [ends]. And I think that's a long-term model.

Excellent. Thank you.

Thanks, Mike.

Brian Kinstlinger, Alliance Global Partners.

Great. Thank you for taking my questions. Given your comments on having some of the best inventory for ads, [do you have a] outlook for direct sales for revenue in 2021 and how do you expect the pressure on the ad market impacts the short term CPM?

We have our own outlook; I don't want to get into too much more detail on the guidance that was given but it's significant. The outlook on direct sales as a contributor exceeds the overall outlook for pro forma revenue as a whole.

With that said, the -- what was the second part of the -- your question, Brian.

The CPM, (multiple speakers) a short term with the CPM this pressured.

Well, look, what we've seen, of course, it's now a ton of pressure in Q2, right? [Bay Travel], bust the industry. Expedia, big spender, gone overnight. We have seen a boom in e-commerce though. The e-commerce and other industries, which are driving this environment, work-from-home, all these things, they are spending. We are well, well above pre-COVID levels on ad pressures right now. Some of that would be due to seasonality, but I think that when we look year-over-year, we're back on that pricing. So the market was low, additional spenders came in and took advantage of that. And ad spend is doing okay for us.

Yeah, I think the other thing is we're starting see for us and our industry prioritization of ad spend, and it is migrating more to digital and more to gaming. So I've certainly been saying for quite some time that if you need to engage meaningfully with young people, you need a gaming strategy. 12 months ago, you'd walk up and down Madison Avenue, as it were -- talking to people at WPP, Publicis, Dentsu, 60% or 70% of them would get it, 30% would sort of say, I don't know why people would watch other play video games.

That is no longer the case 12-months later. We've crossed the rubicon here where people understand the power of video games in terms of how best to find young people and speak to them in a language, they're willing to listen in. And so I think an interesting data point to that is that our sales group in the last two weeks, I would say, has submitted 30 RFPs for Q1 2021 with no shortage of Fortune 100 companies. So that level of activity is highly encouraging for us.

Great. My follow-up is, you've been asked a little bit, I guess you're looking for something more expansive, whether it's side-by-side or all of Enthusiast, what's the biggest contributor in more quickly offering subscriptions? I'm seeing more and more sites offering, for example, premium content that's just for paid subscribers on sites. And this seems to be maybe an easy way to start and dip your toe in the water while you figure out direction?

Again, for us, the competitive advantage that nobody else has is the integration of our assets. The fact that we're building laterally. That's true for direct sales, but it's also true for subscription. We can offer integrated packages to people, editorial, social status, competitive eSports content. There's a much bigger play that we can offer customers and we are spending a lot of time figuring out how to nail it. That's our approach because nobody can offer the things that we can offer. And so we want -- we think our best chance for transformative penetration and transformative growth on the subscription side is an integrated offering.

Great. Thanks for taking the time with me.

And we have reached the end of our question-and-answer session. And it also concludes today's conference call. And you may disconnect your lines at (technical difficulty). Thank you for your participation.