H&R Block Reports Strong FY 2024 Results, Raises Dividend; Other Companies Focus on AI and Growth

Earnings call: H&R Block posts robust FY 2024 results, raises dividend By Investing.com

H&R Block, Inc. (NYSE:HRB) reported its fiscal year 2024 earnings with significant increases in revenue, EBITDA, and earnings per share (EPS). The company's do-it-yourself (DIY) tax preparation business saw considerable market share gains, contributing to the company's overall growth. Alongside the financial results, H&R Block announced a 17% increase in its quarterly dividend and a new share repurchase program valued at $1.5 billion. For fiscal year 2025, H&R Block anticipates revenue between $3.69 billion and $3.75 billion, EBITDA between $975 million and $1.02 billion, and EPS between $5.15 and $5.35, partly due to a low effective tax rate. The company's strategy focuses on driving annual revenue growth of 3-6% and leveraging its cost structure to exceed the pace of revenue growth in EBITDA. H&R Block's fiscal year 2024 results demonstrate a strong performance, with strategic initiatives set to continue driving growth. The company's forward-looking statements indicate a focus on maintaining market share and enhancing client experiences, particularly in the Assisted tax preparation segment. With the planned share repurchases and dividend increase, H&R Block remains committed to delivering value to its shareholders while navigating the challenges and opportunities in the tax preparation industry. Operator: Thank you for standing by, and welcome to H&R Block's Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Michaella Gallina, Vice President, Investor Relations. Please go ahead. Michaella Gallina: Thank you, operator. Good afternoon, everyone, and welcome to H&R Block's fiscal year 2024 financial results conference call. Joining me today are Jeff Jones, our President and Chief Executive Officer, and Tony Bowen, our Chief Financial Officer. Earlier today, we issued a press release and presentation, that can be downloaded or viewed live on our website at investors.hrblock.com. Our call is being broadcast and webcast live, and a replay of the webcast will be available for 90 days. Before we begin, I'd like to remind listeners that comments made by management may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see H&R Block's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as updated periodically with our other SEC filings. Please note, some metrics we'll discuss today are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information accurate only as of today, August 15, 2024. H&R Block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. With that, I will now turn it over to Jeff. Jeff Jones: Good afternoon, everyone, and thanks for joining us today. We will begin by sharing our results for the full fiscal year and the progress we continue to make on our Block Horizons imperatives; then Tony will discuss our financial performance and outlook for fiscal '25, and then we'll open it up for Q&A. Beginning with our fiscal '24 results. I am pleased that we were able to deliver another year of revenue growth, EBITDA that grows even faster, and double-digit EPS growth. Our DIY business continued its momentum with market share gains for the second consecutive year. Performance was driven by paid client and NAC growth, as well as ongoing strength in our Tax Pro Review product. I was pleased with how fast we were able to launch AI Tax Assist, which resulted in higher new client conversion, and our customer satisfaction scores remained strong. In Assisted, our brand continued to resonate with higher value clients, and we were able to grow NAC; trends in Assisted small business tax also remained positive this year. In addition, we're continuing to drive value for shareholders through our capital allocation practice. In fact, today we announced another 17% increase to our quarterly dividend as well as a new repurchase authorization of $1.5 billion, which replaces the prior authorization. Since 2016 through today, we have increased the dividend 88% and repurchased more than 40% of shares outstanding. Looking to fiscal '25, we feel well-positioned to deliver for clients and shareholders; and Tony will share more about our outlook in a moment. But first, let me turn to our Block Horizons strategy, where we continue to make important progress in all three of our strategic imperatives. Starting with Small Business. We had another good year in tax, delivering revenue growth in the mid-single digits. NAC grew 3%, entity trends remained strong, and bookkeeping and payroll had another year of double-digit growth. Our centralized fulfillment model alongside our dedicated sales team have driven services client conversion, and we continue to see a lot of opportunity ahead. Turning to Wave. I'm pleased with the progress that has been made in the last year on our key priorities to accelerate revenue growth and drive profitability. You'll recall we recently launched a new paid subscription solution, called Pro-Tier. This, along with our paid receipt product, are both designed to further empower small business owners to manage their business better. These products have been performing better than anticipated. For the full year, revenue growth was 7%. We continue to improve the losses in the business and expect ongoing positive trends in FY '25. Moving on to our Financial Products imperative. We are pleased with the growth of our mobile banking platform, Spruce, and its performance in both the Assisted and DIY channels this season. Since launch through June 30, Spruce has 476,000 sign-ups and we are nearing a milestone of $1 billion in customer deposits. We are pleased to see positive deposit trends, with nearly 50% coming from non-tax sources this year. In fact, last month deposits increased 60% year-over-year. At the same time, Spruce is continuing to deliver on its mission to help people be better with money. We're excited about new innovations that will be rolling out in the coming months, and our team is focused on acquiring users in and out of the tax season. Now let's turn to Block Experience, which is all about blending digital tools with human expertise and care. We feel great about how we're positioned to serve clients however they want to be served, fully virtual to fully in person and every way in between. In DIY, our strategy continues to deliver, and we're pleased with the results. As I mentioned, we had meaningful growth in paid clients and NAC, which translated to strong revenue growth of 11% this year. AI Tax Assist performed well, and we're excited about our gen-AI use cases which have the potential to drive future efficiencies and cost savings. We look forward to continuing this momentum in fiscal year '25. In the Assisted channel, we were pleased with our NAC growth, improved client satisfaction scores, and success in attracting and serving higher value clients. We're clear about where we can improve the experience for clients, and recently welcomed Curtis Campbell as President of Global Consumer Tax and Chief Product Officer, who has more than ten years of tax industry experience. His impact is already being felt across the organization and I'm excited about his leadership. Over the last few years, we've made significant strides in our products, services, and features through our Block Horizons plan, and I'm feeling very good about our positioning for fiscal year '25. Before I turn things over to Tony to share more about our financial performance and outlook, I want to take a moment to thank him for his incredible tenure at H&R Block. As we shared on the Q2 call, Tony made the personal decision to retire after a 20-year career with Block. Tony has been an integral part of our company, playing a key role in our growth, transformation, and success. His financial acumen, strategic insights, and industry experience have been invaluable to our team. During his tenure, Tony helped us navigate through numerous challenges and opportunities, ensuring that we remain on strong financial footing. He began his career with H&R Block as a Senior Treasury Analyst and has since held multiple executive roles. Under his leadership as CFO, we have returned more than $3.9 billion to shareholders. His impact on H&R Block will be felt for years to come. On behalf of the entire Block family and our Board of Directors, I want to extend our gratitude to Tony for his years of service and leadership and we wish him all the best in his retirement and future endeavors. As you may have seen in our announcement last week, I am pleased to share that we have hired Tony's successor. Tiffany Mason brings a proven track record of financial leadership in consumer services, retail, and franchising, which are all critical to our business. She most recently served as EVP and CFO at Driven Brands, a high-growth auto services company, where she drove strong organic and inorganic growth and led the company through a successful IPO. Prior to that, Tiffany spent 13 years at Lowe's (NYSE:LOW), a Fortune 50 omni-channel home improvement retailer. Tony and Tiffany are working closely together to ensure a seamless transition, and she will officially step into the role of CFO on September 13th. In addition, as we continue to transform H&R Block into an agile and innovative company that delivers more value to our clients, associates, and shareholders. I've also added another key member to our senior leadership team. Scott Manuel joined last week as Chief Strategy and Operations Officer and reports directly to me. Within his role, Scott is overseeing functions essential to driving our long-term enterprise strategy and improving our execution. Scott has a long history of delivering customer-centric innovation in complex and dynamic environments - he's an accomplished engineer, has worked in large scale companies and private equity, and across industries, and is steeped in artificial intelligence. I'm thrilled to have Curtis, Tiffany, and Scott join the already strong Senior Leadership Team. With that, Tony, I will now turn it over to you. Tony Bowen: Thank you, Jeff. It's been an incredible journey, and I'm deeply grateful for the career I've had at H&R Block. First and foremost, I want to thank our finance department and associates, whose hard work and commitment have been instrumental in driving our success. I also want to extend my gratitude to our Board of Directors, shareholders, and investors for their support and trust. As I look back on my time with the company, I'm immensely proud of what we have accomplished together. I'm confident that Block will continue to drive value for shareholders in the years to come. With that, I will now turn to our fiscal year '24 results. We delivered $3.6 billion of revenue, an increase of 4% or $138 million, primarily due to a higher net average charge and company-owned volumes in the Assisted category, combined with greater online paid returns at a higher net average charge in DIY, partially offset by lower Emerald Card activity in the current year. Total operating expenses in the year were $2.8 billion, an increase of 3% or $82 million, primarily due to higher labor costs and bad debt expense, partially offset by lower consulting and outsourced services. Interest expense was $79 million, an increase of 8% over prior year due to higher draws on our line of credit and the higher rate environment. Pretax income was $762 million, an increase of $51 million, or 7%, primarily due to higher revenues in the current year. Our effective tax rate was 21.6% for the full year versus 21% in the prior year. Turning to EBITDA. We delivered $963 million, compared to $915 million in the prior year, an increase of more than 5%. We are pleased with another year of growing EBITDA faster than revenue. Earnings per share from continuing operations increased from $3.56 to $4.14, or 16%, while adjusted earnings per share from continuing operations increased from $3.82 to $4.41, or 15%. In FY '24, we acquired a total of 158 franchise offices. We feel great about franchisees' willingness to sell to us and are pleased with how this strategy supports our longer-term revenue and earnings growth. As Jeff shared, our capital allocation story remains strong. Regardless of year-to-year nuances, our disciplined approach drives meaningful value for shareholders. We produce significant and stable cash flow, pay a growing dividend, and buy back a material number of shares. We also today announced a 17% increase in our quarterly dividend to $37.5 per share. Since 2016, we've increased the dividend by 88%. In FY '24 we completed $350 million of share repurchases at an average price of $43.66; and today we are pleased to announce a new share repurchase authorization of $1.5 billion. Since 2016, we have repurchased more than $2.3 billion, retiring over 89 million shares, or more than 40% of shares outstanding at an average price of $26.74. Now turning to our FY '25 outlook. Let me begin with context around the assumptions we've made. First, we believe the industry growth next year will be in line with historical trends, or about 1%. Second, we assume that we will maintain market share in the overall tax category, but our goal, of course, is always to grow share. Third, we expect to continue taking low-single digit price, which we successfully executed again this year with customer satisfaction scores remaining strong. Fourth, we expect Wave and Small Business to continue to be revenue growth drivers, and lastly, we will continue to repurchase franchise locations opportunistically. As a result, our outlook for FY '25 is for revenue to be in the range of $3.69 billion to $3.75 billion. EBITDA to be in the range of $975 million to $1.02 billion. EPS to be in the range of $5.15 to $5.35, which will benefit from an unusually low effective tax rate of approximately 13%. The tax rate is positively impacted due to the anticipated closure of various matters under examination and the expiration of statute of limitations. We expect this to contribute approximately 50 cents to EPS in fiscal year '25. As we have shared, we have multiple levers to drive annual revenue growth in our targeted range of 3% to 6%; and we believe we can leverage our cost structure for EBITDA to outpace revenue, while utilizing share repurchase to grow EPS even faster. All-in-all, we are well positioned for fiscal '25 and beyond. In closing, it has been an honor to serve as CFO, and I look forward to seeing the company's continued success in the years to come. With that, I will now turn it back over to Jeff for some closing remarks. Jeff Jones: Thank you, Tony. As I reflect on all that we have accomplished, I am grateful for our associates and team. Every day, we strive to deliver on our purpose of providing help and inspiring confidence in our clients and communities everywhere. I would like to extend a sincere and meaningful thank you to our tax professionals, our franchisees, and our associates who make our success possible. I am looking forward to all we will accomplish in the next year and sharing our Q1 results in November. Now, operator, we will open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast Research. Kartik Mehta: Hey, good afternoon. First of all, Tony, it was a pleasure working with you, the best of luck in your retirement. Tony Bowen: Thanks, Kartik. Kartik Mehta: Hey, Jeff. Welcome. Jeff, if you look at FY '25 and over the next tax season and kind of compared to this tax season, what changes do you think that Block needs to make sure that you maintain your market share on the Assisted side? Jeff Jones: Kartik, thank you. I mean, there's no question, and I teed this up a bit in our last call of just -- the opportunity I saw last year as I traveled in office execution and Assisted. We have lots and lots of clients that are choosing the brand. They're making an appointment, they're coming to the office and we just didn't deliver well enough. And so that's really the focus of the entire team as we go into '25, is how do we improve the experience? How do we better manage expectations? How do we help clients understand the value? And then ultimately, how do we deliver on that? And with a real emphasis on new clients, in particular, we saw there's even more opportunity for those people who are coming to us for the first time and don't really understand exactly how the process should work at H&R Block. And so there's many things across all the different businesses that teams are working on, but that has everyone's attention for next year. Kartik Mehta: And then, Tony, just on free cash flow. Obviously, your free cash flow this year was much higher than net income. I'm assuming depreciation will be higher than CapEx again next year. But any other changes on the operating cash flow line that might impact free cash flow next year? Tony Bowen: No. I mean you're right. The depreciation and amortization continues to exceed CapEx, which is why we're generating more than 100% of free cash flow relative to net income. So that trend should continue. As you know, FY '23 with unusually high free cash flow because of some tax benefits that we got. But this year, I'd say it was more of a normal year. Free cash flow as defined by cash flow from operations, less CapEx is north of $650 million. And I think that's a pretty good run rate number for us going forward. Operator: Thank you. Our next question comes from the line of Scott Schneeberger of Oppenheimer & Co. Scott Schneeberger: Thanks very much. Good afternoon and Tony, going to miss you as well. All the best. And I'll get a question to you, I promise. But starting now, Jeff, just high level, looking out to next year, the -- given a little bit of color on what you're expecting. Probably the next earnings call is going to be right around the election. I'm curious how you're thinking about the political outlook and developments in that 1% growth for the industry just kind of maybe compare and contrast candidates and other things you're thinking about out there that could influence the tax season next year? And then I'll follow up a quick follow-up. Thanks. Jeff Jones: I'll leave the compare and contrast candidates for the political pundits. I mean, we absolutely have been in this business long enough to be through many election cycles and just have never really seen an election itself impact the tax filling season. And so it will happen. And then as we get into whatever happens in terms of who wins, whatever policy changes they may make and how that trickles down and impacts the consumer, I mean we certainly aren't trying to predict that, but that's where it really starts to potentially have an impact, positive potentially on the business as well. So as we think about the season, Tony mentioned, we expect it to be a more normal season. Each year, there's always a little something that pops up. I think we've proven a great ability to respond to whatever those things are. 1099-Ks (ph) have been on the agenda for a couple of years, we're ready. If it happens, it's not built into the plan. We don't know if it will happen. So that does hang out there, and we'll wait and see. But otherwise, we're most focused on what can we best do to serve our customers and how do we build the best products and experiences to win more people to the brand. Scott Schneeberger: Thanks. I appreciate that, Jeff. Just one more follow-up for you, and then I'll get to Tony. But the -- Kartik asked about market share opportunity in Assisted and what you can do there. You've done a nice job the last couple of years and do-it-yourself on the market share front. Is that sustainable? And what are some of the levers you're pulling to try and keep that position? Thanks. Jeff Jones: Well, it's been a couple of years of really nice performance, as you said. And the key always starts with having an excellent product, an experience that is easy for the consumer and we feel very good about the product. Of course, there's always things we want to do every year to make it better and better, but that's always the starting point. We have to deliver great value and price competitively, we're doing that. That's obviously a more dynamic conversation as the season unfolds, and we see competitive moves. And then the third thing is we continue to be very aggressive about going after dissatisfied TurboTax clients. And we've made that very easy to switch. We have been very aggressive in how we market against them. And you should expect us to follow that recipe but not take anything for granted. Scott Schneeberger: Great. Thanks. Appreciate that. And then, Tony, congrats again. My question to you is on margin expansion. It looks like got a little bit this year. You referenced growing EBITDA faster than revenue. And the guidance next year appears the ranges imply kind of in line. What is the opportunity as you kind of pass the baton to Tiffany of -- what type of margin expansion can be achieved in years to come and where might the levers be there? Thanks. Tony Bowen: Thanks, Scott, and I really appreciate working with you over the years. So we've delivered pretty consistently EBITDA growing faster than revenue for a number of years, and we've talked about if we can hit that 3% plus revenue number, EBITDA can grow over the long term, 1.5 times that rate, and I think that just takes advantage of the cost structure, takes advantage of us managing expenses, trying to drive productivity, figuring out ways to invest in the business by taking out costs in other places. And as you said, margin has expanded several years in a row, and I think it will continue. We guided to, obviously, top line growth again in '25. We guided to EBITDA growing faster than the revenue and EPS growing even faster. So the model is working. There's always Europe-specific nuances one year over another. This year, we have some ERC credits that we got the benefit of in '24 that aren't continuing in '25. So that has EBITDA being a little bit lower on a year-over-year basis, but it's still outpacing revenue when you look at the guidance range. So overall, the model is still working. Inflation has moderated versus what we saw kind of coming out of the pandemic. So that's obviously helpful. We're still seeing things like merit increases and rent go up, but some of those other things like supplies and utilities that were kind of out of control for a few years are now kind of more normal rates. So the model is working, and I think it will continue to work for the foreseeable future. Operator: Thank you. Our next question comes from the line of George Tong of Goldman Sachs (NYSE:GS). George Tong: Hi. Thanks. Good morning, or good afternoon. I would also like to extend the thanks and congrats to Tony. Best wishes ahead. Tony Bowen: Thank you, George. I appreciate it. George Tong: Yeah. So you mentioned looking at the outlook, industry volumes, you're expecting to be up 1%. Can you break that down into expectations for the Assisted and DIY categories? How fast do you expect both of those to grow in the 2025 tax season? Tony Bowen: Yeah. I mean I don't think our expectations for this upcoming season are different than what we would have thought over the last several years. Obviously, this most recent one was a little bit unusual because of the California extension causing some kind of rebound this most recent tax season. But I think going into next year, we expect DIY to grow a little bit faster than Assisted. I think that's consistent with the longer-term trend. Overall industry growth of 1%, probably means DIY growing a couple of percent, Assisted slightly up. I think that's been our mantra for a long time. And I think over the -- year-to-year, you might have slight nuances, but over the longer term, that's been the trend. George Tong: Okay. Got it. That's helpful. And then with respect to the goal to maintain market share, is that -- how much of that is a reflection of overall tax volumes versus individually Assisted and DIY? In other words, would you expect to be gaining share in DIY? Is that the base case assumed in guidance? And is -- does the guidance also assume Assisted market share as stable? Tony Bowen: Yeah. I think the -- we start with we want to make sure we maintain overall share. We want to make sure that we're serving as many customers as the category is growing. And obviously, we did that in this most recent year. So that's a starting place. I mean obviously, given the trends in our Assisted business over the last few years, we know that, that's more of a headwind and DIY has got a lot of tailwind. So that wouldn't be surprising. But as Jeff said, we're making a lot of changes and focus in the Assisted channel to try to get back to flat share. So it's definitely the goal, but it's not a current expectation. Overall share being flat across the tax category is the base expectation. George Tong: Got it. That's helpful. And just one more quick follow-up on initiatives to drive higher or -- stable or higher market share in Assisted. I know last year, trying to maintain market share was a big area of focus for Assisted and you've tried a number of initiatives. I guess, how will the approach this year be different than last year? Given last year, you had such a big focus on maintaining market share in Assisted as well. Jeff Jones: Yes, you're exactly right. We did and we will, for sure. I mean, last year, we were able to slow the decline among EITC filers, so we did see progress there, that's good news. But it's not enough and some of the things I mentioned about converting more of the people who are choosing us and starting with us is really what is a big shift for this year. And as I mentioned a couple of times already, George, I mean, when we look at the customer journey and the fact that they're choosing us and they're coming and they're starting with us, the two big reasons that they didn't finish last year had a lot to do with -- they were new clients to Block. They didn't fully understand how the process was going to work, we didn't do a good enough job communicating and welcoming them to the brand. And that's a breakdown in execution. So what the team has been working on is real changes to the client experience in the office. We think about before, during and after tax prep. And then specifically with emphasis on new clients, which we know is an extra area of emphasis. Operator: Thank you. Our next question comes from the line of Alex Paris of Barrington Research. Alexander Paris: Good. Thank you. I'd like to add my congratulations to Tony. We'll definitely miss you and just wanted to say to Tiffany, who I'm sure is listening. We look forward to working with you. Tony Bowen: Thank you, Alex. It's been a pleasure. So you've been great over the years. Alexander Paris: Yeah, same here. Thank you. So just to dive a little bit more into the fiscal 2025 guidance. You basically have revenue growth at 3%, EBITDA growth at 4% and adjusted EPS growth at about 8%. So the first question is, what sort of assumption do you have for share repurchases in fiscal 2025? Tony Bowen: Yeah. I mean, obviously, we don't share the specific number that we're targeting. But obviously, we've assumed some share repurchase, which is obviously driving EPS benefit. Obviously, some of the share repurchase we did even in '24 gives a benefit going into '25 as well. But I think you should expect us to be on a trend that's similar to what we've done in the last several years. Obviously, we try to be opportunistic and take advantage of volatility in the stock price. It naturally happens over time. But I think our approach will be very consistent with what you've seen in the last several years. Alexander Paris: Great. And then seasonally, refresh my memory, you do more of your share repurchasing in the first half of the fiscal year? Tony Bowen: That's right. We typically come out of this call and have a focus on it, so in Q1 and into Q2. And we do that for a couple of reasons. One is we get a better EPS benefit, the earlier we buy it in the year. Secondly, we're typically in blackout a lot of time during tax season. So for that reason, we try to do most of it in the first half of the year. That isn't always the case. There have been years where we've done 10b5-1 programs that we've executed during tax season. We've done open market purchases coming out of tax season. So it's not always the case, but generally, we try to do it in the first half of the year. Alexander Paris: Great. Thank you. And then regarding the long-term growth algorithm. For fiscal 2025, you're kind of at the low end of that revenue range. I assume there's some conservatism built into that. Adjusted EBITDA is definitely growing or EBITDA is growing faster than revenue. But I think you said it earlier and perhaps in response to a question, you have some ERC numbers that are not going to repeat this year versus last year. Is that the entire explanation for the slightly lower EBITDA growth rate than I would expect? But with all that said, I just want to be clear. I realize your guidance is above consensus. So just a little bit more. Tony Bowen: Yeah, the employee retention credit -- yeah, the employee retention credit is about a $15 million impact. So it definitely push EBITDA quite a bit higher, if it wasn't for that roll-off that we received in '24. But regardless, as you said, we try to set these numbers in a level where we can achieve. And the fact that the top line is in -- even if it's the lower end of the range, it's still in the range. Top end of the EBITDA number is over $1 billion on the guidance range, which is an incredible feat. Obviously, EPS has benefited from the much lower tax rate, which I talked about in the opening comments. I mean the fact that we exceeded $4 even on an adjusted or a regular GAAP basis and EPS in '24 and now guiding to a number that's over $5 even if it's benefited from tax rate is an incredible feat. So we feel good about the progress. There's always year-over-year kind of P&L nuances, if you will, but the trajectory remains the same, which is up and to the right. Alexander Paris: Even with that expected onetime $0.50 per share gain as a result of the tax benefit, the adjusted EPS guidance, excluding that benefit, is still above consensus. I wanted to ask you about the -- that tax benefit. Is there a particular quarter that you expect that to hit? Or is that going to hit evenly over the four quarters? Tony Bowen: No, it will hit in a particular quarter once we've resolved the open audit and kind of the statutes expire. We're not exactly sure which quarter that will be yet. Could be Q2, could be later in the year, but it will definitely happen, we believe, in the fiscal year, which is why we included it in the guidance range. Alexander Paris: Got you. So the way you answered that question, it's unlikely in Q1. It's going to be Q2 or later in the year? Tony Bowen: Yeah. It's possible. We just -- we aren't in complete control of when that's going to happen, but it will happen by the end of the fiscal year. Alexander Paris: And then I think my last question for you is California. You got a little benefit in fiscal '24 because of the extended deadline from April 15 to October 15, as I recall. How much does that contribute to that extra bolus of revenue from California? Because I'm assuming you got two boluses of revenue from California last fall and then the spring. What's the grow-over for fiscal 2025 because of that? Tony Bowen: Yeah. I mean maybe the way to think about it is how much it drove the industry volume. And as you saw, the Assisted category is probably up about 1 point more because of that California extension in the prior year. So you think that's driving 1 point of volume. But obviously, not all of that is - that doesn't equal 1 point of revenue. So it's probably 75% of that from a revenue perspective. So three quarters of 1 point of revenue, about 1 point of industry -- of tax prep volume. Operator: Thank you. I would now like to turn the conference back to Michaella Gallina for closing remarks. Madam? Michaella Gallina: Thanks, Latif, and thanks, everyone for joining us. We look forward to speaking with you next quarter. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.

H&R Block, Inc. (HRB) Q4 2024 Earnings Call Transcript

Kartik Mehta - Northcoast Research Scott Schneeberger - Oppenheimer & Company George Tong - Goldman Sachs Alexander Paris - Barrington Research Thank you for standing by, and welcome to H&R Block's Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Michaella Gallina, Vice President, Investor Relations. Please go ahead. Michaella Gallina Thank you, operator. Good afternoon, everyone, and welcome to H&R Block's fiscal year 2024 financial results conference call. Joining me today are Jeff Jones, our President and Chief Executive Officer, and Tony Bowen, our Chief Financial Officer. Earlier today, we issued a press release and presentation, that can be downloaded or viewed live on our website at investors.hrblock.com. Our call is being broadcast and webcast live, and a replay of the webcast will be available for 90 days. Before we begin, I'd like to remind listeners that comments made by management may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see H&R Block's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as updated periodically with our other SEC filings. Please note, some metrics we'll discuss today are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information accurate only as of today, August 15, 2024. H&R Block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. Good afternoon, everyone, and thanks for joining us today. We will begin by sharing our results for the full fiscal year and the progress we continue to make on our Block Horizons imperatives; then Tony will discuss our financial performance and outlook for fiscal '25, and then we'll open it up for Q&A. Beginning with our fiscal '24 results. I am pleased that we were able to deliver another year of revenue growth, EBITDA that grows even faster, and double-digit EPS growth. Our DIY business continued its momentum with market share gains for the second consecutive year. Performance was driven by paid client and NAC growth, as well as ongoing strength in our Tax Pro Review product. I was pleased with how fast we were able to launch AI Tax Assist, which resulted in higher new client conversion, and our customer satisfaction scores remained strong. In Assisted, our brand continued to resonate with higher value clients, and we were able to grow NAC; trends in Assisted small business tax also remained positive this year. In addition, we're continuing to drive value for shareholders through our capital allocation practice. In fact, today we announced another 17% increase to our quarterly dividend as well as a new repurchase authorization of $1.5 billion, which replaces the prior authorization. Since 2016 through today, we have increased the dividend 88% and repurchased more than 40% of shares outstanding. Looking to fiscal '25, we feel well-positioned to deliver for clients and shareholders; and Tony will share more about our outlook in a moment. But first, let me turn to our Block Horizons strategy, where we continue to make important progress in all three of our strategic imperatives. Starting with Small Business. We had another good year in tax, delivering revenue growth in the mid-single digits. NAC grew 3%, entity trends remained strong, and bookkeeping and payroll had another year of double-digit growth. Our centralized fulfillment model alongside our dedicated sales team have driven services client conversion, and we continue to see a lot of opportunity ahead. Turning to Wave. I'm pleased with the progress that has been made in the last year on our key priorities to accelerate revenue growth and drive profitability. You'll recall we recently launched a new paid subscription solution, called Pro-Tier. This, along with our paid receipt product, are both designed to further empower small business owners to manage their business better. These products have been performing better than anticipated. For the full year, revenue growth was 7%. We continue to improve the losses in the business and expect ongoing positive trends in FY '25. Moving on to our Financial Products imperative. We are pleased with the growth of our mobile banking platform, Spruce, and its performance in both the Assisted and DIY channels this season. Since launch through June 30, Spruce has 476,000 sign-ups and we are nearing a milestone of $1 billion in customer deposits. We are pleased to see positive deposit trends, with nearly 50% coming from non-tax sources this year. In fact, last month deposits increased 60% year-over-year. At the same time, Spruce is continuing to deliver on its mission to help people be better with money. We're excited about new innovations that will be rolling out in the coming months, and our team is focused on acquiring users in and out of the tax season. Now let's turn to Block Experience, which is all about blending digital tools with human expertise and care. We feel great about how we're positioned to serve clients however they want to be served, fully virtual to fully in person and every way in between. In DIY, our strategy continues to deliver, and we're pleased with the results. As I mentioned, we had meaningful growth in paid clients and NAC, which translated to strong revenue growth of 11% this year. AI Tax Assist performed well, and we're excited about our gen-AI use cases which have the potential to drive future efficiencies and cost savings. We look forward to continuing this momentum in fiscal year '25. In the Assisted channel, we were pleased with our NAC growth, improved client satisfaction scores, and success in attracting and serving higher value clients. We're clear about where we can improve the experience for clients, and recently welcomed Curtis Campbell as President of Global Consumer Tax and Chief Product Officer, who has more than ten years of tax industry experience. His impact is already being felt across the organization and I'm excited about his leadership. Over the last few years, we've made significant strides in our products, services, and features through our Block Horizons plan, and I'm feeling very good about our positioning for fiscal year '25. Before I turn things over to Tony to share more about our financial performance and outlook, I want to take a moment to thank him for his incredible tenure at H&R Block. As we shared on the Q2 call, Tony made the personal decision to retire after a 20-year career with Block. Tony has been an integral part of our company, playing a key role in our growth, transformation, and success. His financial acumen, strategic insights, and industry experience have been invaluable to our team. During his tenure, Tony helped us navigate through numerous challenges and opportunities, ensuring that we remain on strong financial footing. He began his career with H&R Block as a Senior Treasury Analyst and has since held multiple executive roles. Under his leadership as CFO, we have returned more than $3.9 billion to shareholders. His impact on H&R Block will be felt for years to come. On behalf of the entire Block family and our Board of Directors, I want to extend our gratitude to Tony for his years of service and leadership and we wish him all the best in his retirement and future endeavors. As you may have seen in our announcement last week, I am pleased to share that we have hired Tony's successor. Tiffany Mason brings a proven track record of financial leadership in consumer services, retail, and franchising, which are all critical to our business. She most recently served as EVP and CFO at Driven Brands, a high-growth auto services company, where she drove strong organic and inorganic growth and led the company through a successful IPO. Prior to that, Tiffany spent 13 years at Lowe's, a Fortune 50 omni-channel home improvement retailer. Tony and Tiffany are working closely together to ensure a seamless transition, and she will officially step into the role of CFO on September 13th. In addition, as we continue to transform H&R Block into an agile and innovative company that delivers more value to our clients, associates, and shareholders. I've also added another key member to our senior leadership team. Scott Manuel joined last week as Chief Strategy and Operations Officer and reports directly to me. Within his role, Scott is overseeing functions essential to driving our long-term enterprise strategy and improving our execution. Scott has a long history of delivering customer-centric innovation in complex and dynamic environments - he's an accomplished engineer, has worked in large scale companies and private equity, and across industries, and is steeped in artificial intelligence. I'm thrilled to have Curtis, Tiffany, and Scott join the already strong Senior Leadership Team. Thank you, Jeff. It's been an incredible journey, and I'm deeply grateful for the career I've had at H&R Block. First and foremost, I want to thank our finance department and associates, whose hard work and commitment have been instrumental in driving our success. I also want to extend my gratitude to our Board of Directors, shareholders, and investors for their support and trust. As I look back on my time with the company, I'm immensely proud of what we have accomplished together. I'm confident that Block will continue to drive value for shareholders in the years to come. With that, I will now turn to our fiscal year '24 results. We delivered $3.6 billion of revenue, an increase of 4% or $138 million, primarily due to a higher net average charge and company-owned volumes in the Assisted category, combined with greater online paid returns at a higher net average charge in DIY, partially offset by lower Emerald Card activity in the current year. Total operating expenses in the year were $2.8 billion, an increase of 3% or $82 million, primarily due to higher labor costs and bad debt expense, partially offset by lower consulting and outsourced services. Interest expense was $79 million, an increase of 8% over prior year due to higher draws on our line of credit and the higher rate environment. Pretax income was $762 million, an increase of $51 million, or 7%, primarily due to higher revenues in the current year. Our effective tax rate was 21.6% for the full year versus 21% in the prior year. Turning to EBITDA. We delivered $963 million, compared to $915 million in the prior year, an increase of more than 5%. We are pleased with another year of growing EBITDA faster than revenue. Earnings per share from continuing operations increased from $3.56 to $4.14, or 16%, while adjusted earnings per share from continuing operations increased from $3.82 to $4.41, or 15%. In FY '24, we acquired a total of 158 franchise offices. We feel great about franchisees' willingness to sell to us and are pleased with how this strategy supports our longer-term revenue and earnings growth. As Jeff shared, our capital allocation story remains strong. Regardless of year-to-year nuances, our disciplined approach drives meaningful value for shareholders. We produce significant and stable cash flow, pay a growing dividend, and buy back a material number of shares. We also today announced a 17% increase in our quarterly dividend to $37.5 per share. Since 2016, we've increased the dividend by 88%. In FY '24 we completed $350 million of share repurchases at an average price of $43.66; and today we are pleased to announce a new share repurchase authorization of $1.5 billion. Since 2016, we have repurchased more than $2.3 billion, retiring over 89 million shares, or more than 40% of shares outstanding at an average price of $26.74. Now turning to our FY '25 outlook. Let me begin with context around the assumptions we've made. First, we believe the industry growth next year will be in line with historical trends, or about 1%. Second, we assume that we will maintain market share in the overall tax category, but our goal, of course, is always to grow share. Third, we expect to continue taking low-single digit price, which we successfully executed again this year with customer satisfaction scores remaining strong. Fourth, we expect Wave and Small Business to continue to be revenue growth drivers, and lastly, we will continue to repurchase franchise locations opportunistically. As a result, our outlook for FY '25 is for revenue to be in the range of $3.69 billion to $3.75 billion. EBITDA to be in the range of $975 million to $1.02 billion. EPS to be in the range of $5.15 to $5.35, which will benefit from an unusually low effective tax rate of approximately 13%. The tax rate is positively impacted due to the anticipated closure of various matters under examination and the expiration of statute of limitations. We expect this to contribute approximately 50 cents to EPS in fiscal year '25. As we have shared, we have multiple levers to drive annual revenue growth in our targeted range of 3% to 6%; and we believe we can leverage our cost structure for EBITDA to outpace revenue, while utilizing share repurchase to grow EPS even faster. All-in-all, we are well positioned for fiscal '25 and beyond. In closing, it has been an honor to serve as CFO, and I look forward to seeing the company's continued success in the years to come. With that, I will now turn it back over to Jeff for some closing remarks. Jeff Jones Thank you, Tony. As I reflect on all that we have accomplished, I am grateful for our associates and team. Every day, we strive to deliver on our purpose of providing help and inspiring confidence in our clients and communities everywhere. I would like to extend a sincere and meaningful thank you to our tax professionals, our franchisees, and our associates who make our success possible. I am looking forward to all we will accomplish in the next year and sharing our Q1 results in November. [Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast Research. Kartik Mehta Hey, good afternoon. First of all, Tony, it was a pleasure working with you, the best of luck in your retirement. Hey, Jeff. Welcome. Jeff, if you look at FY '25 and over the next tax season and kind of compared to this tax season, what changes do you think that Block needs to make sure that you maintain your market share on the Assisted side? Jeff Jones Kartik, thank you. I mean, there's no question, and I teed this up a bit in our last call of just -- the opportunity I saw last year as I traveled in office execution and Assisted. We have lots and lots of clients that are choosing the brand. They're making an appointment, they're coming to the office and we just didn't deliver well enough. And so that's really the focus of the entire team as we go into '25, is how do we improve the experience? How do we better manage expectations? How do we help clients understand the value? And then ultimately, how do we deliver on that? And with a real emphasis on new clients, in particular, we saw there's even more opportunity for those people who are coming to us for the first time and don't really understand exactly how the process should work at H&R Block. And so there's many things across all the different businesses that teams are working on, but that has everyone's attention for next year. Kartik Mehta And then, Tony, just on free cash flow. Obviously, your free cash flow this year was much higher than net income. I'm assuming depreciation will be higher than CapEx again next year. But any other changes on the operating cash flow line that might impact free cash flow next year? Tony Bowen No. I mean you're right. The depreciation and amortization continues to exceed CapEx, which is why we're generating more than 100% of free cash flow relative to net income. So that trend should continue. As you know, FY '23 with unusually high free cash flow because of some tax benefits that we got. But this year, I'd say it was more of a normal year. Free cash flow as defined by cash flow from operations, less CapEx is north of $650 million. And I think that's a pretty good run rate number for us going forward. Thank you. Our next question comes from the line of Scott Schneeberger of Oppenheimer & Co. Scott Schneeberger Thanks very much. Good afternoon and Tony, going to miss you as well. All the best. And I'll get a question to you, I promise. But starting now, Jeff, just high level, looking out to next year, the -- given a little bit of color on what you're expecting. Probably the next earnings call is going to be right around the election. I'm curious how you're thinking about the political outlook and developments in that 1% growth for the industry just kind of maybe compare and contrast candidates and other things you're thinking about out there that could influence the tax season next year? And then I'll follow up a quick follow-up. Thanks. Jeff Jones I'll leave the compare and contrast candidates for the political pundits. I mean, we absolutely have been in this business long enough to be through many election cycles and just have never really seen an election itself impact the tax filling season. And so it will happen. And then as we get into whatever happens in terms of who wins, whatever policy changes they may make and how that trickles down and impacts the consumer, I mean we certainly aren't trying to predict that, but that's where it really starts to potentially have an impact, positive potentially on the business as well. So as we think about the season, Tony mentioned, we expect it to be a more normal season. Each year, there's always a little something that pops up. I think we've proven a great ability to respond to whatever those things are. 1099-Ks (ph) have been on the agenda for a couple of years, we're ready. If it happens, it's not built into the plan. We don't know if it will happen. So that does hang out there, and we'll wait and see. But otherwise, we're most focused on what can we best do to serve our customers and how do we build the best products and experiences to win more people to the brand. Scott Schneeberger Thanks. I appreciate that, Jeff. Just one more follow-up for you, and then I'll get to Tony. But the -- Kartik asked about market share opportunity in Assisted and what you can do there. You've done a nice job the last couple of years and do-it-yourself on the market share front. Is that sustainable? And what are some of the levers you're pulling to try and keep that position? Thanks. Jeff Jones Well, it's been a couple of years of really nice performance, as you said. And the key always starts with having an excellent product, an experience that is easy for the consumer and we feel very good about the product. Of course, there's always things we want to do every year to make it better and better, but that's always the starting point. We have to deliver great value and price competitively, we're doing that. That's obviously a more dynamic conversation as the season unfolds, and we see competitive moves. And then the third thing is we continue to be very aggressive about going after dissatisfied TurboTax clients. And we've made that very easy to switch. We have been very aggressive in how we market against them. And you should expect us to follow that recipe but not take anything for granted. Scott Schneeberger Great. Thanks. Appreciate that. And then, Tony, congrats again. My question to you is on margin expansion. It looks like got a little bit this year. You referenced growing EBITDA faster than revenue. And the guidance next year appears the ranges imply kind of in line. What is the opportunity as you kind of pass the baton to Tiffany of -- what type of margin expansion can be achieved in years to come and where might the levers be there? Thanks. Tony Bowen Thanks, Scott, and I really appreciate working with you over the years. So we've delivered pretty consistently EBITDA growing faster than revenue for a number of years, and we've talked about if we can hit that 3% plus revenue number, EBITDA can grow over the long term, 1.5 times that rate, and I think that just takes advantage of the cost structure, takes advantage of us managing expenses, trying to drive productivity, figuring out ways to invest in the business by taking out costs in other places. And as you said, margin has expanded several years in a row, and I think it will continue. We guided to, obviously, top line growth again in '25. We guided to EBITDA growing faster than the revenue and EPS growing even faster. So the model is working. There's always Europe-specific nuances one year over another. This year, we have some ERC credits that we got the benefit of in '24 that aren't continuing in '25. So that has EBITDA being a little bit lower on a year-over-year basis, but it's still outpacing revenue when you look at the guidance range. So overall, the model is still working. Inflation has moderated versus what we saw kind of coming out of the pandemic. So that's obviously helpful. We're still seeing things like merit increases and rent go up, but some of those other things like supplies and utilities that were kind of out of control for a few years are now kind of more normal rates. So the model is working, and I think it will continue to work for the foreseeable future. Thank you. Our next question comes from the line of George Tong of Goldman Sachs. George Tong Hi. Thanks. Good morning, or good afternoon. I would also like to extend the thanks and congrats to Tony. Best wishes ahead. Yeah. So you mentioned looking at the outlook, industry volumes, you're expecting to be up 1%. Can you break that down into expectations for the Assisted and DIY categories? How fast do you expect both of those to grow in the 2025 tax season? Tony Bowen Yeah. I mean I don't think our expectations for this upcoming season are different than what we would have thought over the last several years. Obviously, this most recent one was a little bit unusual because of the California extension causing some kind of rebound this most recent tax season. But I think going into next year, we expect DIY to grow a little bit faster than Assisted. I think that's consistent with the longer-term trend. Overall industry growth of 1%, probably means DIY growing a couple of percent, Assisted slightly up. I think that's been our mantra for a long time. And I think over the -- year-to-year, you might have slight nuances, but over the longer term, that's been the trend. George Tong Okay. Got it. That's helpful. And then with respect to the goal to maintain market share, is that -- how much of that is a reflection of overall tax volumes versus individually Assisted and DIY? In other words, would you expect to be gaining share in DIY? Is that the base case assumed in guidance? And is -- does the guidance also assume Assisted market share as stable? Tony Bowen Yeah. I think the -- we start with we want to make sure we maintain overall share. We want to make sure that we're serving as many customers as the category is growing. And obviously, we did that in this most recent year. So that's a starting place. I mean obviously, given the trends in our Assisted business over the last few years, we know that, that's more of a headwind and DIY has got a lot of tailwind. So that wouldn't be surprising. But as Jeff said, we're making a lot of changes and focus in the Assisted channel to try to get back to flat share. So it's definitely the goal, but it's not a current expectation. Overall share being flat across the tax category is the base expectation. George Tong Got it. That's helpful. And just one more quick follow-up on initiatives to drive higher or -- stable or higher market share in Assisted. I know last year, trying to maintain market share was a big area of focus for Assisted and you've tried a number of initiatives. I guess, how will the approach this year be different than last year? Given last year, you had such a big focus on maintaining market share in Assisted as well. Jeff Jones Yes, you're exactly right. We did and we will, for sure. I mean, last year, we were able to slow the decline among EITC filers, so we did see progress there, that's good news. But it's not enough and some of the things I mentioned about converting more of the people who are choosing us and starting with us is really what is a big shift for this year. And as I mentioned a couple of times already, George, I mean, when we look at the customer journey and the fact that they're choosing us and they're coming and they're starting with us, the two big reasons that they didn't finish last year had a lot to do with -- they were new clients to Block. They didn't fully understand how the process was going to work, we didn't do a good enough job communicating and welcoming them to the brand. And that's a breakdown in execution. So what the team has been working on is real changes to the client experience in the office. We think about before, during and after tax prep. And then specifically with emphasis on new clients, which we know is an extra area of emphasis. Thank you. Our next question comes from the line of Alex Paris of Barrington Research. Good. Thank you. I'd like to add my congratulations to Tony. We'll definitely miss you and just wanted to say to Tiffany, who I'm sure is listening. We look forward to working with you. Tony Bowen Thank you, Alex. It's been a pleasure. So you've been great over the years. Alexander Paris Yeah, same here. Thank you. So just to dive a little bit more into the fiscal 2025 guidance. You basically have revenue growth at 3%, EBITDA growth at 4% and adjusted EPS growth at about 8%. So the first question is, what sort of assumption do you have for share repurchases in fiscal 2025? Tony Bowen Yeah. I mean, obviously, we don't share the specific number that we're targeting. But obviously, we've assumed some share repurchase, which is obviously driving EPS benefit. Obviously, some of the share repurchase we did even in '24 gives a benefit going into '25 as well. But I think you should expect us to be on a trend that's similar to what we've done in the last several years. Obviously, we try to be opportunistic and take advantage of volatility in the stock price. It naturally happens over time. But I think our approach will be very consistent with what you've seen in the last several years. Alexander Paris Great. And then seasonally, refresh my memory, you do more of your share repurchasing in the first half of the fiscal year? Tony Bowen That's right. We typically come out of this call and have a focus on it, so in Q1 and into Q2. And we do that for a couple of reasons. One is we get a better EPS benefit, the earlier we buy it in the year. Secondly, we're typically in blackout a lot of time during tax season. So for that reason, we try to do most of it in the first half of the year. That isn't always the case. There have been years where we've done 10b5-1 programs that we've executed during tax season. We've done open market purchases coming out of tax season. So it's not always the case, but generally, we try to do it in the first half of the year. Alexander Paris Great. Thank you. And then regarding the long-term growth algorithm. For fiscal 2025, you're kind of at the low end of that revenue range. I assume there's some conservatism built into that. Adjusted EBITDA is definitely growing or EBITDA is growing faster than revenue. But I think you said it earlier and perhaps in response to a question, you have some ERC numbers that are not going to repeat this year versus last year. Is that the entire explanation for the slightly lower EBITDA growth rate than I would expect? But with all that said, I just want to be clear. I realize your guidance is above consensus. So just a little bit more. Tony Bowen Yeah, the employee retention credit -- yeah, the employee retention credit is about a $15 million impact. So it definitely push EBITDA quite a bit higher, if it wasn't for that roll-off that we received in '24. But regardless, as you said, we try to set these numbers in a level where we can achieve. And the fact that the top line is in -- even if it's the lower end of the range, it's still in the range. Top end of the EBITDA number is over $1 billion on the guidance range, which is an incredible feat. Obviously, EPS has benefited from the much lower tax rate, which I talked about in the opening comments. I mean the fact that we exceeded $4 even on an adjusted or a regular GAAP basis and EPS in '24 and now guiding to a number that's over $5 even if it's benefited from tax rate is an incredible feat. So we feel good about the progress. There's always year-over-year kind of P&L nuances, if you will, but the trajectory remains the same, which is up and to the right. Alexander Paris Even with that expected onetime $0.50 per share gain as a result of the tax benefit, the adjusted EPS guidance, excluding that benefit, is still above consensus. I wanted to ask you about the -- that tax benefit. Is there a particular quarter that you expect that to hit? Or is that going to hit evenly over the four quarters? Tony Bowen No, it will hit in a particular quarter once we've resolved the open audit and kind of the statutes expire. We're not exactly sure which quarter that will be yet. Could be Q2, could be later in the year, but it will definitely happen, we believe, in the fiscal year, which is why we included it in the guidance range. Alexander Paris Got you. So the way you answered that question, it's unlikely in Q1. It's going to be Q2 or later in the year? Tony Bowen Yeah. It's possible. We just -- we aren't in complete control of when that's going to happen, but it will happen by the end of the fiscal year. Alexander Paris And then I think my last question for you is California. You got a little benefit in fiscal '24 because of the extended deadline from April 15 to October 15, as I recall. How much does that contribute to that extra bolus of revenue from California? Because I'm assuming you got two boluses of revenue from California last fall and then the spring. What's the grow-over for fiscal 2025 because of that? Tony Bowen Yeah. I mean maybe the way to think about it is how much it drove the industry volume. And as you saw, the Assisted category is probably up about 1 point more because of that California extension in the prior year. So you think that's driving 1 point of volume. But obviously, not all of that is - that doesn't equal 1 point of revenue. So it's probably 75% of that from a revenue perspective. So three quarters of 1 point of revenue, about 1 point of industry -- of tax prep volume. Thank you. I would now like to turn the conference back to Michaella Gallina for closing remarks. Madam? Michaella Gallina Thanks, Latif, and thanks, everyone for joining us. We look forward to speaking with you next quarter. And this concludes today's conference call. Thank you for participating. You may now disconnect.

Evoke plc (EIHDF) Q2 2024 Earnings Call Transcript

Per Widerström - Chief Executive Officer Sean Wilkins - Chief Financial Officer Per Widerström Good morning, everyone, and thanks for joining us today for our H1 2024 results. I am Per Widerström, and I've now been the CEO of Evoke for 10 months. We already gave you the key headlines of our first half in our trading update a month ago, and the actual numbers for H1 are exactly in line with the guidance we gave. So, we are going to keep today fairly brief. I will start with a short summary, including the actions we are taking to address performance, including details of our current trading, before Sean walks through the financials. And then, I cover our strategic progress, before taking your questions. The first half financial results are exactly in line with our trading update announcement a few weeks ago, but let me start by reiterating what I said before, that these results are disappointing and are not acceptable. We understand exactly what went wrong and we have taken corrective actions to address the problems. This is what I will take you through in more detail shortly. We are seeing good traction from our decisive actions, and I'm pleased to say that Q3 to date is in line with our 5% to 9% growth targets. We are laser-focused on delivering our commitments for H2 and we have implemented a number of tactical actions focused on short-term performance turnaround to ensure we deliver these targets in the second half. But be in no doubt that the actions we are taking are much more significant than this and are much more strategically positive, focus on our value creation plan, and setting up the business for the longer term. We are seeing steady improvements in our run rates, but I'm really excited about our growing capabilities and what this means for our future profitability. Turning to Slide 3 and to cover current trading and what we are seeing and expect to see in the second half. There is a short summary on the page on what we covered in our trading update around why the H1 performance was behind the plan and actions we have taken to address it. You can also see some of the wide range of initiatives and improvements that we'll be landing across the second half, in particular the improvements in our products, the way we do customer lifecycle management, and our overall customer value propositions. These are fundamental shifts that will drive significant longer-term benefits, but we also expect to see some immediate uplifts as things lands during the course of the second half. We have already made several changes in the past few months to address short-term performance and drive improvements. It's fair to say that a lot of the real exciting initiatives are still to come in Q3 and Q4. In terms of what we are seeing in the business right now, both the end of Q2 and start of Q3 have seen strong underlying progress in our year-on-year growth rate and revenue growth in Q3 up to the 10th of August is consistent with our 5% to 9% growth target range. The period benefits slightly from the timing of the Euros, but the main driver of growth has been strong trends in our core customer cohort of mid-value customers and also strong ongoing growth in online gaming in our core markets. This is really the heart and engine of the business. So, it's pleasing to see this is where the growth is coming from. With that, I'm going to hand over to our CFO, Sean Wilkins, to run through our financials and wider outlook first. And then, I will come back to expand on some of these strategic changes we have been making. Sean Wilkins Thanks, Per, and good morning, everyone. I'm Sean Wilkins, the CFO, and I've now been with the business for six months. This is a hugely exciting time for the group as we are undertaking a total transformation of the business. This will deliver stronger revenues, stronger growth, higher margins, and more sustainable market-leading positions. As with any transformation of this scale, the route to success is never a straight line. We had some successes and some challenges in the first half, and the results you can see on Slide 5 of the first half are not where we wanted them to be. We already provided the main financial headlines last month, with revenues down 2% and an adjusted EBITDA margin of 13% to 14%. So, there are no surprises here. As we discussed in the trading update, we didn't see the returns we expected from our increased marketing investment. And with the operational gearing in our retail business, this meant that the adjusted EBITDA of £116 million was about £35 million to £40 million lower than we had expected. This is what we explained in our post-close trading update in July. In the appendix of this presentation, there are some more slides on the reported results, including details of the exceptional items and adjustments, being mainly the purchase price allocation, amortization, integration costs, and the U.S. termination fees already disclosed. What we will cover in more detail today is that the first half is not reflective of all the actions we've taken to secure our performance in H2 and beyond is much stronger. I'll talk a bit more about this after covering our cash flow. Turning to Slide 6 and our cash flow. Net cash, excluding customer balances, dropped by £12 million in the half, resulting a net debt of £1.73 billion. Given the phasing of our marketing investments and cost savings, our adjusted EBITDA on an LTM basis reduced from £308 million at the end of December to £268 million at the end of June 2024. This means that the leverage increased from 5.6x to 6.4x. Alongside this drop in adjusted EBITDA, you can see we paid out over £50 million for exceptional costs in the first half, which is driving the small cash outflow. This includes significant items like costs to exit our U.S. B2C business, which will deliver clear and higher returns in future periods. We expect this increase in leverage to be temporary and expect leverage at the end of 2024 to be much closer to where we began the year. Looking forward, we plan for rapid deleveraging to our 2026 target of below 3.5x. It is important to note that despite profits being below our plan, the business remains highly cash generative, with almost £79 million of underlying business free cash flow in the period. We also have really strong liquidity, with nearly £300 million of total liquidity at the end of June. Turning to Slide 7, I'd like to provide some more details on the improvement in profitability that we expect in the second half. As Per already said, the actions we have taken have driven an improvement in our trading. We are pleased with the improving momentum in our revenue run rate. This chart walks through the main bridging items from half one adjusted EBITDA of £116 million to our half two guidance of £185 million to £195 million. Marketing phasing will add £35 million to £40 million. We significantly increased our marketing in the first half and are seeing some of the benefits of this in our improved run rate into half two. The lower marketing spend in H2 will be a marketing ratio of around 18% to 19% of online revenues, which we see as a more normal rate than the elevated 25% in half one. The phasing of employment costs will add £5 million to £10 million in H2, given the full half impact of actions taken during the first half to improve our operating model. Revenue initiatives will add around £15 million to EBITDA. We have a deep pipeline of initiatives here, some of which Per talked through. We have completely changed the way the finance function supports the business in tracking and driving business. Each of these initiatives is tracked individually, enabling the business to take corrective actions to ensure we're hitting our financial plans. An example of a new initiative which is driving improved revenue and profitability is our recently launched upgraded Betbuilder. This has made it much easier for our customers to place combination Betbuilder bets. With a high-quality product in place, we then skewed the marketing and promotions towards this in the Euros and into the start of the new football season. This new product drives both revenue and profit uplift on its own as more players can place the bets they like, and also increases the efficiency of our marketing and bonuses as we are able to promote a really attractive product. As you know, we are in the process of selling and closing our U.S. B2C business, and this will add a further £4 million to EBITDA in the second half. Finally, we have taken a range of additional cost initiatives, which will save a further £10 million in H2. One of the key learnings in my first six months in the role is that we have loads to go for on the cost side. We continue to see a wide range of manual processes, duplication and inefficiency in our cost base. This ongoing work will lead to a structurally lower cost base, with further annualization impact into 2025, giving us confidence in our 2025 plans. Finally, on Slide 8, a quick update on my financial priorities that I outlined at our full year results. Firstly, we are driving and embedding a cultural shift in the business. This is all about a shift in mindset to deliver value creation. I have quickly restructured the finance team to set a structure that will support greater rigor of our plans and provide greater support to our decision makers and drive high returns. We built rigorous daily, weekly and monthly tracking and increased our reforecasting cycle to monthly to ensure that we can be more accurate and confident with our forecasts. Each element of our plan is tracked and monitored to ensure we are delivering. This enables the business to take corrective actions if we are off course and to quickly scale up investments where we are over-delivering. Secondly, resource allocation is fundamental to creating value. We are in the process of exiting the U.S. B2C business and have made structural changes in our approach to marketing and product investments to drive higher returns through pursuing our strategy. Thirdly, we are making strong progress with our efficiency and operating leverage. We continue to take cost out of the business following our strategy to deliver a more targeted business, investing in the right products and brands in the right countries. We are building a more scalable, more efficient business powered by intelligent automation and AI. I'll now hand back to Per to provide some more details on how we have set up the business for success in H2 of this year and beyond. Turning to Slide 10, this is a reminder of our commitment to shareholders to create value. As we outline today and our trading update last month, we are not happy with the financial performance in the first half. The scale of transformation is significant and it is needed for us to deliver a short-term trading turnaround as well as ensuring long-term profitable growth and value creation. Our value creation plan does not change. And with the structure improvements we have made in the business, I'm even more confident about our plan to create shareholder value. Turning to Slide 11 with a reminder of our strategy. This is a complete reset of the business built around a clear and compelling strategy. We know where to invest in our core markets and we know how to invest and how to win customers in these markets. During the first half, we have made strong progress with our strategy, building an almost completely new team; new modus operandi, ways of working; and our clear strategic framework to guide the success and value creation of the business. There is, of course, lots still to do and I will not rest until this business is performing the way it should and can do. But I'm really pleased with the progress we have made here to set us up for profitable growth in H2 2024 and beyond. Turning to Slide 12, and just to reiterate and expand on some of the changes we have been making to transform the business. Our first competitive advantage we are investing behind is operational excellence driven by data and automation. We have hired a world-class team for data, intelligent automation and artificial intelligence, who are already driving a step change in our capabilities. We have become much more sophisticated in our play segmentation, enabling us to provide better products and promotions to our core customers who value them the most, driving retention, loyalty, and also higher player values. These improvements are enabling us to do more with less, delivering £30 million of cost savings while providing better outcomes for our customers. And we are already seeing tangible short-term benefits here to our run rates, with an improvement in, for example, our bonus ratios. Our second competitive advantage being invested into is our winning culture. We rebranded the group as Evoke, a critical step to bring together our business into one company focused on execution of our strategy. We have an almost entirely new executive team, bringing in leading talent and experience from inside the sector and outside, as well as strengthening the wider leadership community. And we have radically restructured operating model, removing layers and broadening spans of controls, getting our people across the business closer to the customer and speeding up decision making. Our third competitive advantage we are investing behind is our leading distinct brands. We have relaunched Mr Green as the most distinctive casino brand in the market and we are repositioning William Hill with successful campaigns now being based around, for example, top prize guarantee in racing and top prizes on [indiscernible] and football, and gradually shifting our marketing focus from pure promotions towards highlighting our product excellence. Our investment in our competitive advantages and value creation is underpinned by our six strategic initiatives. These initiatives are fundamental to creating a leaner, more profitable business with investments in capabilities that are enabling us to win customers and win in our target markets. Put simply, we have taken decisive actions to ensure we hit our plans for the second half, and we are making significant structural improvements in our business to ensure we create a better, more profitable business for the future. Turning to Slide 13 and how our actions and priorities are both delivering short-term trading improvements while at the same time, building significantly enhanced capabilities for the future. We will deliver 5% to 9% revenue growth in H2 2024. We are already seeing the benefits of our short-term changes, which include the benefit of new product launches like the Betbuilder, with further new product launches and UX enhancements coming in the next few weeks. This is enabling us to be much more laser focused with our personalized promotions and more effective with our marketing as we highlight the benefit of our leading products rather than just giving free bets. These capabilities will grow substantially in the long term as we roll out our automated customer lifecycle management model, which has already been well under development and will lead to a step change in retention and monetization as we deliver our strategy to give customers a personalized experience delivered by our clear premium brands. Stronger revenues will be magnified for profitability with our more efficient cost base. The second half of this year will benefit from the full £30 million cost savings plan that we announced at the start of this year, the benefit of reducing losses from our U.S. B2C exit, and lower marketing ratio with our more targeted marketing. Over the long term, there is substantial upside potential for our profitability as we capture the benefits of our strategic initiatives. Evoke is becoming a business with leading scalable technology powered by AI and intelligent automation, with a winning organization operating with pace, decisiveness and urgency to deliver improved profit margins. And finally, deleveraging will enhance our return on equity. As Sean mentioned, while leverage is temporarily elevated in the first half, we see a clear route to rapid deleveraging, which will deliver high shareholder returns. Thank you for your continued support. And we are now ready to take your questions. Thank you very much, Per and Sean. We have our first question on the webcast from Ciaran O' Flynn from Davy. He asks, "Can you provide more detail on the impact of Euro 2024 on current trading?" Sean Wilkins Yeah. Thanks. I'll take that one. It's Sean Wilkins, CFO. On the Euros, we had very strong margin bookie-friendly results. To a certain extent, that suppressed staking, but overall, it was very successful for us. Betbuilder, which we relaunched shortly before the Euros, was extremely successful during the time. We're taking over 20% of staking. And that means that we're well set out for the new football season, as it's launched over the last 10 days or so. And we launched the Premiere League this Friday. Just one point to note on that. The bookie-friendly results were very much in June, so in the first half. In the second half, i.e., in July and the second half of the tournament, I would say that that was fairly neutral to growth in the second half. So, when we talk about being in line with our targets of 5% to 9% for the second half to date, that doesn't really benefit very much at all from the Euros. Unidentified Company Representative Thank you. And the next question comes from Eleni from Sona AM. "Could you clarify what percentage of growth came from the Euros in H1? And what are the key events in H2 that can help you achieve the 5% to 9% growth target?" Sean Wilkins So, let me take the first half. I mean, we haven't disaggregated the growth into Euros and other. It's not something that we are disclosing. I did just say that we got good bookie-friendly results. And obviously, England doing well helped. But yeah, so I think Per is going to take the second half of that question. Per Widerström Yeah, if we look at H2, we are very much looking forward to also come back later on in terms of how we deliver. But if we look at H2 and the revenue initiatives we do have, I would like to distinguish between two dimensions. First one is the short-term turnaround that we are absolutely all over. And that is about making sure we are focused on our core markets. We are all over when it comes to the bonus efficiency, the improved price positioning, as well as how we are upgrading. And I would say when it comes to customer segmentation, much more sophisticated than this company has ever been before. So that, I would say, is, the short-term drivers when it comes to the H2. But when it comes to the more structural improvements that will also have an impact for the H2 revenue impact that will be customer life cycle management, which is a big driver. And that is going to enable us through the introduction in new customer engagement platform, Bloomreach, to introduce further personalization. And on top of that, we are optimizing how the customer journeys in order to, for example, improve deposit UX. A very important part of the structure change as well is what we do on a customer value proposition CVP. We are seeing a step change now when it comes to the consistency. If we take now William Hill here in U.K., we are consistent in our messaging in terms of the proposition, a pricing perspective as well as from a product perspective. And here, we are absolutely focused on the mid and high-value players. And third dimension, when it comes to the structural change we see that will also have an impact in the short term are the product improvements. It has been mentioned before, but very encouraged to see the impact we have from Betbuilder, also the impact we have on when it comes to improve deposit UX. But going forward now for the H2, there are some really exciting launches to come. By looking at the further improvements of the Betbuilder, we're looking at the impact sub to be introduced. I've mentioned the deposit UX. We will continue but absolutely focused on ensuring a fairly seamless experience from a customer journey perspective. From a retail perspective, we are continuing our efforts when it comes to improving experience when it comes to SSBTs. And as has been previously mentioned, starting Q4 this year and into Q1 next year is the retail gaming machines upgrade that is going to have a material impact when it comes to our opportunity here and commitment to close the gap versus competition. I think we've mentioned that before as well. If we look at the current gaming machines that we do have that as a gross per machine a week by £750 where we look at where market is and also where we expect to be about £1,000 per week. So, we are very much looking forward to these launches and also see the revenue uptick being materialized as well. Unidentified Company Representative Our next question comes from Ruchi from Western Asset Management. "Can you please update if you had to have conversations with rating agencies post revision of earnings outlook for this year? It will be useful if you can share any feedback you've received. And then, the second question is, can you also guide on working capital and CapEx development in H2?" Sean Wilkins Yeah, thanks. Let me take that. We've got a very positive ongoing relationship with the ratings agencies. And it would be inappropriate for me to share any of the content of that relationship here. Just looking at cash flow, first half net working capital we saw £23 million improvement in cash, an improvement in net working capital. Guidance for the second half is that, that will be neutral. On CapEx, the first half was £33 million. The full year, we're expecting to see £75 million to £80 million, which was exactly in line with the guidance that I gave earlier in the year. Just let me give you an update on overall on cash flow. In the first half, we saw a cash burn of £37 million, that's ignoring the RCF. In the second half, I'm expecting cash to be neutral, which means that for the full year, I expect that cash burn to be largely what it was in the first half, roughly £40 million out. It is important to remember our liquidity. I think liquidity is at roughly £300 million, so no concerns at all on liquidity. Unidentified Company Representative Great. The next question comes from Richard Stuber from Deutsche Numis. "Could you please elaborate on strategic progress making on the 40% of international online you define as optimized? And what percentage of international revenue do you expect to come from these optimized markets in the next 12 to 24 months? And the second question is, which of your core international markets were the key drivers of international growth? And do you expect these trends to continue?" Per Widerström If I take the first one to the strategic progress, we are absolutely focused on the core markets, but those are the four that have previously communicated. And when it comes to the -- and there we do aim for obviously, podium positions for the local strong scale. The optimized market is, as we say, optimized. And that's a clear focus to drive underlying cash flow, maximizing the underlying cash flow, where we obviously see that where we have opportunities to scale our resources, we will do that, but with a very strict and disciplined approach when it comes to return on investment. So, in terms of the short-term trading turnaround, we are absolutely adamant to be, very disciplined when it comes to the return on investment in those optimized markets. The investment we do behind our competitive advantages when it comes to, for example, our customer life cycle management, much more insights driven automated customized cycle management, the way we do when it come -- the way we're focusing product improvements, that will also benefit the optimized market. So, from a strategic perspective, daily trading is very much now in line with the strategy. When it comes to the capabilities that we're investing in to shorten also mid- and long-term future growth, it will also benefit these optimized markets. So, very encouraged with what I see now when it comes to a new team that we have, managing and optimizing these markets, at the same time, capitalizing on the improvement we see now in terms of capability. And also, where we do see, as I mentioned, opportunities scale up, where we do see some really interesting and encouraging markets, there's nothing to say here that some of those market that should be upgraded to core markets going forward. Sean Wilkins Thanks, Per. Richard, just in terms of the percent that we -- I think the question was what percent of our international revenue comes from our core markets. That's not something which we give out specific guidance on. Like, it would be a sensible sort of rough figure if you think about this over 50% comes from core. And obviously, core is growing significantly faster than optimized. Unidentified Company Representative The next question is from Ed Young from Morgan Stanley. He asks, "Could you give some color on current trading? Should we understand that you are already in the range for H2 or that's incremental improvement from Q2 put you in place to deliver it?" Sean Wilkins So, I think what we said in the presentation was that we've seen trading to date consistent with 5% to 9%. Just to be clear, that's not us trying to be smart with our words. We have seen in the first part of half two growth of between 5% to 9%. So, it's entirely consistent, it is within that range. Unidentified Company Representative Great. And then, our next question is from Nicholas from CIFC. "You mentioned revenue growth in Q3 up to the 10th of August is in line with your 5% to 9% target. How is profitability during this period looking compared to 21% margin guidance?" Sean Wilkins So that's not something that we would disclose at this point, but it does give me an opportunity just to go back to Slide 7. Slide 7 talks about our bridge from half one to half two. And I think one important thing to bring out on that is that four out of five of those blocks are things which are entirely under our control or that have been delivered already. So, if you look at marketing phasing, that is the marketing phasing that we plan. And it is the cost that I expect in the second half. On the OpEx phasing, they are cost savings that have been made already and will flow through in the second half. Look at reduced U.S. losses. We've taken the action on reduced U.S. losses. And if you look at the cost initiatives, there are things that we will be delivering in the second half. The one that has a wider range around it is the revenue initiatives, which -- and I think it would be fair to say the thing that we have very good line of sight to is what -- which of the things that Per mentioned earlier are going to land. The more speculative question is what effect and impact are they going to have once they land. So, good visibility of that bridge between half one and half two is the point I wanted just to make. Unidentified Company Representative We have another question from James Wheatcroft from Jefferies. He asks, "Please can you give us an update on 888 Africa?" Per Widerström So, thanks for that question. So, let me take that one. On 888 Africa, I mean it's a fantastic story today. We see the business going from strength to strength. The first half revenues, is up nearly 3 times. And we do continue to see really strong leading cases when it comes to the future growth. So here, I and my team are absolutely confident that this is going to be a very strong value generator for Evoke going forward. And I do look forward to expand on this further in our coming, upcoming sessions. Unidentified Company Representative Thank you. There are no further questions from the webcast. So, I'd like to hand back to Per for any closing remarks. Per Widerström Thank you so much for that. So first and foremost, I'd like to thank everyone for joining in the call. And as we have outlined and presented today, we are undertaking a total transformation, a total reset of the business. And while the first half financial results are not where we wanted them to be, I've been really pleased with the improvements we are seeing now, both in the short term and building up for the long term when it comes to overall strength of the business. So, we have started Q3 well with 5% to 9% growth, and I can't wait to tell you more about this quarter back in October. So, I would like to thank you again for your ongoing support. And we are always available to answer any further questions, but let's be absolutely clear that we are 110% focused now to make sure that this turnaround is indeed going to be the success we expect it to be in order for us to deliver, once again, the value creation plan and ultimately, shareholder value. So, thank you so much to everyone joining in the call today.

QuoteMedia, Inc. (QMCI) Q2 2024 Earnings Call Transcript

Brendan Hopkins - IR Dave Shworan - Director, President and CEO Keith Randall - President, CEO and CFO Good day, everyone and welcome to this QuoteMedia Second Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. But later you will have the opportunity to ask questions, during the question-and-answer session. [Operator Instructions] Please note today's session is being recorded and I'll be standing by should you need any assistance. It is now my pleasure to turn - the day's program over rather to Mr. Brendan Hopkins. Brendan Hopkins Thanks, Jim. And thank you all for joining us. I have a brief Safe Harbor and we'll get started. Except for historical information contained herein, the statements in this conference call are forward-looking statements that are made pursuant to the Safe Harbor provisions in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. With that said, I would like to turn the call over to, Dave Shworan, CEO of QuoteMedia. Dave Shworan Thanks Brendan. Welcome everybody and thank you for joining us. We're happy to go over our 2024, Q2 results. As you've probably seen in our filings we achieved just under $4.7 million in revenue for the quarter, plus an increase of $341,000 of deferred revenue. A significant portion of the deferred revenue increase, is the result of a lot of setup, development and customization work. We completed for several of our new as well as larger clients. Generally this means that we've been paid by the clients, and perform the related work to get the client ready to go live. But we have to recognize that revenue spread out over the term of the service contract, which could be as long as three, four or five years. So as I plan for the future and analyze how we're doing, I don't just look at the revenue lines, I look at everything. I look at our revenue, plus I look at the amount we build and collected from our clients in the quarter, which is setup in development work that we've done, but can't recognize as revenue. So you can see without having to defer our revenue would have been higher. In addition as I mentioned before, we've been deep in development, and we are releasing several new products as well as additional proprietary data sets later this year. We have lots of new clients in the pipeline, and we're getting closer to - getting them signed, and we're hoping to see some of the larger new prospects close in the coming months. In summary, everything is going well, and we do feel like we're - we'll have a strong finish to the year, and believe that we'll have a very exciting 2025. I'll now pass the mic to Keith Randall, so he can take us through the numbers for the quarter, and then we can answer any questions. I'll start with the income statement note that all comparisons are on a year-over-year basis unless otherwise noted. Overall we had a 1% decrease in total revenue for the quarter. We had a few clients, who reduced their spending with QuoteMedia offsetting the revenue from new clients added during the quarter. Breaking down our revenue. Interactive content revenue, which is web display content, increased 3% from the comparative quarter. An increase in the average revenue per customer, was offset by a decrease in the number of customers. Total Quotestream revenue decreased 4% with corporate Quotestream revenue decreasing 5% an individual Quotestream revenue decreasing 2%. Both resulting from slight decreases in the number of customers, and average revenue per customer. Our cost of revenue consists of fixed and variable stock exchange fees and other data costs and Amortization of capitalized development costs. Our cost of revenue increased 1% for the quarter. This was mainly due to increased amortization expense, associated with capitalized costs related to improve infrastructure, new product development, data collection and the expense of our global market coverage. Our gross margin percentage was 48% a 3% decrease which was primarily due to the increase in cost of revenue from the comparative quarter. Our total operating expense increased 10% for the quarter. Most of the increase relates to additional personnel hired, to achieve our expansion objectives including improvements, made to our infrastructure security and business continuity management. Sales and marketing expenses increased 3%, due to increased personnel cost offset by decrease in stock-based compensation expense. We incurred $60,000 in stock-based compensation expense in the comparative quarter, related to the fair value adjustment to our preferred stock warrant liability. G&A expenses increased 12%, primarily due to the increase in bad debt expense, related to increasing our allowance for bad debts by $125,000 during the quarter. This was offset by a decrease in professional fees, as we incurred additional professional fees in the comparative quarter, resulting from the change of principal accounts in January 2023. Software development expenses increased 15%, primarily due to additional - development personnel hired since the comparative quarter. We also capitalized a lower percentage of software developer salaries versus comparative quarter, resulting in increased development expenses. Our net loss for the quarter was $251,000, compared to net income of $74,000 in the comparative quarter. The decrease in net income was mainly due to increased personnel cost, and the $125,000 increased to our bad debt allowance during the quarter. We expect our bottom line to improve for the remainder of the year, as pending sales deals close, and our revenue growth improves. Our adjusted EBITDA was $493,000, compared to $808,000 in the comparative quarter, a decrease of $314,000. Please refer to the reconciliation included in our press release, for the calculation of adjusted EBITDA. Turning now to our balance sheet and cash flow statement. Our cash total $232,000 at quarter end, which was a $109,000 decrease from our year-end cash balance of $342,000. Our deferred revenue totaled 1.21 sorry $2.1 million at quarter end, which was a $300,000 increase from the $1.8 million at year-end. The future costs associated with realizing net revenue is minimal, as the majority of our deferred revenue relates to setup and development work already completed. Those setup and development fees have been deferred, and will be recognized in future quarters, over the service contract to which they relate. Our year-to-date net cash flow from operations was $1.6 million while net cash used in investing activities was $1.7 million, primarily due to spending on infrastructure and product development. Thank you, Keith. We're now happy to open up the call for questions. And if you have any future questions after the call, please feel free to reach out to Brendan Hopkins. And his email address is [email protected]. Gentlemen, thank you. [Operator Instructions] We'll hear first from Ankur Sagar. Please go ahead. Your line is open. Unidentified Analyst Hi. Good afternoon Dave and Keith. Thank you for taking my questions. First question really regarding the revenue, if I look at last year, I mean it was a modest growth year. I mean you had quarters with 10% revenue growth. Since the beginning of this fiscal year Q1, Q2, has definitely been quite weak in terms of the revenue performance. I mean you have lost a couple of clients and in the prepared remarks today, and then some clients have decreased their spending. And I think the new order growth has been low. Is there anything you can comment on, is it just due to the competitive pressures? I mean are you seeing increasing competition, or why is it taking longer to close new deals, or even that you're losing some are they are decreasing the spend of the client? Dave Shworan Yes, thanks for the question. I don't think, obviously business goes in surges ups and downs and things like that. But the reality is, like looking at our prospects looking at our pipeline looking at - all the clients that we're talking to now are small medium and large and going through kind of projections, and looking at what we're hoping to close in the next three months, the next six months, the next nine months that type of thing. We do all of that. Those numbers and that spreadsheet is actually unbelievable. So, I'm really happy with what we're doing. I'm really happy with all the companies that are coming to us. It's just takes time, the bigger ones obviously take time. We're doing some proposals that are really, really great. It's just that we've had yes, I mean the first quarter was rough, because we lost some clients at the very end of the year. And that continues obviously those are recurring clients that are no longer there, or the decrease spend is no longer there. And so, you're fighting through that as the quarters continue. But at the same time, the amount that we're doing, the amount of new data sets, new products, catering to these - clients, catering to our very large clients that are coming to us for much more stuff. Budgets are coming out, they want to spend a lot more with us every year. And so, as their budgets come out they're assigning big blocks of money for us. It's really, really good. So, I guess it's just - it's a picture that people don't see the future picture I guess, which is unfortunate and it's very hard for us to do as a public company. We can't go down that path, and talk too much about the future. And so, it's just - I guess internally we look at all of this, and we go through, everything with the sales teams and it's very good, like things are very, very good. So I just wanted to say that. Unidentified Analyst And so - it seems to me and I think - you said the same thing last call as well. You seem pretty confident for the pipeline when you see it. Why is it taking longer to close this pipeline? And if you look at the rest of '24, what is your confidence level in being able to close some or a good chunk of it. Are these just very large deals. And anything you can share, about that that'll be great. I would assume being already in Q3 you probably have some level of confidence there as to what you can probably close in the next couple of quarters or so? Dave Shworan Yes, exactly. And that's why I think we're going to have a strong end of year. I think that 2025 is going to be very strong. It's a matter of are these closing sooner. Is it going to take longer? How much more discussions have to go on. How much more analysis evaluation? Some of these projects are like one year of implementation, one year of setup, one year of development customization in order to then go live for a five-year contract, things like that, right? So it takes a long time to do all of this, but we're taking out incumbents. We're replacing sometimes, several vendors with a firm to take over everything, whether it's the actual workload, the development work, all the data sets the different, all the different areas that there may be licensing from all kinds of other third-parties that QuoteMedia is replacing. We're incredibly strong now - as far as doing that. We can we can substitute out, lots and lots of vendors at certain firms and take over everything, which is our power right now. And all of this is proprietary data now to QuoteMedia. We own it. We are collecting all of this ourselves. We're very strong in all of the data areas too, right? Unidentified Analyst So are these deals like six-figure, seven-figure deals, and are these in recurring revenue in nature. And again, what's your confidence level in terms of it being able to close some, before...? Dave Shworan Yes, there's everything. There's every level of deal, right? There's a I mean, obviously the smaller ones are ongoing and we were always working on those, but the bigger focus is the medium one the larger ones those are ones I'm more focused on. Trying to get those over the finish line, trying to find out if there anything more that needs to be done. Do we need to get in a room one more time, and discuss everything? How do we push this faster? Sometimes it's timelines for the clients, sometimes it's their timing of their budgets. There's a lot of parts and pieces to it all, it's when do they terminate other contracts, I guess that - there's nobody wants things closed more than I do, right. Like I do everything in my power, to make it happen, but it's - sometimes you just have to wait. It's like, no, you can't, they're not going to close this month. They're still this and this to go over, and this and this to review. But yes, there's every level - every size, every size that you can imagine, is in the pipeline. Unidentified Analyst One last one regarding the profitability and cash flow. So as you have mentioned, I mean being a data company QuoteMedia is profitable. It does generate cash. You mentioned about having this multi-year cycle, where you chose to really heavily invest into your products, if I just look back at the audited financials in the last five years since 2019, QuoteMedia has generated about $12 million of cash, which a good chunk of that has went into software development. And the story is pretty much the same, for the - this six months of '24. And that bet obviously allows you to control the destiny, and take and not depend on other vendors. Obviously that has taken time to get paid for that - and have that new revenue ramp that you're expecting. Does it make sense for now to dial back on that? And at least let the cash collect on the balance sheet rather than just keep investing into that software development efforts that you're doing? Dave Shworan Yes, I mean really we're not. I don't think that there's any more like massive projects that we're looking at. There's a handful of smaller projects that we want to do - and we budget for them, and we plan for them. And there's a few other data sets for example that, I'd like to make sure that we finalize and we go down certain paths. We're doing a lot of internal data now. So it's not additional costs necessarily, except for man hours and manpower, but doing all of our proprietary data behind the scenes. Our analytics, all of our trading idea, all of the crunching of all the different numbers to - flag different things for our clients and for improved trading activity, and things like that. So that's really where a lot of the energy is going now. We've kind of finished all the bigger projects that we were working on, over the last few years. I think probably the last - I would say four years has been very, very big on new developments of new products, and new data sets and getting rid of third-parties, and just collecting everything ourselves. So yes, it's been four years of hard, hard work, but I don't think it's like - it's not like it's going to continue like that where we're going to keep spending another $5 million or whatever on the next. Unidentified Analyst If I - just to one addition to that. I mean, if I just look at the six months financial maybe Keith can chime in to. Just - I mean the company did generate about $1.6 million, $1.7 million of cash, and that was capitalizing in a softer development cost. And I'm referring to that I mean that software development, can that not be dialed back? Is it just the maintenance of your existing data sets? Is that what it is? We can't capitalize maintenance, right. So that maintenance expenses again and you'll know in from my comments that we're capitalizing smaller percentage of, or lately we've been capitalizing a smaller percentage of developer salaries, which increases the software development expense when you capitalize less, right. So - I don't see - we were hiring at a pretty rapid rate over the last four years, I see our hiring leveling out. And so yes, I do think we'll probably dial back the development over the next... Unidentified Analyst Okay. So basically we're on that same expectation, if the revenue ramps from here, would you signing any deals from these pipeline that you're so optimistic about, that just drops to the bottom line and grows the cash and net income...? Keith Randall As Dave said, we're - always going to be a - new development to be done or enhancements to existing products. Really, that's a lot of what we're doing, is to develop what we're capitalizing is almost most of it is enhancements to existing products as well remember. Dave Shworan Yes. I just - by quoting on my comments on this, I mean I say it in a way it's - if I just look back the company has invested this much cash into its products. Obviously, I don't think you guys are very happy with where the public market valuation sits right now. With just you guys putting $12 million into the business. The valuation of this company is at $18 million, the revenue is not growing so does the net income. So I hope, this is probably the trough of it and things change from here for the best. And I think that's what you expect as well. Unidentified Analyst Yes, no exactly. All right, great. Thank you for taking my questions. We'll move on to Michael Kopinski. Please go ahead your line is open sir. Unidentified Analyst Thank you. Just a couple of follow-up questions, related to the comments there in terms of the revenues. How much is related to competitive pricing, because I know that there's always that element there so versus lower volumes that we've seen from existing clients. I know we've talked about volumes in the past, and was wondering if it's a macroeconomic situation that you could talk a little bit about. And of course versus the loss of clients and was just wondering if you can kind of give us thought on what that annualized revenue from the loss of clients might be if you can just give us a little color there? Dave Shworan Yes and Keith. I don't really know numbers. I mean, I just kind of know - historical we're typically running it around a churn rate or a loss rate in the year of about 3% I think. So, we've got a 97% retention rate. I think that's been consistent all the way along. I know at the beginning of this year we had that kind of happened. We're not really predicting a lot of loss of more clients, but it's just - at the end of the year that happened. But Keith do you want to address some of that? Keith Randall Well, and also remember, too, that some of the decreases are clients that are changing their data. Maybe they want to save money on data, so they're switching to less expensive data. And some of that is like pass-through fees. So, some of the decrease in revenue doesn't really impact our bottom line that much. If you're talking about clients who just change the, say exchange data, for example. So, keep that in mind, too, because we have had clients that are looking for - their invoices have gone down, but a lot of that, in many cases, is just exchange fees. Unidentified Analyst And what was the annualized revenue from the clients that you lost in the fourth quarter of 2023? Keith Randall Yes, I don't have that figure. I mean, we can talk after, but I don't have that figure at my fingertips right now. Okay. And then, in terms of you indicated that you're expecting a stronger second half, or a strong end of the year. I was wondering if you could just put some color around that. In particular, are you looking for 5% growth? Are you looking for 10% growth? And if you could just give us - some sense of what you mean by strong? Keith Randall Yes, I think if you're talking revenue growth, I think the third quarter is going to be relatively flat. But the fourth quarter, I think we're probably looking at about a 5% increase over the fourth quarter of last year. Unidentified Analyst Got it. And then, has the conversion time from pipeline of business to actual revenue - has that tail kind of gotten longer? Or can you kind of give us a sense of what's happening in terms of the conversion? Yes, I mean, it all depends on the client. So, when we go through all the reviews, I mean, there's, I think, several hundred clients on the go at the same time all the time. And you're looking at when they will close, when do they terminate their other agreements, when do we start our development work, all of these things. So, it's hard to say. I mean, there's always short tail and long tail and every kind in there. And then some of them are - they're massive. And you're like, okay, is that going to close by the end of the year? Or is it going to be probably not? It's just too big to close by the end of the year. So, it's probably going to close in 2025. But, it's really hard to answer questions like that because every client is different and everything that we're looking at is different. And the bigger they are, the more complex they are, the more that you're taking over, four or five vendors. You're having to integrate into their trading system, their order management system, so that they can, release all of our products to their clients that have integrated trading and turn off all of their other products. So, there's, you can see that that can take time. That can take even up to a year of development work to do all of that. Now, you do get paid for it and you do have fees, monthly fees for all of that. But it really, then the big money kicks in once they go live, right? But you still make quite a bit on setup and development. Keith Randall Unfortunately, we can't start recognizing that revenue until their service starts. So, that's what we've encountered. And even in this quarter, we've had, we've done development work during this quarter, but we haven't started recognizing any of that revenue because their service hasn't started. Unidentified Analyst You may have addressed this on a prior call, but why did you lose the clients? What did they say in terms of why did they leave your service in the fourth quarter of last year? Dave Shworan I think I addressed that the last quarter. But, so, we had one company that was acquired and was part of an international firm that had all other data sets. And then we had another one that discontinued their business completely. I can't remember. And then there was a couple that decreased their spend by switching to low-cost exchange data. And that is a bit of a trend. So, that's going to be something that we're going to be fighting a bit on the top line. It doesn't affect our bottom line, but it affects our top line because it is a trend where companies are trying to save money. And the exchanges are battling each other by coming out with lower-cost exchange data to compete against each other. And so, when companies try to save money, that's one thing they look at, is there cheaper data we can use to see real-time quotes instead of our current data that we're getting from you? And the answer is yes. There is another data set that's come out from another exchange that's a little less costly. Maybe you can save 50% of your spend if you switch to that. And so, that's a bit of a trend in the industry. And it has been for a while. But, as companies are always watching their dollars, that's something that happens. Unidentified Analyst And, Dave, I know that you spent a lot of money over the last several years to increase your feature sets and improve product suites and so forth. Have you been disappointed in terms of the revenue impact from that spend, in particular because we were anticipating that we would see kind of heightened revenue, enhanced revenue up to the double digits for at one point up as much as 20% but obviously that didn't happen. I was just wondering in terms as the spend that you are anticipating now and the feature sets that you plan to roll out in the second half of this year. What the expectations would be? Would there be a bigger impact from those feature sets than what we've seen so far or what can you just give us a sense of the market opportunity for some of the new features and products that you're planning? Dave Shworan Yes. I guess to be honest I am not as happy as I could be as far as switching to our own data, and then taking that to market and hoping that the world would just switch everything to QuoteMedia and go away from competitors or multi-billion dollar competitors. But more and more trust and faith is happening. It's one of those things where you have to - it's almost like your startup in those areas, right where the trust has to be there. We have had firms now switch to us, which is great. We had one actually just closed last month that switched away from one of our large competitors to us. We've got others in discussions now that are large. And so, I wish it would happen faster, of course but there was more to it than just switching to have that revenue. It was also switching to have the power to have the less restrictions, less building of our competitors at the same time as building ourselves. The risks - there was a lot of risks where when you're using third parties, you could have third parties, double your fees. We have one that actually tried to do that. We have, and then terminations, I mean, there's all kinds of things, competition. So there's many reasons why we did what we did and we went through that spend. I mean, if you want to become one of the largest providers, you need to take it all on. And so that's what we did. And, I think that it's going to go really well. It looks like it's going really well. We've got lots and lots of new prospects. Our prospect pipeline has grown tremendously. So that shows me we're going in the right direction. Unidentified Analyst Can you tell me what the new features that you're planning for the second half of this year, the introductions, and give us a sense of what's going to be offered the second half? Dave Shworan Yes, there's, I mean, there's quite a few different products that we're coming out with. We're coming out with paper trading, which we already have clients that are lined up for that. We've got our new technical charting products that are coming out. And hopefully you're going to start to see some of those released onto some of the major portals and be able to see that in the limelight. That's been several years of development. We've got our integrated Quotestream web solution, which is now being used for firms that want to integrate their own software into it. So it's now a platform that they don't have to maintain their own product - main product. We maintain the main product and they maintain sub-products inside it. So that's, it's kind of hard to explain on a quick call, but that's being very active. We've got five firms looking to do all of that. Yes, and then there's data, lots and lots of data, right? Proprietary data and analytics and different things that, we've now that we've owned our own everything, we can now process data and create, use AI to process lots and lots of additional data that clients have been asking for, which was a restriction when we use third parties. You're not allowed to do that. So, yes, so now we're doing all of that. So that's a big thing. But again, that doesn't incur a lot of cost because it's more man hours and people. So, that's good. But yes, there's lots happening. I mean, lots. And we have no further signals from our audience. Mr. Shworan, I'll turn it back to you for any additional or closing remarks, sir. Dave Shworan Okay, well, thank you so much. And thanks everybody for being on the call with us. Thanks for the questions. And yes, we look forward to succeeding, growing, doing great things. And if you have any further questions, please feel free to reach out to Brendan Hopkins, he can kind of direct everybody. [email protected] is his email address. And we look forward to speaking with you again. Thanks so much. Have a great day. This does conclude today's teleconference and we thank you all for your participation. You may now disconnect your lines. Have a great day.

Earnings call: Bridgeline Digital focuses on AI to drive growth in Q3 2024 By Investing.com

Bridgeline Digital (BLIN), a provider of AI-driven site search technologies, reported its financial results for the third quarter of 2024, emphasizing advancements in their HawkSearch product and strategic partnerships. The company announced $3.9 million in total revenue, with subscription license revenue making up 77% of this figure. Despite a net loss of $300,000 for the quarter, Bridgeline highlighted a gross profit margin of 69% and an improved adjusted EBITDA of $3,000. They also reported a decrease in operating expenses and a noncash gain from the change in fair value of warrants. Bridgeline's management remains optimistic about future growth and the company's strategic direction. Bridgeline Digital's commitment to AI-driven site search through HawkSearch and strategic partnerships with companies like Optimizely and BigCommerce indicates a strong focus on product innovation and market expansion. The company's management team expressed confidence in the growth trajectory and the ability to maintain high gross margins, particularly in subscription services. While operating at a loss, the company has managed to decrease operating expenses and improve its adjusted EBITDA, suggesting a potential for improved financial health in the future. Bridgeline Digital's approach to optimizing customer acquisition costs through partnerships and a focus on premium services may set the stage for a stronger performance in the upcoming quarters. Bridgeline Digital's (BLIN) third-quarter results reflect a company in the midst of a strategic push, with a focus on subscription licenses and operational efficiency. To further understand the company's financial health and market position, let's consider some key InvestingPro Data and InvestingPro Tips. InvestingPro Data highlights that Bridgeline Digital has a market capitalization of $8.85 million, which gives investors a sense of the company's size in the competitive tech landscape. The company's P/E ratio stands at -0.9, indicating that investors are currently not expecting earnings growth in the near term. Additionally, the gross profit margin of 67.54% for the last twelve months as of Q2 2024 aligns closely with the 69% reported for Q3 2024, showcasing consistency in the company's ability to manage cost of goods sold. InvestingPro Tips provide strategic insights, noting that Bridgeline Digital holds more cash than debt on its balance sheet, which could offer a buffer against financial uncertainties. However, it's also important to recognize that the stock price has been quite volatile, and analysts do not anticipate the company to be profitable this year. This is further supported by the fact that the company is not profitable over the last twelve months and that short-term obligations exceed liquid assets, which could pose liquidity challenges. For investors seeking a deeper dive into Bridgeline Digital's financials and market performance, there are additional InvestingPro Tips available at https://www.investing.com/pro/BLIN. These tips can help investors make more informed decisions by providing a comprehensive analysis of the company's financial health and stock performance. Operator: Good day and thank you for standing by. Welcome to the Bridgeline Digital Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Windhausen, Chief Financial Officer. Please go ahead. Thomas Windhausen: Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2024 third quarter conference call. On the call with us this afternoon is Ari Kahn, Bridgeline's President and CEO, who will begin the call with a discussion of our business highlights. I will then update you on our financial results for the quarter. And we will conclude by taking questions. Before we begin, I'd like to remind listeners that during this conference call, comments that we make regarding Bridgeline that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we expressly disclaim and assume no obligation to inform you if they do. The results we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may have impact on our business, please review the reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission. Also please note, on the call this afternoon we will discuss some non-GAAP financial measures when commenting on the company's financial performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release, and you can obtain a copy of that on our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari? Ari Kahn: Thank you, Tom. Good afternoon, everyone. Recent advances in AI, especially large language models and Gen AI are revolutionizing e-commerce and reshaping online shopper expectations. As a result, nearly every e-commerce site will upgrade their site search to be both intelligent and conversational. This shift is disrupting the $1 billion site search market, forcing everyone to reconsider their search provider. HawkSearch is uniquely positioned to displace competitors. Our team has a deep history in AI and is approaching the site search market in a more meaningful way than anyone else. This gives us an opportunity to take a disproportionate share of the market during this turbulent time. We are the only AI company offering merchandising AI agents that work directly with our customers' marketing team to continuously tune their site search's results. This capability, known as tailored AI, is already positioning us as a leader in the market. Tailored AI has helped double the average HawkSearch sale size, win new customers every week, secure top-tier partnership and gain recognition from leading analysts like Gartner (NYSE:IT). We have truly taken a different approach to AI by providing collaborative agents rather than a black-box, one-size-fits-all solution. Our competition only allows customers to enable AI and assumes they should then be hands off as AI powers their site regardless of their corporate goals. With tailored AI, we deliver AI agents that collaborate with our customers' marketing teams to optimize their sites. Our customers are empowered to continually tune and train the AI agents based on their ever-changing goals, inventory and market demands. We're moving fast in AI innovation. This year, we launched concept search. We launched image search, visual search, conversation search, and now Smart Response. No other platform has moved this quickly to seize the tailored AI opportunity in site search. As we continue to innovate, we expect these advancements to accelerate our growth, solidify our leadership in a market where search now drives 60% of our subscription revenue. This quarter we sold 23 licenses with $420,000 in ARR, $1.4 million in TCV. That brings us to 70 licenses totaling $1.7 million in ARR and $5.1 million in total contract value this fiscal year. HawkSearch was the lion's share of these sales. Importantly, our investments in partner connectors accelerate sales by allowing customers to launch HawkSearch with the click of a button. We're launching multiple customers every single week. Our tailored AI approach also accelerates sales because our customers know that they can continually refine search results based on their merchandising goals. And this is different than competitors who simply have an AI button that puts the site on autopilot, with no ability for ongoing tuning and, therefore, a significant Q&A review before the launch. With each launch, we have more references and further recognition as leaders in the site search sector. Analysts continue to recognize HawkSearch for its advancements in AI, and this is driving demand and average sales price. Gartner recognized HawkSearch in its Magic Quadrant for Search and Product Discovery (NASDAQ:WBD), highlighting HawkSearch's strength in both Artificial Intelligence and the B2B market. Info-Tech Research Group awarded HawkSearch as a Champion in Enterprise Search and recognized HawkSearch as a Top-Rated software within the category. FeaturedCustomers listed HawkSearch as a Top Performer in the Summer 2024 Customer Success Report for Enterprise Search Software. This quarter, HawkSearch launched the GenAI-powered Athena release, update features with Smart Response and conversational dialogue based on search queries, where prompts for follow-up questions and suggestions to imitate a personalized in-person conversation with a sales assistant are available. Two important platform partners that we expect to continue to generate new sales for HawkSearch are Optimizely and BigCommerce. BigCommerce is promoting HawkSearch ahead of all other search providers on the first page of its app store, providing tens of thousands of BigCommerce customers the ability to upgrade to HawkSearch's AI technology. HawkSearch offers a one-click install for Optimizely, and is recognized by Optimizely as a top paid app in their app store on the very first page. HawkSearch is now uniquely positioned to improve site search for more than 1,000 Optimizely configured commerce customers, with several already purchasing license. We partnered with a system integrator and Optimizely expert, Xngage, for our Optimizely connector, which leads to even more sales. HawkSearch AI will be showcased at Opticon 2024 in San Antonio, Texas this November with Optimizely. At the Applied AI Conference in Chicago this past June, Moblico presented HawkSearch as a key AI-powered search platform for mobile devices. This is a new market in which HawkSearch's concept search is particularly well suited for success. And here are a few of the wins that we had this quarter. Colonial Electric Supply, a large electrical distributor, chose Bridgeline's HawkSearch to power product discovery for its Optimizely platform e-commerce sites. Colonial selected HawkSearch for its AI search capabilities and reputation in the electrical distributor sector. Grizzly Industrial, a leading industrial supplier, selected HawkSearch to power search on its e-commerce site. HawkSearch will enhance Grizzly Industry's e-commerce product discovery by offering precise search tailored to the needs of the machinery industry, including advanced part number search for both full and partial numbers, unit of measurement conversion for dimensional products and merchandising tools to run product-specific campaigns. Sailrite, a large crafts retailer, selected HawkSearch to improve its product discovery for both B2C and B2B sites. HawkSearch launched on two of Sailrite's e-commerce sites on the BigCommerce multi-storefront platform. Our partnership with Sailrite reflects our expertise in supporting retail and BigCommerce multi-storefront. Schaedler Yesco, an electrical distributor with over 29 locations and 1,000 brands, implemented HawkSearch on its Optimizely powered e-commerce site using the Xngage connector for HawkSearch. And Voltus GmbH, a leading German electrical distributor, selected Bridgeline to power site search for its e-commerce site. Voltus aims to increase online revenue by using Bridgeline's AI-powered site search for its online catalog with more than 80,000 products. All-in-all, we had 23 license sales this quarter, 70 this year-to-date and our average license sale is nearly double the MRR of last year. This increase in volume and size is largely due to our advances in AI. So at this time, I'll turn the call back over to our Chief Financial Officer, Tom Windhausen. Go ahead, Tom. Thomas Windhausen: Thanks, Ari. I'll provide an update on our financial results for the third quarter of fiscal 2024 which ended June 30th, 2024. Total revenue for the quarter ended June 30th, 2024 was $3.9 million, compared to $3.9 million in the prior year period. Now going into each component of revenue. Our subscription license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue and perpetual license revenue, for the quarter ended June 30th, 2024, was $3 million, compared to $3.2 million in the prior year period. As a percentage of total revenue, subscription and license revenue was 77% of total revenue for the quarter ended June 30th, '24. Services revenue was $923,000 for the quarter ended June 30th, 2024, an increase from $742,000 in the prior year third quarter. As a percentage of total revenue, services revenue accounted for 23% of total revenue for the quarter ended June 30th, '24. Cost of revenue was $1.2 million for the quarter ended June 30th, '24, a decrease from $1.3 million in the prior year period. And as a result, gross profit was $2.7 million for the quarter ended June 30th, '24, as compared to $2.6 million in the prior year period. Our overall gross profit margin was 69% for the quarter ended June 30th, '24, compared to 68% in the prior year period, with subscription license gross margins at 72% for the quarter ended June 30th, '24 compared to 73% in the prior year period, and service margins of 58% for the quarter ended June 30th, '24 compared to 44% in the same period in 2023. Our operating expenses of $3.1 million in the quarter ended June '24 were lower compared to $3.3 million in the prior year period. Moving down to below operating expenses. The change in fair value of our liability classified warrants resulted in a noncash gain of $88,000 this quarter compared to a noncash loss of $107,000 in the prior year period. And moving to bottom line, GAAP net income loss. Our net loss was $300,000 for the quarter ended June 30th, '24 compared to a net loss of $800,000 in the prior year period. Moving to EBITDA. Our adjusted EBITDA for the quarter ended June '24 was $3,000, compared to a negative $163,000 in the prior year comparable period. Now moving to our balance sheet. On June 30th, 2024, we had $1.2 million of cash and $1.5 million of accounts receivable. Our total debt outstanding as of June 30th, 2024 was under EUR500,000 or about US$524,000 with a weighted average interest rate of about 4.6%, with principal payments due through 2028. We have no other debt or remaining earn-outs from any other provisions or from any other previous acquisitions. And at June 30th, '24, our total assets were $16 million and total liabilities were $5.6 million. In the quarter, cash decreased about $100,000, of which $19,000 was used in investing activities and $84,000 was used in financing activities. Our flat operating cash for the quarter was consistent with our EBITDA of $3,000 for the quarter ended June 2024. Finally, as an update to our cap table. As of June 2024, our cap table included 10.4 million shares outstanding, 39,000 shares from Series C to preferred on an as-converted basis, 1.7 million of warrants and 2.1 million options. Of these warrants, nearly 900,000 with an exercise price of $4 will expire in September 2024. After that, we will have about 800,000 warrants, primarily 180,000 warrants with a $2.85 exercise price expiring in May 2026 and 592,000 warrants with a $2.51 exercise price which expire in November 2026. Bridgeline looks forward to continued growth and success in the remaining of 2024 and beyond as we continue to focus on driving growth, product innovation, customer success and shareholder value. Thank you for joining us on the call today. And at this time, we'd like to open the call to questions-and-answers. Moderator? Operator: Thank you. [Operator Instructions] Thomas Windhausen: We have a couple of questions that were previously submitted. So while people go in the Q&A roster, we'll handle those. All right, the first one here. What are our opportunities to expand within our existing customer base? Ari Kahn: Okay. Great. HawkSearch is the primary expansion opportunity. And we have more than 600 HawkSearch customers. Every single one of those customers just like every single website owner on the planet, needs to embrace what's happening with AI and upgrade their site search to include AI capabilities and conversational capabilities. So we see opportunities. We've already upgraded several customers within Bridgeline for Smart Search, but we're going to have hundreds more. And in general, our pricing increases by about 35% when somebody upgrades to site search within Bridgeline. And nearly 60% of our subscription revenue is search revenue right now. So that's a significant increase for us. However, that increase really pales in comparison to the broader market opportunity. This entire market is undergoing a really disruptive shift where everybody needs to evaluate what they're doing in the search area and how customers' expectations are quickly evolving to interact with websites in a more natural way, in a multimodal, meaning images and cameras driving search, and in a consultative way, meaning that they expect websites to come back with intelligent questions and to have a dialogue to better refine what products will fit their goals. And these are all opportunities for HawkSearch to grow across a $1 billion market. Thomas Windhausen: Great. Our next submitted question, how are our relationships with companies such as BigCommerce, Salesforce (NYSE:CRM) and Optimizely helping expand our customer base? And what does our new customer pipeline look like? Ari Kahn: Okay. Great. Every e-commerce site has a content management and commerce platform as its foundation. And what we are doing is making it so that HawkSearch is available point-and-click out of the box on each of these platforms. That doesn't mean that you won't do any work thereafter. But it means that you can quickly try Hawk out, launch it in its vanilla form, and tune it thereafter. And this is important because it's actually different than the approach that other companies have taken, at least in the AI part of site search, where they are thinking of AI as sort of this omnipotent capability that you just enable and it drives everything from that point forward. But we're partnering with Salesforce and with Optimizely and BigCommerce and Sitefinity and other commerce platforms so that you can quickly find us in their app stores, quickly and painlessly launch HawkSearch. And then from that point forward, tune HawkSearch to have more refined results based on your evolving business needs. So they're going to be -- they're going to continue to drive a large part of our business for us. And already this has resulted in substantial improvements to our own sales pipeline. We have a pipeline now that is nearly triple the size this time last year. We've got a conversion rate that is 1.5 times what it was last year and an average sales price that is nearly double what we saw last year. And all of this bodes for HawkSearch really becoming the dominant revenue factor for Bridgeline. Thomas Windhausen: Great. Next question submitted. What types of doors have opened up after HawkSearch was named a top-performing enterprise search software provider? I think that's referring to the Summer 2024 Customer Success Report on Enterprise Search for FeaturedCustomers. Ari Kahn: Okay. Great. Well, I'm happy to say that we're getting leads directly from analysts and directly related to these awards and reports. Without naming names, I'll say that one of the largest hardware suppliers came directly from this report, and we're in a sales cycle for them right now. And that would be one of the largest customers Bridgeline has won to date, in fact. So they produce leads, they reduce our customer acquisition costs, they accelerate our sales cycle. And it's a strategic part of our marketing going forward. Thomas Windhausen: We have one more submitted. I'll go through that. When will HawkSearch's momentum outpace that of other products for Bridgeline and dominate the business? Ari Kahn: Okay. Well, from a momentum perspective, in terms of growth, HawkSearch certainly is growing leaps and bounds faster than everything else. It is very dominant, and now represents 60% of our subscription revenue. However, that doesn't shine through in our financials yet, and it will at its current pace in just a couple of quarters. We expect the growth of HawkSearch to outpace any decline in other revenue in that time period. And most importantly, because what we've done with AI and because we are in a disruptive market, I mean, site search, everyone, everyone has to reevaluate those. So they might stay with their current solution, but everyone's got to evaluate it. And with our advances in AI, this creates an opportunity for an inflection point in the site search market that could be just absolutely incredible for Bridgeline. So we're positioned for that. We're taking a leadership role in AI that is beyond what anyone else is doing. Quite frankly, we have a very deep understanding of how AI works and how it collaborates, not replaces, but collaborates with the merchandising team. And these together can completely create exponential growth in that market. Thomas Windhausen: Moderator, do we have anyone on the Q&A? Operator: We do. One moment for our first question. And our first question is going to come from the line of Casey Ryan with WestPark Capital. Your line is open. Please go ahead. Casey Ryan: I have a question about, hey, great to talk to you. What are the incremental margins, you're talking about sort of expanding what the a) like example customer might spend using HawkSearch, right? What's the incremental gross margin, I guess, is what I'm thinking about. So the corporate average is 68%. But if a customer moves from billing, say, $12,000 a year or something to $20,000 because they're utilizing more features of Hawk, does the gross margin expand, say, directionally far above the corporate average? Ari Kahn: Yes, that's a really great point. Our cost of goods sold in the -- with this increase in revenue, our cost of goods sold are essentially constant for them. So we should start seeing our gross margins approaching 80%. As our customers begin to -- and that's even without the AI. Then as our customers start using more and more of the AI, that's going to be in the mid-70% range. So I expect us to stabilize in the high-70s. And one of the things that has happened recently that has been very that I think is going to be very impactful on gross margin, is above and beyond all of that, we've seen customers that have become so reliant upon the performance for HawkSearch that they are asking for isolated environments rather than a SaaS environment, and paying a premium, to be able to isolate their performance from anyone else. And in those instances, you also start averaging in about 80% gross margin as well. So we expect to be in the high 70s altogether, and we're going to be there, and I'm talking about for subscription in the near-term. One other point on that is that our sales are, now have a much higher percentage of license to services than they have historically. And our services are selling at a premium. This quarter we had pretty high services gross margin. I think we should be striving for 50%, in that range. But the subscription will become a larger percentage of our revenue as well, Casey. Casey Ryan: Yes. That's actually a helpful point on the services side. So that 58% margin was sort of an anomaly maybe in the quarter and it shouldn't be something we expect every quarter moving forward from here. Ari Kahn: Right. That is an anomaly. Historically, we've been in the 40s and I think that 50 is about the highest anyone should ever expect. And if we get a 58%, then, great, we'll take it, but not necessarily repeatable. Casey Ryan: Okay. Thank you. That's really helpful. And then one more question. I'm just thinking about on the OpEx line. Maybe this is a market that needs evangelism and there's a natural cycle to it, I think as you were suggesting, as customers need to evaluate what these tools can do for them and start to integrate them, and as you say, not integrate them. But is there any value or potential, say, in like an unconstrained resource market where more sales and marketing could speed that up or does the market feel too big and it kind of needs to move at the pace and you guys can't necessarily drive that yourself? Ari Kahn: I think that an increased investment in sales and marketing would have results for us. We see the market is almost infinite, and our ability to increase investments in sales and marketing would be proportionally -- will proportionally impact sales for us. We have focused in R&D recently and made a lot of investments in that regard, including partnerships with some revenue share to accelerate some of the development to help manage our own expenses. But sales and marketing is a place where we're looking for ways to invest even more and, in particular, for partnerships to help manage that customer acquisition cost, because we expect that if we invest more in sales and marketing, we're going to get proportionate results. Casey Ryan: That makes a lot of sense. Thank you. It was a great quarter. We look forward to following along as we move forward. Thanks. Ari Kahn: Thank you, Casey. Operator: Thank you. [Operator Instructions] And I'm showing no further questions and I'd like to hand the conference back to management for closing remarks. Ari Kahn: Thank you, everybody. Thank you for joining us today. We appreciate the continued support from all of our customers, our partners and our shareholders. We're excited about our business and ongoing growth prospects. And we look forward to speaking with you again on our fourth quarter fiscal '24 conference call expected to be in December of 2024. Be well, everyone. Thanks. Operator: This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.

Bridgeline Digital, Inc. (BLIN) Q3 2024 Earnings Call Transcript

Thomas Windhausen - Chief Financial Officer and Treasurer Ari Kahn - President and Chief Executive Officer Good day and thank you for standing by. Welcome to the Bridgeline Digital Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Windhausen, Chief Financial Officer. Please go ahead. Thomas Windhausen Thank you, and good afternoon, everyone. Thank you for joining us today. My name is Thomas Windhausen, I'm the Chief Financial Officer of Bridgeline Digital. I'm pleased to welcome you to our fiscal 2024 third quarter conference call. On the call with us this afternoon is Ari Kahn, Bridgeline's President and CEO, who will begin the call with a discussion of our business highlights. I will then update you on our financial results for the quarter. And we will conclude by taking questions. Before we begin, I'd like to remind listeners that during this conference call, comments that we make regarding Bridgeline that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change over time, and we expressly disclaim and assume no obligation to inform you if they do. The results we report today should not be considered as an indication of future performance. Changes in economic, business, competitive, technological, regulatory and other factors could cause Bridgeline's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may have impact on our business, please review the reports and documents filed from time to time by Bridgeline Digital with the Securities and Exchange Commission. Also please note, on the call this afternoon we will discuss some non-GAAP financial measures when commenting on the company's financial performance. We provide a reconciliation of our GAAP financials to these non-GAAP measures in our earnings release, and you can obtain a copy of that on our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari? Ari Kahn Thank you, Tom. Good afternoon, everyone. Recent advances in AI, especially large language models and Gen AI are revolutionizing e-commerce and reshaping online shopper expectations. As a result, nearly every e-commerce site will upgrade their site search to be both intelligent and conversational. This shift is disrupting the $1 billion site search market, forcing everyone to reconsider their search provider. HawkSearch is uniquely positioned to displace competitors. Our team has a deep history in AI and is approaching the site search market in a more meaningful way than anyone else. This gives us an opportunity to take a disproportionate share of the market during this turbulent time. We are the only AI company offering merchandising AI agents that work directly with our customers' marketing team to continuously tune their site search's results. This capability, known as tailored AI, is already positioning us as a leader in the market. Tailored AI has helped double the average HawkSearch sale size, win new customers every week, secure top-tier partnership and gain recognition from leading analysts like Gartner. We have truly taken a different approach to AI by providing collaborative agents rather than a black-box, one-size-fits-all solution. Our competition only allows customers to enable AI and assumes they should then be hands off as AI powers their site regardless of their corporate goals. With tailored AI, we deliver AI agents that collaborate with our customers' marketing teams to optimize their sites. Our customers are empowered to continually tune and train the AI agents based on their ever-changing goals, inventory and market demands. We're moving fast in AI innovation. This year, we launched concept search. We launched image search, visual search, conversation search, and now Smart Response. No other platform has moved this quickly to seize the tailored AI opportunity in site search. As we continue to innovate, we expect these advancements to accelerate our growth, solidify our leadership in a market where search now drives 60% of our subscription revenue. This quarter we sold 23 licenses with $420,000 in ARR, $1.4 million in TCV. That brings us to 70 licenses totaling $1.7 million in ARR and $5.1 million in total contract value this fiscal year. HawkSearch was the lion's share of these sales. Importantly, our investments in partner connectors accelerate sales by allowing customers to launch HawkSearch with the click of a button. We're launching multiple customers every single week. Our tailored AI approach also accelerates sales because our customers know that they can continually refine search results based on their merchandising goals. And this is different than competitors who simply have an AI button that puts the site on autopilot, with no ability for ongoing tuning and, therefore, a significant Q&A review before the launch. With each launch, we have more references and further recognition as leaders in the site search sector. Analysts continue to recognize HawkSearch for its advancements in AI, and this is driving demand and average sales price. Gartner recognized HawkSearch in its Magic Quadrant for Search and Product Discovery, highlighting HawkSearch's strength in both Artificial Intelligence and the B2B market. Info-Tech Research Group awarded HawkSearch as a Champion in Enterprise Search and recognized HawkSearch as a Top-Rated software within the category. FeaturedCustomers listed HawkSearch as a Top Performer in the Summer 2024 Customer Success Report for Enterprise Search Software. This quarter, HawkSearch launched the GenAI-powered Athena release, update features with Smart Response and conversational dialogue based on search queries, where prompts for follow-up questions and suggestions to imitate a personalized in-person conversation with a sales assistant are available. Two important platform partners that we expect to continue to generate new sales for HawkSearch are Optimizely and BigCommerce. BigCommerce is promoting HawkSearch ahead of all other search providers on the first page of its app store, providing tens of thousands of BigCommerce customers the ability to upgrade to HawkSearch's AI technology. HawkSearch offers a one-click install for Optimizely, and is recognized by Optimizely as a top paid app in their app store on the very first page. HawkSearch is now uniquely positioned to improve site search for more than 1,000 Optimizely configured commerce customers, with several already purchasing license. We partnered with a system integrator and Optimizely expert, Xngage, for our Optimizely connector, which leads to even more sales. HawkSearch AI will be showcased at Opticon 2024 in San Antonio, Texas this November with Optimizely. At the Applied AI Conference in Chicago this past June, Moblico presented HawkSearch as a key AI-powered search platform for mobile devices. This is a new market in which HawkSearch's concept search is particularly well suited for success. And here are a few of the wins that we had this quarter. Colonial Electric Supply, a large electrical distributor, chose Bridgeline's HawkSearch to power product discovery for its Optimizely platform e-commerce sites. Colonial selected HawkSearch for its AI search capabilities and reputation in the electrical distributor sector. Grizzly Industrial, a leading industrial supplier, selected HawkSearch to power search on its e-commerce site. HawkSearch will enhance Grizzly Industry's e-commerce product discovery by offering precise search tailored to the needs of the machinery industry, including advanced part number search for both full and partial numbers, unit of measurement conversion for dimensional products and merchandising tools to run product-specific campaigns. Sailrite, a large crafts retailer, selected HawkSearch to improve its product discovery for both B2C and B2B sites. HawkSearch launched on two of Sailrite's e-commerce sites on the BigCommerce multi-storefront platform. Our partnership with Sailrite reflects our expertise in supporting retail and BigCommerce multi-storefront. Schaedler Yesco, an electrical distributor with over 29 locations and 1,000 brands, implemented HawkSearch on its Optimizely powered e-commerce site using the Xngage connector for HawkSearch. And Voltus GmbH, a leading German electrical distributor, selected Bridgeline to power site search for its e-commerce site. Voltus aims to increase online revenue by using Bridgeline's AI-powered site search for its online catalog with more than 80,000 products. All-in-all, we had 23 license sales this quarter, 70 this year-to-date and our average license sale is nearly double the MRR of last year. This increase in volume and size is largely due to our advances in AI. So at this time, I'll turn the call back over to our Chief Financial Officer, Tom Windhausen. Go ahead, Tom. Thomas Windhausen Thanks, Ari. I'll provide an update on our financial results for the third quarter of fiscal 2024 which ended June 30th, 2024. Total revenue for the quarter ended June 30th, 2024 was $3.9 million, compared to $3.9 million in the prior year period. Now going into each component of revenue. Our subscription license revenue, which is comprised of SaaS licenses, maintenance and hosting revenue and perpetual license revenue, for the quarter ended June 30th, 2024, was $3 million, compared to $3.2 million in the prior year period. As a percentage of total revenue, subscription and license revenue was 77% of total revenue for the quarter ended June 30th, '24. Services revenue was $923,000 for the quarter ended June 30th, 2024, an increase from $742,000 in the prior year third quarter. As a percentage of total revenue, services revenue accounted for 23% of total revenue for the quarter ended June 30th, '24. Cost of revenue was $1.2 million for the quarter ended June 30th, '24, a decrease from $1.3 million in the prior year period. And as a result, gross profit was $2.7 million for the quarter ended June 30th, '24, as compared to $2.6 million in the prior year period. Our overall gross profit margin was 69% for the quarter ended June 30th, '24, compared to 68% in the prior year period, with subscription license gross margins at 72% for the quarter ended June 30th, '24 compared to 73% in the prior year period, and service margins of 58% for the quarter ended June 30th, '24 compared to 44% in the same period in 2023. Our operating expenses of $3.1 million in the quarter ended June '24 were lower compared to $3.3 million in the prior year period. Moving down to below operating expenses. The change in fair value of our liability classified warrants resulted in a noncash gain of $88,000 this quarter compared to a noncash loss of $107,000 in the prior year period. And moving to bottom line, GAAP net income loss. Our net loss was $300,000 for the quarter ended June 30th, '24 compared to a net loss of $800,000 in the prior year period. Moving to EBITDA. Our adjusted EBITDA for the quarter ended June '24 was $3,000, compared to a negative $163,000 in the prior year comparable period. Now moving to our balance sheet. On June 30th, 2024, we had $1.2 million of cash and $1.5 million of accounts receivable. Our total debt outstanding as of June 30th, 2024 was under EUR500,000 or about US$524,000 with a weighted average interest rate of about 4.6%, with principal payments due through 2028. We have no other debt or remaining earn-outs from any other provisions or from any other previous acquisitions. And at June 30th, '24, our total assets were $16 million and total liabilities were $5.6 million. In the quarter, cash decreased about $100,000, of which $19,000 was used in investing activities and $84,000 was used in financing activities. Our flat operating cash for the quarter was consistent with our EBITDA of $3,000 for the quarter ended June 2024. Finally, as an update to our cap table. As of June 2024, our cap table included 10.4 million shares outstanding, 39,000 shares from Series C to preferred on an as-converted basis, 1.7 million of warrants and 2.1 million options. Of these warrants, nearly 900,000 with an exercise price of $4 will expire in September 2024. After that, we will have about 800,000 warrants, primarily 180,000 warrants with a $2.85 exercise price expiring in May 2026 and 592,000 warrants with a $2.51 exercise price which expire in November 2026. Bridgeline looks forward to continued growth and success in the remaining of 2024 and beyond as we continue to focus on driving growth, product innovation, customer success and shareholder value. Thank you for joining us on the call today. And at this time, we'd like to open the call to questions-and-answers. Moderator? We have a couple of questions that were previously submitted. So while people go in the Q&A roster, we'll handle those. All right, the first one here. What are our opportunities to expand within our existing customer base? Ari Kahn Okay. Great. HawkSearch is the primary expansion opportunity. And we have more than 600 HawkSearch customers. Every single one of those customers just like every single website owner on the planet, needs to embrace what's happening with AI and upgrade their site search to include AI capabilities and conversational capabilities. So we see opportunities. We've already upgraded several customers within Bridgeline for Smart Search, but we're going to have hundreds more. And in general, our pricing increases by about 35% when somebody upgrades to site search within Bridgeline. And nearly 60% of our subscription revenue is search revenue right now. So that's a significant increase for us. However, that increase really pales in comparison to the broader market opportunity. This entire market is undergoing a really disruptive shift where everybody needs to evaluate what they're doing in the search area and how customers' expectations are quickly evolving to interact with websites in a more natural way, in a multimodal, meaning images and cameras driving search, and in a consultative way, meaning that they expect websites to come back with intelligent questions and to have a dialogue to better refine what products will fit their goals. And these are all opportunities for HawkSearch to grow across a $1 billion market. Thomas Windhausen Great. Our next submitted question, how are our relationships with companies such as BigCommerce, Salesforce and Optimizely helping expand our customer base? And what does our new customer pipeline look like? Ari Kahn Okay. Great. Every e-commerce site has a content management and commerce platform as its foundation. And what we are doing is making it so that HawkSearch is available point-and-click out of the box on each of these platforms. That doesn't mean that you won't do any work thereafter. But it means that you can quickly try Hawk out, launch it in its vanilla form, and tune it thereafter. And this is important because it's actually different than the approach that other companies have taken, at least in the AI part of site search, where they are thinking of AI as sort of this omnipotent capability that you just enable and it drives everything from that point forward. But we're partnering with Salesforce and with Optimizely and BigCommerce and Sitefinity and other commerce platforms so that you can quickly find us in their app stores, quickly and painlessly launch HawkSearch. And then from that point forward, tune HawkSearch to have more refined results based on your evolving business needs. So they're going to be -- they're going to continue to drive a large part of our business for us. And already this has resulted in substantial improvements to our own sales pipeline. We have a pipeline now that is nearly triple the size this time last year. We've got a conversion rate that is 1.5 times what it was last year and an average sales price that is nearly double what we saw last year. And all of this bodes for HawkSearch really becoming the dominant revenue factor for Bridgeline. Thomas Windhausen Great. Next question submitted. What types of doors have opened up after HawkSearch was named a top-performing enterprise search software provider? I think that's referring to the Summer 2024 Customer Success Report on Enterprise Search for FeaturedCustomers. Ari Kahn Okay. Great. Well, I'm happy to say that we're getting leads directly from analysts and directly related to these awards and reports. Without naming names, I'll say that one of the largest hardware suppliers came directly from this report, and we're in a sales cycle for them right now. And that would be one of the largest customers Bridgeline has won to date, in fact. So they produce leads, they reduce our customer acquisition costs, they accelerate our sales cycle. And it's a strategic part of our marketing going forward. Thomas Windhausen Great. Let's see if we've got any other questions now? We have one more submitted. I'll go through that. When will HawkSearch's momentum outpace that of other products for Bridgeline and dominate the business? Ari Kahn Okay. Well, from a momentum perspective, in terms of growth, HawkSearch certainly is growing leaps and bounds faster than everything else. It is very dominant, and now represents 60% of our subscription revenue. However, that doesn't shine through in our financials yet, and it will at its current pace in just a couple of quarters. We expect the growth of HawkSearch to outpace any decline in other revenue in that time period. And most importantly, because what we've done with AI and because we are in a disruptive market, I mean, site search, everyone, everyone has to reevaluate those. So they might stay with their current solution, but everyone's got to evaluate it. And with our advances in AI, this creates an opportunity for an inflection point in the site search market that could be just absolutely incredible for Bridgeline. So we're positioned for that. We're taking a leadership role in AI that is beyond what anyone else is doing. Quite frankly, we have a very deep understanding of how AI works and how it collaborates, not replaces, but collaborates with the merchandising team. And these together can completely create exponential growth in that market. We do. One moment for our first question. And our first question is going to come from the line of Casey Ryan with WestPark Capital. Your line is open. Please go ahead. I have a question about, hey, great to talk to you. What are the incremental margins, you're talking about sort of expanding what the a) like example customer might spend using HawkSearch, right? What's the incremental gross margin, I guess, is what I'm thinking about. So the corporate average is 68%. But if a customer moves from billing, say, $12,000 a year or something to $20,000 because they're utilizing more features of Hawk, does the gross margin expand, say, directionally far above the corporate average? Ari Kahn Yes, that's a really great point. Our cost of goods sold in the -- with this increase in revenue, our cost of goods sold are essentially constant for them. So we should start seeing our gross margins approaching 80%. As our customers begin to -- and that's even without the AI. Then as our customers start using more and more of the AI, that's going to be in the mid-70% range. So I expect us to stabilize in the high-70s. And one of the things that has happened recently that has been very that I think is going to be very impactful on gross margin, is above and beyond all of that, we've seen customers that have become so reliant upon the performance for HawkSearch that they are asking for isolated environments rather than a SaaS environment, and paying a premium, to be able to isolate their performance from anyone else. And in those instances, you also start averaging in about 80% gross margin as well. So we expect to be in the high 70s altogether, and we're going to be there, and I'm talking about for subscription in the near-term. One other point on that is that our sales are, now have a much higher percentage of license to services than they have historically. And our services are selling at a premium. This quarter we had pretty high services gross margin. I think we should be striving for 50%, in that range. But the subscription will become a larger percentage of our revenue as well, Casey. Casey Ryan Yes. That's actually a helpful point on the services side. So that 58% margin was sort of an anomaly maybe in the quarter and it shouldn't be something we expect every quarter moving forward from here. Ari Kahn Right. That is an anomaly. Historically, we've been in the 40s and I think that 50 is about the highest anyone should ever expect. And if we get a 58%, then, great, we'll take it, but not necessarily repeatable. Casey Ryan Okay. Thank you. That's really helpful. And then one more question. I'm just thinking about on the OpEx line. Maybe this is a market that needs evangelism and there's a natural cycle to it, I think as you were suggesting, as customers need to evaluate what these tools can do for them and start to integrate them, and as you say, not integrate them. But is there any value or potential, say, in like an unconstrained resource market where more sales and marketing could speed that up or does the market feel too big and it kind of needs to move at the pace and you guys can't necessarily drive that yourself? Ari Kahn I think that an increased investment in sales and marketing would have results for us. We see the market is almost infinite, and our ability to increase investments in sales and marketing would be proportionally -- will proportionally impact sales for us. We have focused in R&D recently and made a lot of investments in that regard, including partnerships with some revenue share to accelerate some of the development to help manage our own expenses. But sales and marketing is a place where we're looking for ways to invest even more and, in particular, for partnerships to help manage that customer acquisition cost, because we expect that if we invest more in sales and marketing, we're going to get proportionate results. Casey Ryan That makes a lot of sense. Thank you. It was a great quarter. We look forward to following along as we move forward. Thanks. Thank you. [Operator Instructions] And I'm showing no further questions and I'd like to hand the conference back to management for closing remarks. Ari Kahn Thank you, everybody. Thank you for joining us today. We appreciate the continued support from all of our customers, our partners and our shareholders. We're excited about our business and ongoing growth prospects. And we look forward to speaking with you again on our fourth quarter fiscal '24 conference call expected to be in December of 2024. Be well, everyone. Thanks. This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.

Cineverse Corp. (CNVS) Q1 2025 Earnings Call Transcript

Gary Loffredo - Chief Legal Officer, Secretary and Senior Advisor Chris McGurk - Chairman and Chie Executive Officer Mark Lindsey - Chief Financial Officer Erick Opeka - President and Chief Strategy Officer Conference Call Participants Brian Kinstlinger - Alliance Global Partners Daniel Kurnos - The Benchmark Company Good day, everyone. Welcome to Cineverse's Third Quarter Fiscal 2024 Financial Results Conference Call. My name is Cameron and I'll be your operator today. Currently, all participants are in a listen-only mode. You will have a question-and-answer session following management's prepared remarks. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the call over to your host, Gary Loffredo, Chief Legal Officer, Secretary & Senior Advisor for Cineverse. Please go ahead. Gary Loffredo Good afternoon, everyone. Thank you for joining us for the Cineverse fiscal year 2025 first quarter financial results conference call. The press release announcing Cineverse's results for the fiscal first quarter ended June 30th, 2024 is available at the investor section of the company's website at www.cineverse.com. A replay of this broadcast will also be made available at Cineverse's website after the conclusion of this call. Before we begin, I would like to point out that certain statements made on today's call contain forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions. The company's periodic reports that are filed with the SEC describe potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements. All the information discussed on this call is as of today, August 14th, 2024, and Cineverse does not assume any obligation to update any of these forward-looking statements except those required by law. In addition, certain financial information presented in this call represent non-GAAP financial measures, and we encourage you to read our disclosures and the reconciliation tables through applicable GAAP measures in our earnings release carefully as you consider these metrics. I'm Gary Loffredo, Chief Legal Officer, Secretary & Senior Advisor at Cineverse. With me today are Chris McGurk, Chairman and CEO; Erick Opeka, President and Chief Strategy Officer; Tony Huidor, Chief Operating Officer & Chief Technology Officer; Mark Lindsey, Chief Financial Officer; Mark Torres, Chief People Officer; and Yolanda Macias, Chief Content Officer, all of whom will be available for questions following the prepared remarks. On today's call, Chris will discuss our fiscal year 2025 first quarter highlights, the latest operational developments, outlook, and long-term growth strategy. Mark will follow with a review of our results for the fiscal first quarter ended June 30th, 2024. And Eric will provide some details on our streaming business results and operating initiatives before we open the floor to questions. I will now turn the call over to Chris McGurk to begin. Chris McGurk Thanks, Gary, and thanks everyone for joining us here today. This was a transition quarter for Cineverse. Consistent with the prior four quarters, we again generated significant savings in SG&A during this quarter of $1.3 million or 17% versus the prior year, reflecting our previously reported cost savings initiatives. Most importantly, our offshoring of domestic employment positions to Cineverse Services India. We've now reduced our domestic headcount by 57 positions or 39% since we began consolidating operations after we completed our acquisition activities two years ago. That offshoring of domestic positions to a battle tested efficient operating division of Cineverse in India was the driving factor behind the $8.9 million in SG&A cost savings we recorded in the last fiscal year and this quarter's results demonstrate the continued success of this key initiative. Those cost savings were the main factor that enabled us to beat our direct operating margin target again this quarter, recording a 51% margin versus our stated target of 45% to 50%. Our revenues in this quarter were impacted by an almost $2 million decline in digital licensing due to the timing of digital content releases between quarters and the comparison to non-recurring revenues in our legacy digital equipment business that we booked in last year's quarter. Another key timing and transition related issue that impacted revenues in the quarter is that we did not yet begin to report any upsides from our new sales teams and SaaS sales initiatives for our proprietary Matchpoint Technology, AI based products and omni-advertising programs, most importantly direct ad sales. However, we've now built a very robust pipeline in all those areas that Eric will talk about in just a minute. And based on that, we fully expect to begin to record revenue upsides over the next few quarters as we close multiple deals that are already in the sales queue. Eric will also speak to the skyrocketing growth in viewership across our channel and podcast portfolio, which obviously bodes very well for a significant rebound in our advertising business as well as an even more expanded sales pipeline. In addition, we remain very optimistic about the release of the next installment of our Terrifier horror franchise, Terrifier 3, which is on target for an October 11th, 2024 theatrical release. We are marshaling all the resources of the company to maximize profits from that release. We're concentrating not just on theatrical, but also on the highly profitable ancillary distribution markets, including video-on-demand, DVD/Blu-Ray and particularly our Screambox horror streaming channel, where we saw a substantial increase in subscribers following the release of Terrifier 2. If we are successful in all of this, the film should provide a substantial cash inflow to support the rest of our business, particularly in building the content pipeline. Importantly, we also extended our $7.5 million line of credit with East West Bank another 12 months to September 2025. This further strengthens our financial flexibility. We also updated our digital library valuation with the same third-party appraiser that valued it in 2023. This valued our library of more than 66,000 titles as of March 31st, 2024 at approximately $39.8 million, a substantial increase over last year's valuation and several large multiples above the book value of our library, which was just $2.6 million as of June 30th, 2024. This library valuation alone, excluding all other assets is by itself significantly higher than our current market capitalization, which we believe significantly undervalues the company. Reflecting that significant disparity, we purchased approximately 184,000 shares of Cineverse equity through June 30th, 2024 and are continuing to use our previously reported stock repurchase program as appropriate since we believe repurchasing shares is a value creating investment opportunity for the company. And with that I will turn things over to Mark for our financial review. Mark? Mark Lindsey Thank you, Chris. For the quarter ended June 30, 2024, Cineverse reported total revenues of $9.1 million compared to $13.0 million in the prior year period. As a reminder, the first quarter of fiscal year '24 included material non-recurring revenue of approximately $1.2 million related to our legacy digital cinema business, which is not present this quarter. When excluding the impact of the legacy digital cinema business, the decrease in revenue was primarily driven by approximately $2 million decline in the company's digital distribution revenue mostly resulting from a delay in content releases during the quarter compared to the prior year quarter and an approximate $500,000 decline in advertising revenues due to our channel optimization efforts. We expect this trend to reverse for the remainder of fiscal year 2025 as the economy improves and our new direct advertising sales team continues to ramp up. Despite these top line revenue results for the quarter, we remain cautiously optimistic for double-digit revenue growth in fiscal year 2025. As the economy improves, interest rates decline with the expected improvement in the advertising market in a political year is realized and revenue growth from our technology offerings. Eric will provide additional details on the operational drivers behind our financial results. As Chris mentioned, our direct operating margin for the quarter was 51%, which is in excess of our previously provided guidance of 45% to 50% for fiscal year 2024. Our improved direct operating margin is a direct result of our cost optimization initiatives referred to earlier. We expect our direct operating margin in future quarters to be in line with our previously stated target margins of 45% to 50%. SG&A expenses decreased $1.3 million or 17% for the quarter compared to the prior year quarter. Again this improvement is a result of the cost optimization initiatives discussed previously. We expect our SG&A expenses to remain relatively flat dollar wise and to continue to decline as a percentage of revenue for the remainder of fiscal year '25 as we continue to leverage offshoring efforts in Cineverse Services India. Adjusted EBITDA for the quarter was negative $1.4 million compared to negative $1.5 million for the same quarter last year, reflecting the continued impact of our cost savings initiatives even in a down revenue quarter. We had $4 million in cash and cash equivalents on our balance sheet as of June 30 and $4.7 million outstanding on our working capital facility, down from $6.3 million as of March 31, 2024. As we noted in our last call, we have extended the maturity date of our working capital facility with East West Bank to September 2025. As you recall, two quarters ago, we also expanded the size of our facility from $5 million to $7.5 million. We appreciate our relationship with East West Bank and the confidence they are showing by extending the maturity date and expanding the size of our credit facility, which increases our financial flexibility and liquidity and is a testament to our improving financial position and creditworthiness. During the quarter, our cash flow used in operations was $1.7 million of which $2 million was related to investment in our content portfolio via advance and/or minimum guarantee payments. When excluding our content portfolio spend during the quarter, our cash flow provided by operations was a positive $271,000 showing just how close we are to being sustainably cash flow positive. We expect to be operating cash flow positive for the full fiscal year 2025. I also want to remind everyone that our Board of Directors recently approved a one-year extension of our stock repurchase program. The program to purchase 500,000 shares now expires on March 1, 2025. Through June 30, 2024, we've repurchased approximately 184,000 shares under this program reducing our shares outstanding from year-end. With a book value of $29 million and a market cap of approximately $13 million we continue to believe our stock is significantly undervalued and will continue to repurchase shares under our program during open trading windows and as cash availability permits. With that I'll turn the floor over to Eric to discuss market environment and our growth initiatives. Erick Opeka Thank you, Mark. This quarter, we've made significant strides in moving forward our strategic initiatives, particularly in our streaming technology, content distribution and monetization efforts. First, let me highlight our streaming performance. We achieved remarkable viewer growth with 2.26 billion minutes watched in Q2, 2024, up 73% year-over-year. The surge was driven both by our established brands and successful new channel launches. For example, our Bob Ross channel saw over 800 million minutes watched, up 33% year-over-year. New channels like Dog Whisperer and Yu-Gi-Oh! have shown impressive growth with Dog Whisperer experiencing nonstop growth for five consecutive months and Yu-Gi-Oh! up 132% in June over its May launch. The surge in inventory comes at the right time as we ramp up in direct sales and go into our busiest time of the year. In terms of our subscriber base, our subscriber count stands at approximately 1.39 million down approximately 3.5% sequentially, but up 10% year-over-year. This decline is attributed to the summer seasonal churn we typically see and we expect to see this number to see appreciable increases in subscriber count on the back of the Terrifier 3 release later this year and the usual surge in subscribers that occurred during Q3, our fiscal Q3 rather. Keep in mind, we saw triple-digit subscriber growth following the release of Terrifier 2 in late 2022. It's worth noting that our year-over-year comparisons in digital transaction sales were impacted by substantial revenues that came in from several one-off licensing deals, Terrifier 2 and other content in the prior fiscal year, which we didn't have this year. However, we're extremely excited about the upcoming release of Terrifier 3 and its impact on revenues across all company lines of business. Unlike its predecessor, which began as an event release, Terrifier 3 will have a wide release on more than 2,200 screens and we expect to see considerable revenue from this release, including theatrical, ESP transactions, rentals and licensing, which will likely substantially surpass the patterns we saw with Terrifier 2. Regarding our ad sales, during the quarter, we've been holding our programmatic price force for Connected TV at higher levels to support our direct sales efforts, which have had an impact on our programmatic revenues in the short-term. While this represents a significant portion of the year-over-year decline in ad revenue, we believe this approach will yield better results in the long term. We expect this to be corrected significantly as direct sales come online and we focus on improving yield management and bid density with our inventory for programmatic during the quarter alongside those direct sales. Our efforts to streamline operations and focus on higher margin activities are paying off in terms of improved margins. Our direct operating margins of 51% signal that our business model of building deep fan bases in popular verticals and providing scale volumes of relevant library and low cost first window content is working. We will continue to optimize our streamlining efforts and we currently have plans to further reduce our OpEx by another 5% to 7% over the next two quarters. Combined with our focus on higher margin technology and licensing sales, we believe we can maintain gross margins in the mid-50% range for the streaming business and show sustainable profitability going forward as revenues increase. On the sales front, we've made considerable progress in building our content advertising and Matchpoint sales units, which has been the focus of the first part of the year. We've added six seasons digital sales executives nationwide who are already delivering results. Our Matchpoint efforts have been particularly promising. After just a few months, we've built a pipeline north of 6 million of potential customers. We expect to significantly increase that once our inbound and outbound marketing efforts are fully underway. I'm pleased to announce we closed our first SaaS focused deal worth $250 million in annual contract value. We believe this is on the lower end of the kind of deals we'll be seeing moving forward indicating significant potential for growth in this area. Our licensing sales have also seen substantial growth and we expect to generate low millions of dollars in new licensing revenue from our sales team in the current quarter alone. This is a testament to the value of our extensive content library. Looking ahead, we anticipate being sold out of inventory on several verticals in the next quarter and expect significant acceleration in digital, licensing and Matchpoint revenues from deals currently in negotiation. On our podcast network, we continue to see exponential listener growth yielding a 49% revenue surge over the last 60 days. We're extremely focused on monetizing our podcast inventory, which we believe is currently being monetized at just a fraction of its full commercial value. Our current sales team has ramped up their direct efforts and we're engaging with numerous third parties to help us rapidly fill the inventory over the next several quarters. We're also expanding our efforts to bring in additional top tier shows that further enhance our podcast offerings. Turning to our technology initiatives, we're in the final stages of Phase 2 development for cineSearch, our AI powered content search and discovery tool. We expect a full consumer release within the next quarter. We're also preparing the product for B2B licensing and already in discussions with several Tier 1 OEMs. This innovative platform developed in partnership with Google addresses the biggest consumer problems in streaming, search and discovery by providing an enhanced AI driven search experience that we believe will be a game changer in the industry. We're also exploring some exciting new opportunities in AI. We're in early discussions with multiple parties to license parts of our extensive content library for AI training purposes. Additionally, we're in talks to represent AI training rights for other content owners, which could potentially add hundreds of thousands of titles to our existing library for this initiative. These developments position us at the forefront of the rapidly evolving entertainment technology landscape in AI. As we move forward, we're focusing on four key areas to drive top line growth, expanding our distribution of SVOD, AVOD and fast streaming channels to our OEM and tech partner network expanding our licensing of library to those same partners growing direct ad sales on our owned and operated channels and growing our new key revenue driver businesses, Matchpoint and Podcast. We believe this diversified approach will be the foundation for a unique profitable streaming business with best-in-class margins. In conclusion, despite some temporary headwinds, we're seeing positive trends across our business overall. Our strong direct operating margins, growing viewership, expanding sales team and innovative technology initiatives position us well for future growth. We're excited about the opportunities ahead, particularly as we approach key revenue generating seasons, continue to roll out new products and partnerships and prepare for the release of Terrifier 3. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Brian Kinstlinger with Alliance Global Partners. You may proceed. Brian Kinstlinger Great. Thanks for taking my questions. I wanted to start with getting a better understanding of the revenue trends. First, if you could explain the drop in digital distribution. What were the content delays? What specifically, if you could, I think you guys mentioned that a few times. And then is this a one-time event, an anomaly, or is this something we should expect going forward and this is kind of the base of where your revenue is going to start to grow from? Chris McGurk Hey, Brian, this is Chris. I think that Eric addressed that a little bit in his remarks, but I think Yolanda and Eric if you want to field that question. Erick Opeka Sure. I'll get it started. So if you kind of look at the bulk of that number, right, it's probably about so if you're taking out the non-recurring revenue from projection systems, which was about $1 million or so. And you take out the about 500K on the ad supported side, I believe it's about $1.5 million. We had in the prior year, we had some large specific licensing deals that in aggregate were around $1 million of that, that we didn't have that same licensing occurring in this quarter. Those were opportunistic one-time licenses that happened in the prior year that we just didn't have this year. We do have content to license. We had deals that were pending. They just were not closed during this particular quarter. We'll see those deals in the current quarter that we're in. So that's that. And then the second is we had in that quarter in the prior year, we had multiple titles that were new released plus sort of the back half of the Terrifier bump that we didn't have this year. We did go through a gap in the calendar in the releasing year. Yolanda, can give a little more color on, to the extent of how many titles moved, but we had titles that moved out due to production delays and other things that were on the schedule. Yolanda, I don't know if you have any additional color for Brian on that. Chris McGurk Here's the question, Eric. And I think, Brian, it is an anomaly. We don't expect that going forward. But you just have to realize that in the licensing business, we're subject to the content pipeline and there are a lot of timing issues that occur and we expect to see substantial growth in that business going forward. Brian Kinstlinger Okay. Let me take a step back, because I want to understand what's going on excluding digital distribution. Your revenue for streaming and digital is a three year low. You've got more channels that are taking with consumers. You got 73% increase in viewership. You got wider distribution you keep announcing. You've got several new products and services you've announced for the last year and a half. So what am I missing that excluding digital distribution that revenue seems to be, I would expect it to be growing, it needs to be headwinds to growth or offset to higher growth, maybe a higher level picture? Erick Opeka Yeah, I would say, you know, most of our salespeople just started within, you know, the last quarter to quarter and a half. You know, the typical ramp period for those salespeople is, usually around two quarters where we really see them start to hit their stride, which we are starting to see that now. Matchpoint is the same thing, right? We have a very robust pipeline. We closed our first deal. I think we're about to close our second deal any day now. And there's many more deals like that in the pipeline. It just took longer than we had anticipated to get those sales processes and systems stood up. So I think in terms of the viewership, you're right. We've had a pretty significant surge in viewership in the last quarter or so and really starting in last year, we had been less aggressive on squeezing monetization out on programmatic to sort of protect our CPMs for the oncoming direct sales team. And so it's really a delicate balancing act, right. We could either we could short-term really increase revenues and, you know, lower our CPM floors and goose revenue, but that comes at the expense of higher margin, higher CPM revenue from packaging the sales team sells. Conversely, if we keep them too high, short-term, we have revenue challenges out of our programmatic business. So I think we're trying to strike a balance. I think we were maybe a little too aggressive in protecting CPMs early on as that team was ramping. So I think we're finding the good balance now. That team is selling broad-based omnichannel packages, so we're less CPM sensitive. And so we're playing with that and increasing the revenue there, being more opportunistic on CPM. So I think a lot if I want to sum all this up, it's really, it really comes back to we have a lot of sales teams ramping up and getting on board. We have good pipelines of revenue coming and I truly believe we're bouncing off the bottom of revenue now and going into a pretty robust period of growth. Brian Kinstlinger Okay. One more question for me, I'll get back in the queue. Dog Whisperer obviously has been, it sounds like a home run for you guys. And I think you're almost as equally as excited about GoPro if I have the two channels right that are catalyst right now, I mean, you have others. How much revenue can someone in a range reasonably expect from a top earning channel of yours these days when fully ramped and distributed widely? Erick Opeka So typically, generally speaking, you know, a high end successful channel of the type that we're doing would be in the low to mid-7 figure range. I think Dog Whisperer is a unique property because we in addition to having channelization rights, we have licensing rights, we have some other consumer goods rights, we have digital distribution rights. So I would say that one would be on the higher end of that scale. For things that we that are channelized only, you're looking at probably lower 7 figures on the revenue front. That varies obviously depending on the success of the channel, the rate of distribution and so on. But that would that's generally speaking where these things perform. The next question is from the line of Dan Kurnos with Benchmark. You may proceed. Daniel Kurnos Yes. Thanks. Good afternoon. Eric, I just want to follow-up on your commentary, just around the market place. The upfronts are over now by and large. And, yes, we all know that programmatic CPM floors got slashed. And I totally appreciate what you're trying to do with direct sales, which we've seen a lot in the industry. But obviously Netflix and Amazon and others have been pumping a ton of supply into the marketplace. And so we're starting to see some of the monetization out of you guys. It's obviously early, probably you would like to be a little bit further ahead than where you are. But I just want to understand what gives you confidence, knowing that you have more niche properties, but what gives you confidence that you're going to see sort of this nice rebound with this consolidated direct sales and programmatic effort going forward? Erick Opeka Sure. Well, so if you think about if we were just competing on spots and dots, you know, just selling ad inventory, look, we're not Netflix, right? We are a specialty enthusiast player. We have some compelling verticals, but we're not competing with the big scale general entertainment streamers on a Connected TV inventory to inventory comparison, right. What we are doing is working with brands and developing, I'd say, more bespoke and more custom campaigns that involve things like in addition to inventory, involve omnichannel, podcast, display, other forms of audio, email, social and even things like events and other things. So we think that approach protects us because those kinds of initiatives are important to brands, especially to entertainment brands like gaming, movies and so on, which is I think our bread and butter. So those brands really are less and we're not really looked as a place, hey, let's go in and buy CTV inventory for this, that and the other. That's a piece of the mix, but our direct sales teams are really selling comprehensive packages of opportunities that include things like sponsorship and everything else. So when you look at it from that perspective, you can't buy that kind of experience for your brand or your film release or your video game on an open exchange, you just can't do it. So that's why we think and the demand for that is increasing. We're going into arguably our busiest season of the year. We're probably one of the top brands in the horror vertical, for example. We'll be sold out of all available inventory for that market to Fortune 500 brands, movie studios, you name it that are focused on that. We're getting sponsorship revenue for some very large brands, for events and things like that. So I am very optimistic about that approach. If we were just competing on programmatic, it would be I think you're right, that would be a much harder battle. But we're starting from a much lower base and I think we can do lots and lots of sales and lots of growth for many years focused on this part of the industry, that our team is just incredibly experienced and has been selling for collectively over a 100 years of experience among everybody that's going to be doing it. Daniel Kurnos Got it. That's really helpful. And then speaking off on a smaller base, I mean, is the podcast just break a million a quarter this quarter, and how big do you think that gets? And you mentioned political in your commentary. Is that something you guys can actually tap into because this year is obviously going to be bonkers? Erick Opeka Yeah. So I think we're approaching that number. Our podcast and we have a podcast and other bucket that we break out, in terms of that. I think that number is pretty close to that number, if not exceeding it at this point. Keep in mind, right, and I think we've discussed this previously that the amount of monetization that's happening out of the podcast business today up until very recently was 100% programmatic. We've just started to get our first campaigns online. So we've been doing campaigns with the usual direct to consumer brands, some movie studios and other things. So that business is just starting to lift off. If I had to be conservative, I'd say, we're probably monetizing one directly less than 10% of that total inventory today. So there's a tremendous amount of upside growth out of that. We're also we're in the process of changing programmatic partners. We believe that could have a substantial material increase on the programmatic piece alone, right. I think we you know our growth rates in that business have sort of we've outgrown our current programmatic partnerships and I think we're looking at expanding those and taking them to the next level. So I think you'll see a lot of growth there as well. I'm sorry. On the political side, we are getting political through programmatic. Most of the if you kind of look out there at the marketplace, this market is really probably one of the more most focused demographically and regionally that's ever been done before. So I think local markets are tending to take a big chunk of the lion's share of this election. It's less about swaying independent voters. But we are seeing our piece. We are getting a piece. We'll see a lift from that in programmatic particularly. I don't know that we'll see the same lift that you would see out of say, broadcast conglomerates or others that are far more about regional targeting. But we will get a decent lift. I think internally we've been forecasting that, you know, we looked at prior years and I think we saw something like a, you know, 10% to 15% lift out of that. Don't know exactly how that's going to go this year, because it's anyone's guess, how much is spent and where it's spent, how it's spent. But we should see a lift like that, like we did in prior years. Daniel Kurnos Got it. And just have you embedded does your guidance include any monetization from cineSearch at all? And then lastly, on the OpEx side, obviously, a lot of progress there. You said 5% to 7% more. Just curious if you guys if that's just from the offshoring and if there's sort of any other plans after that or there's more of a balance? I think Chris has said a balance of reinvestment going forward once the revenues scale. Erick Opeka Yes. I think so if you kind of look at our OpEx today, you know, I mentioned during the remarks about 5% to 7%. That's identified already of things that are already underway. That's predominantly switching a variety of technology vendors. I think we've recognized somewhere in the neighborhood of $1.6 million to $1.8 million of OpEx savings, which should equal that percentage range. Those are identified. A good chunk of its underway already. And so we would expect to realize that over the next two quarters or so. There's infrastructure changes and other things that we need to make. But this is from heavy iron compute systems, SaaS products and other things that are core infrastructure that we're just migrating. Just due to the scale we have, we're getting cheaper prices on things. So those are already underway. You know, we're the other piece of that, and I think you heard that in Lindsey's remarks is we're holding fast on SG&A. We think we can maintain and operate our business sufficiently for the foreseeable future at the sort of the SG&A percentages we're at. So really we'll see SG&A decline as we hold this as revenue increases as well. So all-in, I think the gross margins are looking very strong for this business with the 5% to 7% change. I think we'll be comfortably into the low-50s on the streaming side of the business, which is now the bulk of the revenue. Daniel Kurnos Okay. Thanks for bearing with me, Eric. Appreciate it. There are no further questions remaining, so I'll pass the conference back over to the management team for closing remarks. Chris McGurk This is Chris. Thank you all for joining us again today. And please feel free to reach out to Julie Milstead with any additional questions you might have. And we look forward to speaking with you all again on our next quarterly call. Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

GameSquare Holdings, Inc. (GAME) Q2 2024 Earnings Call Transcript

Good afternoon, and thank you for joining us for the GameSquare Holdings 2024 Second Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. [Operator Instructions]. Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For information about forward-looking statements and risk factors, please see our 10-Q for the quarter ended June 30, 2024, which will be available on the company's website or with the Securities and Exchange Commission. I would now like to turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead. Justin Kenna Thank you, and good afternoon to everyone joining us on today's call. I'm extremely excited to review the progress we're making at GameSquare as we pursue strategic priorities aimed at creating a fast-growing, highly profitable and next-generation media business. Activity across our business is high, and we are making significant progress towards optimizing our business model, investing in our long-term growth and improving profitability. While we still have work to do, we believe our pro forma results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. On a pro forma basis, revenue was $28.6 million for the 2024 second quarter, representing a 24% increase year-over-year and a 22% increase in 2024 first quarter. Strong revenue growth during the second quarter reflects the initial success of the actions we've taken and the strategies we are pursuing to rapidly grow our business. I'm extremely pleased with the significant improvement in profitability and our pro forma adjusted EBITDA loss for the 2024 second quarter improved to $5.4 million from $10 million for the same period last year and $7.9 million for the 2024 first quarter. The $2.5 million improvement in adjusted EBITDA loss over the past 3 months provides us with growing confidence in our efforts to reach profitability by the 2024 fourth quarter as we expect further revenue growth, higher gross margin and additional OpEx reductions to benefit our business in the second half of the year. As you can see, we expect to see the same, if not, greater dollar improvement in adjusted EBITDA in the third and fourth quarters as we approach profitability. Our operating plan for 2024 focuses on 3 main components: first, to complete the integration of the FaZe Clan acquisition and significantly reduce our cost structure; second, to strengthen our balance sheet and divest noncore assets; and third, to leverage our platform of owned and operated IP, agency and media and SaaS technology assets to drive profitable growth. I'm pleased with the progress we have made executing our plan during the first half of the year, which I believe will result in accelerating revenue growth and significantly enhanced profitability in the second half of the year. I'll use the rest of my time today to provide a business update before turning the call over to Mike, who will review our second quarter results in more detail. As a reminder, in March of 2024, we completed the acquisition of FaZe Clan, an all-stock transaction valued at $14 million. FaZe Clan is comprised of 2 assets: FaZe Esports, which is one of the world's best and most recognized esports organizations; and FaZe Media, which is one of the largest followed gaming brands in the world. As part of our strategy for the FaZe Clan acquisition, we understood that in order for FaZe Media to be successful FaZe's founders and creators must be allowed to have an ownership stake in the organization and be empowered with the creative direction. As a result, we have completed 2 important transactions with FaZe Media to align GameSquare, FaZe's founders and other key stakeholders around plan to return the brand back to its roots and reboot FaZe Media for success in 2024 and beyond. First, in May, we called FaZe Media as a separate stand-alone entity that combines the FaZe's creative talent roster and non-esports assets into a creative-led IP and Internet media company under the leadership of CEO FaZe Banks, an original FaZe founder. We simultaneously closed an $11 million investment in FaZe Media from Matt Kalish, a founder of DraftKings, who now serves on the Board of FaZe Media. Second, in June, we agreed to sell a 25.5% interest in FaZe Media to an entity controlled by FaZe's CEO, FaZe Banks, and owing FaZe Media at $14 million. Under the terms of the transaction, GameSquare retained voting control of the transferred shares for a period of 2 years during which FaZe Media will continue to be consolidated into GameSquare's financial statements. We believe these transactions create the proper infrastructure for FaZe Media to be successful. FaZe Media now truly is a creator-led IP and media company supported by the leadership and expertise of Matt Kalish and full resources of GameSquare. When we acquired FaZe Clan, the brand was suffering from significant losses, declining community engagement and no clear strategic direction. We're extremely proud of our efforts to turn around FaZe's performance and bring the brand back to life. This is a direct result of the return and hard work of the FaZe founders under leadership of CEO FaZe Banks; the strength of GameSquare's platform; our history with and know all the brand; and most importantly, our belief, if managed correctly, FaZe can reengage with an extremely committed community and lead to monetization opportunities in the coming months and quarters. I'd like to use this opportunity to thank everyone at GameSquare and FaZe for their hard work and dedication over the past 2 quarters. Since FaZe Media's reboot in April of 2024, the reengagement of the community has been fantastic. A couple of highlights include 4 of FaZe's talent roster were in the top 50 most watched streamers worldwide in July. FaZe's created roster has gained 4.5 million stream followers since May and now have 173 million followers in total. FaZe's roster garnered over 1.2 billion total views in Q2 '24, a 28% increase in 3 months. And finally, from April to July, FaZe Clan's weekly viewership has increased from 1.5 million hours watched to a peak of 4.8 million hours watched, an impressive 3x increase in just 4 months since the brand's reboot. Driving engagement with FaZe's community is an important indicator of future growth opportunities for GameSquare, as engagement helps support a robust pipeline of brand deals and future monetization opportunities. In fact, we have multiple 7-figure deals that we expect to convert to partnerships in the coming months. In addition to GameSquare's ownership and voting in FaZe Media, we continue to own 100% of FaZe Esports. As one of the top esports organizations in the world, we believe there is an enormous opportunity to profitably grow FaZe Esports, following a similar strategy that successfully grew our former esports team by over 220% in just 2 years. Supporting FaZe's brand overall is important for FaZe Esports, too. We're currently working on several opportunities to begin monetizing FaZe Esports with a new multiyear sponsorship and partnership deal opportunities. As you can see, in just a short period of time, we are quickly rebuilding FaZe Clan, creating a proper foundation and developing new monetization opportunities that we believe will support multiyear high-margin revenue opportunities for GameSquare. We are also focused on driving efficiencies and reducing costs at FaZe Media and FaZe Esports. When comparing the second quarter of 2024 and 2023 results at FaZe Clan, we have removed approximately $18 million of annualized costs and believe there are opportunities to remove additional costs throughout the remainder of 2024. With a more efficient operating model and a more disciplined management structure, we believe there is a lot of opportunity to drive profitable growth to FaZe Media and FaZe Esports, especially as each businesses -- as each business scales. Our second quarter improvement in adjusted EBITDA reflects the initial benefits of our integration strategy, and we expect additional enhancements to our cost structure in the coming quarters. We are extremely excited by the opportunities the FaZe Clan acquisition represents and how the brand fits into the GameSquare ecosystem. As part of our plan throughout 2024, we have sold noncore business assets to optimize our business and strengthen our balance sheet. Year-to-date, FaZe Clan has raised over $36 million of non-diluted capital, raised over $16.5 million of new capital through a private placement and a prepaid advance agreement, and paid off the principal balance of our senior secured notes. As a result, we have significantly strengthened our balance sheet and capital position and have the financial resources in place to support the growth strategies we are pursuing to take advantage of growing demand trends currently underway across our global markets. The final component of our plan in 2024, I want to review today the opportunities we are pursuing across our owned and operated IP, agency and media, and SaaS technology assets to profitable growth and improved profitability. Since our first quarter call, we made progress growing our owned and operated IP, agency and media, and SaaS technology assets. Starting with owned and operated IP. As I mentioned previously on today's call, FaZe Media's highly successful reboot and new talent roster is driving engagement within the community, which is supporting our deal pipeline and beginning to contribute to GameSquare's revenue growth. In addition, during the second quarter, we launched the FaZe Clan's co-branded product line with SteelSeries to retailers globally. And we recently announced a partnership with NFL to launch a new traveling creator series called NFL 4 THE FANS LIVE. This innovative series blends the excitement of NFL fandom on game days with interactive gaming and creator-driven content accessible for an in-person and online audience during the 2024 NFL season. We are also starting to see growing revenue contribution from our newly traded events business for GameSquare direct-to-brand experiences with partners such as Epic, owned IP such as the recently announced NFL partnership in the creative series, programming partner opportunities such as our SEICon partnership in Las Vegas, and large-scale esports production with the FaZe Halo Championship Major. In fact, events in the second quarter contributed over 5% of consolidated revenue. We are continuing to develop this area of the business with more partnerships and announcements, which we expect to come in the second half that showcase this continued revenue growth and our growing expertise. Looking towards growth in our media and agency businesses, we continue to pursue opportunities to expand our publisher relationships with major players like Epic Games and leverage the rapid success of our UEFN world building business. Just last week, we announced the $3 million of total new brand partnerships with renowned brands, including Topgolf, 5-hour ENERGY and Dairy MAX as well as multiple soon-to-be-announced projects with leading global sports media and entertainment companies. Our pipeline continues to grow, and we expect to announce additional new partnerships as we enter the seasonally strong second half of the year. Finally, on the SaaS and technology side of our business, we continue to combine our data and insights capabilities with our creative management and activation platform to deliver a more comprehensive solution for game publishers and brands looking to drive targeted audiences and improved revenue performance. In addition, we have developed an innovative AI-supported solution that leverages our data and technology stack to uncover influencers and creators based on unique search criteria. By utilizing our platform for data analysis and audience insights, companies can identify the most influential creators to partner with for their marketing efforts. We believe that this data-driven approach ensures that campaigns are effectively targeted and yield high performing ROI and performance-based returns. Our new AI solution is set to launch in the coming weeks in a customer that operates one of the largest online mobile games. We plan to make this capability available to other customers as part of our broader rollout plan throughout the quarter. Additionally, we are excited to announce the expansion of our managed services to include even more tailored solutions for our clients. This will include end-to-end campaign management, content creation and performance optimization. By offering these comprehensive services, we can now provide a one-stop shop for companies looking to enhance their marketing efforts through creator and influencer-led partnerships. As we look to the back half of the year, we are excited by the direction we are headed. We believe we will start to see the benefits of the investments we made in the first and second quarters throughout the second half of 2024. In addition, we are already seeing positive momentum underway across several of our markets as our refined platform resonates with global brands. While 2024 has already been a busy and transformative year for GameSquare, we believe we are just getting started, and I'm optimistic about reporting on our continued success on future calls. So with this overview, I'd like to turn the call over to Mike to review our second quarter financial results. Mike Munoz Thanks, Justin. As a reminder, 2024's financial results include multiple corporate actions, most significantly, the March 7, 2024, acquisition of FaZe Clan and the March 1, 2024, sale of Complexity Gaming, which has been treated as a discontinued operation in our 2024 and 2023 year-to-date results. We also further divested noncore assets during the year on May 31, 2024. As a result, we believe it is best to look at our business on a pro forma basis, which includes a full year-to-date contribution of FaZe Clan. Comparing our 2024 second quarter pro forma results to prior year, total revenue was $28.6 million compared to $23.1 million. The 24% year-over-year increase in revenue was primarily due to growth from FaZe Clan operations and programmatic advertising. Gross margin on a pro forma basis for the 2024 second quarter was $4.2 million or 14.8% of sales compared to $4.6 million or 20.1% of sales for the same period last year. The decline in gross margin for the year reflects a less profitable mix of sales, which temporarily impacted gross margin in the second quarter. We expect gross margin to improve going forward, supported by a more profitable revenue mix in the second half and actions underway to improve gross margin. As Justin mentioned, we have made significant strides in improving our operating cash burn figures over the last 12 months. On a pro forma basis, adjusted EBITDA loss for the 2024 second quarter amounted to $5.4 million compared to a loss of $10 million last year. As a percentage of revenue, our adjusted EBITDA loss improved from 43.5% for the 2023 second quarter to 18.9% for the 2024 second quarter. We believe the integration activities between GameSquare and FaZe Clan will yield annual cost savings of approximately $18 million in 2024 when comparing GameSquare and FaZe Clan pro forma combined results in Q4 '23 to the combined results in Q4 '24. With this overview, I'll turn the call back over to Justin. Justin Kenna Thanks, Mike. Before we open the call to questions, I want to review our expectations for the remainder of the year. After a solid first half, we believe we are extremely well positioned to achieve well over $100 million in annual revenue with an annual gross margin to range between 22.5% to 27.5%. We anticipate revenue growth to accelerate in the third and fourth quarters. In addition, we remain committed to pursuing strategies to expand gross margin, reduce SG&A expenses and drive profitability. As we look to the seasonally strong second half of the year, we believe we are well positioned to achieve our guidance and benefit from dramatic improvements in profitability. I believe our strong first half financial and operating performance support our initial success in creating a fast-growing, highly profitable and next-generation media business. I look forward to updating investors on our success on our third quarter conference call in November. So with this, Lou, Mike, and I are happy to take questions. Operator, please open up the line to any questions. Thank you. [Operator Instructions]. The first question comes from Sean McGowan with ROTH Capital. Sean McGowan I don't know if this is a question for Mike or Justin or Lou or anybody, but can you tell us if there were any unusual items that drove the gross margin to its level in the second quarter? Because it looks like your target for the year implies a pretty steep rebound in the back half of the year. So was there anything in the quarter that was unusual? And what gives you the confidence that you can rebound that much? Justin Kenna Yes, I can kick off, and Lou or Mike, feel free to add into this. Sean, the Q2 results had a higher percentage of programmatic revenue within the mix, which is our lowest margin area that kind of drags the blended down. You'll see from some of the recent news, the $3 million that we spoke about and recent sort of brand win, they are from being driven from the agency side of the business, which are much higher in nature. So we do tend to see a fair spike on the agency side and the owned and operated IP side in the back half of the year. So you will see that, seasonally, we are stronger in the back half of the year than the first half of the year, and that tends to come from that higher-margin revenue. So they seem like a bigger jump just based on the numbers, but for each dollar of growth within agency and owned and operated IP, you're going to see a real increase in margins. But we still feel very confident in being able to hit that number. we expect back half of the year margins to be far greater. We still expect revenue to grow, but I think the mix of that revenue will come more from the agency and owned and operated IP areas rather than large sort of growth from programmatic. Sean McGowan Okay. And two kind of housekeeping questions. Can you remind us of where on the income statement we would see embedded things like the transaction costs? And is stock-based comp in one line or is that kind of spread around? Mike Munoz Yes, I can answer that. So all stock-based comps and general and administrative expense, we don't spread it between the 3 primary operating costs. And sorry, Sean, what was the former question? Transaction costs, yes, roll off into other operating expenses. Sean McGowan Okay. All right. And then my last question is kind of a general question, I guess, for you, Justin. We're at economic times. We get good news. Some days, we get bad news. We've got election stuff, a lot of moving parts. What's your sense among your advertising partners as to what to expect as we go into the holiday season? Justin Kenna Yes. It's certainly been tricky, Sean. I think that there was a lot of discussion earlier in the year that ad and brand spend was back. And we found that our pipeline was really growing, but brands were still quite hesitant to spend that -- we're in a really strong position. I mean we -- that pipeline that we've been working on is starting to really resonate and close and translate into real revenue. Again, we mentioned some of the brands attached to sort of the new $3 million of agency recent wins. I think we mentioned there are a couple of sort of 7-figure deals on the FaZe side that we're in the process of closing out. And there's real pipeline into the back half of the year. So there's definitely mixed stories coming out of ad and brand win. But we're certainly feeling like we're breaking through, and we expect that to continue. So Q3, Q4 is looking really strong for us. We talked about the growth of our events business. There's a lot of events in the back half of the year from a gaming perspective. You have a lot of majors from the esports perspective. There's TwitchCon. We the NFL creator series. So there's a number of real catalysts there, but from -- just from the advertising perspective, yes, we're closing deals right now. And I think that this is certainly a space where we are starting to see those dollars finally kind of flow in. So yes, we feel really good about the back half of the year. This concludes the question-and-answer session. I would like to turn the conference back over to Justin Kenna for any closing remarks. Please go ahead. Justin Kenna Thanks, everyone, for joining the call today. We sort of touched on the fact that we're very much looking forward to giving you another update in November, and we are -- this is -- certainly, we've been working tirelessly around the integration of FaZe and the cleanup on that front. I think you've seen some of the benefits in the adjusted EBITDA improvement, but we expect that to really continue in a material way. So we're excited to continue sort of putting runs on the board. And this is sort of our first real combined set of financials, and we're very much looking forward to showing that continued improvement and like we talked about, getting to profitability. And we are very aware that, that is going to be key in these markets. So we're well on track and looking forward to catching up with everyone in November. So thanks for joining, and thanks for the continued support. Cheers. This concludes GameSquare's 2024 Second Quarter Financial Results Conference Call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

Earnings call: GameSquare reports revenue growth and strategic progress By Investing.com

GameSquare Holdings (ticker GSQ) has reported a 24% increase in pro forma revenue for the second quarter of 2024, reaching $28.6 million, and a significant improvement in profitability, with a pro forma adjusted EBITDA loss of $5.4 million, compared to a $10 million loss in the same period last year. The company's CEO, Justin Kenna, outlined strategic priorities, including the integration of FaZe Clan, divestiture of noncore assets, and leveraging of proprietary assets for growth. GameSquare also announced $3 million in new brand partnerships and expects to see the benefits of its investments throughout the second half of 2024. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In summary, GameSquare Holdings is navigating through a transformative period with a focus on strategic growth areas and operational efficiency. The company is looking forward to capitalizing on its investments and partnerships, aiming for a strong performance in the latter half of 2024. Investors are advised to look for further updates in the company's November call, which will provide insights into the third-quarter performance and outlook for the holiday season. InvestingPro Insights GameSquare Holdings (GSQ) has shown resilience despite facing challenges in profitability and liquidity. The company's commitment to strategic growth is evident in its recent revenue uptick and the integration of high-profile partnerships. Here are some insights from InvestingPro that can shed light on GameSquare's financial health and future prospects: InvestingPro Data: InvestingPro Tips: For more insights, there are additional InvestingPro Tips available at https://www.investing.com/pro/GAME, which can provide investors with a deeper analysis of GameSquare's financial health and market position. Full transcript - GameSquare Holdings Inc (NASDAQ:GAME) Q2 2024: Operator: Good afternoon, and thank you for joining us for the GameSquare Holdings 2024 Second Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. [Operator Instructions]. Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For information about forward-looking statements and risk factors, please see our 10-Q for the quarter ended June 30, 2024, which will be available on the company's website or with the Securities and Exchange Commission. I would now like to turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead. Justin Kenna: Thank you, and good afternoon to everyone joining us on today's call. I'm extremely excited to review the progress we're making at GameSquare as we pursue strategic priorities aimed at creating a fast-growing, highly profitable and next-generation media business. Activity across our business is high, and we are making significant progress towards optimizing our business model, investing in our long-term growth and improving profitability. While we still have work to do, we believe our pro forma results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. On a pro forma basis, revenue was $28.6 million for the 2024 second quarter, representing a 24% increase year-over-year and a 22% increase in 2024 first quarter. Strong revenue growth during the second quarter reflects the initial success of the actions we've taken and the strategies we are pursuing to rapidly grow our business. I'm extremely pleased with the significant improvement in profitability and our pro forma adjusted EBITDA loss for the 2024 second quarter improved to $5.4 million from $10 million for the same period last year and $7.9 million for the 2024 first quarter. The $2.5 million improvement in adjusted EBITDA loss over the past 3 months provides us with growing confidence in our efforts to reach profitability by the 2024 fourth quarter as we expect further revenue growth, higher gross margin and additional OpEx reductions to benefit our business in the second half of the year. As you can see, we expect to see the same, if not, greater dollar improvement in adjusted EBITDA in the third and fourth quarters as we approach profitability. Our operating plan for 2024 focuses on 3 main components: first, to complete the integration of the FaZe Clan acquisition and significantly reduce our cost structure; second, to strengthen our balance sheet and divest noncore assets; and third, to leverage our platform of owned and operated IP, agency and media and SaaS technology assets to drive profitable growth. I'm pleased with the progress we have made executing our plan during the first half of the year, which I believe will result in accelerating revenue growth and significantly enhanced profitability in the second half of the year. I'll use the rest of my time today to provide a business update before turning the call over to Mike, who will review our second quarter results in more detail. As a reminder, in March of 2024, we completed the acquisition of FaZe Clan, an all-stock transaction valued at $14 million. FaZe Clan is comprised of 2 assets: FaZe Esports, which is one of the world's best and most recognized esports organizations; and FaZe Media, which is one of the largest followed gaming brands in the world. As part of our strategy for the FaZe Clan acquisition, we understood that in order for FaZe Media to be successful FaZe's founders and creators must be allowed to have an ownership stake in the organization and be empowered with the creative direction. As a result, we have completed 2 important transactions with FaZe Media to align GameSquare, FaZe's founders and other key stakeholders around plan to return the brand back to its roots and reboot FaZe Media for success in 2024 and beyond. First, in May, we called FaZe Media as a separate stand-alone entity that combines the FaZe's creative talent roster and non-esports assets into a creative-led IP and Internet media company under the leadership of CEO FaZe Banks, an original FaZe founder. We simultaneously closed an $11 million investment in FaZe Media from Matt Kalish, a founder of DraftKings (NASDAQ:DKNG), who now serves on the Board of FaZe Media. Second, in June, we agreed to sell a 25.5% interest in FaZe Media to an entity controlled by FaZe's CEO, FaZe Banks, and owing FaZe Media at $14 million. Under the terms of the transaction, GameSquare retained voting control of the transferred shares for a period of 2 years during which FaZe Media will continue to be consolidated into GameSquare's financial statements. We believe these transactions create the proper infrastructure for FaZe Media to be successful. FaZe Media now truly is a creator-led IP and media company supported by the leadership and expertise of Matt Kalish and full resources of GameSquare. When we acquired FaZe Clan, the brand was suffering from significant losses, declining community engagement and no clear strategic direction. We're extremely proud of our efforts to turn around FaZe's performance and bring the brand back to life. This is a direct result of the return and hard work of the FaZe founders under leadership of CEO FaZe Banks; the strength of GameSquare's platform; our history with and know all the brand; and most importantly, our belief, if managed correctly, FaZe can reengage with an extremely committed community and lead to monetization opportunities in the coming months and quarters. I'd like to use this opportunity to thank everyone at GameSquare and FaZe for their hard work and dedication over the past 2 quarters. Since FaZe Media's reboot in April of 2024, the reengagement of the community has been fantastic. A couple of highlights include 4 of FaZe's talent roster were in the top 50 most watched streamers worldwide in July. FaZe's created roster has gained 4.5 million stream followers since May and now have 173 million followers in total. FaZe's roster garnered over 1.2 billion total views in Q2 '24, a 28% increase in 3 months. And finally, from April to July, FaZe Clan's weekly viewership has increased from 1.5 million hours watched to a peak of 4.8 million hours watched, an impressive 3x increase in just 4 months since the brand's reboot. Driving engagement with FaZe's community is an important indicator of future growth opportunities for GameSquare, as engagement helps support a robust pipeline of brand deals and future monetization opportunities. In fact, we have multiple 7-figure deals that we expect to convert to partnerships in the coming months. In addition to GameSquare's ownership and voting in FaZe Media, we continue to own 100% of FaZe Esports. As one of the top esports organizations in the world, we believe there is an enormous opportunity to profitably grow FaZe Esports, following a similar strategy that successfully grew our former esports team by over 220% in just 2 years. Supporting FaZe's brand overall is important for FaZe Esports, too. We're currently working on several opportunities to begin monetizing FaZe Esports with a new multiyear sponsorship and partnership deal opportunities. As you can see, in just a short period of time, we are quickly rebuilding FaZe Clan, creating a proper foundation and developing new monetization opportunities that we believe will support multiyear high-margin revenue opportunities for GameSquare. We are also focused on driving efficiencies and reducing costs at FaZe Media and FaZe Esports. When comparing the second quarter of 2024 and 2023 results at FaZe Clan, we have removed approximately $18 million of annualized costs and believe there are opportunities to remove additional costs throughout the remainder of 2024. With a more efficient operating model and a more disciplined management structure, we believe there is a lot of opportunity to drive profitable growth to FaZe Media and FaZe Esports, especially as each businesses -- as each business scales. Our second quarter improvement in adjusted EBITDA reflects the initial benefits of our integration strategy, and we expect additional enhancements to our cost structure in the coming quarters. We are extremely excited by the opportunities the FaZe Clan acquisition represents and how the brand fits into the GameSquare ecosystem. As part of our plan throughout 2024, we have sold noncore business assets to optimize our business and strengthen our balance sheet. Year-to-date, FaZe Clan has raised over $36 million of non-diluted capital, raised over $16.5 million of new capital through a private placement and a prepaid advance agreement, and paid off the principal balance of our senior secured notes. As a result, we have significantly strengthened our balance sheet and capital position and have the financial resources in place to support the growth strategies we are pursuing to take advantage of growing demand trends currently underway across our global markets. The final component of our plan in 2024, I want to review today the opportunities we are pursuing across our owned and operated IP, agency and media, and SaaS technology assets to profitable growth and improved profitability. Since our first quarter call, we made progress growing our owned and operated IP, agency and media, and SaaS technology assets. Starting with owned and operated IP. As I mentioned previously on today's call, FaZe Media's highly successful reboot and new talent roster is driving engagement within the community, which is supporting our deal pipeline and beginning to contribute to GameSquare's revenue growth. In addition, during the second quarter, we launched the FaZe Clan's co-branded product line with SteelSeries to retailers globally. And we recently announced a partnership with NFL to launch a new traveling creator series called NFL 4 THE FANS LIVE. This innovative series blends the excitement of NFL fandom on game days with interactive gaming and creator-driven content accessible for an in-person and online audience during the 2024 NFL season. We are also starting to see growing revenue contribution from our newly traded events business for GameSquare direct-to-brand experiences with partners such as Epic, owned IP such as the recently announced NFL partnership in the creative series, programming partner opportunities such as our SEICon partnership in Las Vegas, and large-scale esports production with the FaZe Halo Championship Major. In fact, events in the second quarter contributed over 5% of consolidated revenue. We are continuing to develop this area of the business with more partnerships and announcements, which we expect to come in the second half that showcase this continued revenue growth and our growing expertise. Looking towards growth in our media and agency businesses, we continue to pursue opportunities to expand our publisher relationships with major players like Epic Games and leverage the rapid success of our UEFN world building business. Just last week, we announced the $3 million of total new brand partnerships with renowned brands, including Topgolf, 5-hour ENERGY and Dairy MAX as well as multiple soon-to-be-announced projects with leading global sports media and entertainment companies. Our pipeline continues to grow, and we expect to announce additional new partnerships as we enter the seasonally strong second half of the year. Finally, on the SaaS and technology side of our business, we continue to combine our data and insights capabilities with our creative management and activation platform to deliver a more comprehensive solution for game publishers and brands looking to drive targeted audiences and improved revenue performance. In addition, we have developed an innovative AI-supported solution that leverages our data and technology stack to uncover influencers and creators based on unique search criteria. By utilizing our platform for data analysis and audience insights, companies can identify the most influential creators to partner with for their marketing efforts. We believe that this data-driven approach ensures that campaigns are effectively targeted and yield high performing ROI and performance-based returns. Our new AI solution is set to launch in the coming weeks in a customer that operates one of the largest online mobile games. We plan to make this capability available to other customers as part of our broader rollout plan throughout the quarter. Additionally, we are excited to announce the expansion of our managed services to include even more tailored solutions for our clients. This will include end-to-end campaign management, content creation and performance optimization. By offering these comprehensive services, we can now provide a one-stop shop for companies looking to enhance their marketing efforts through creator and influencer-led partnerships. As we look to the back half of the year, we are excited by the direction we are headed. We believe we will start to see the benefits of the investments we made in the first and second quarters throughout the second half of 2024. In addition, we are already seeing positive momentum underway across several of our markets as our refined platform resonates with global brands. While 2024 has already been a busy and transformative year for GameSquare, we believe we are just getting started, and I'm optimistic about reporting on our continued success on future calls. So with this overview, I'd like to turn the call over to Mike to review our second quarter financial results. Mike Munoz: Thanks, Justin. As a reminder, 2024's financial results include multiple corporate actions, most significantly, the March 7, 2024, acquisition of FaZe Clan and the March 1, 2024, sale of Complexity Gaming, which has been treated as a discontinued operation in our 2024 and 2023 year-to-date results. We also further divested noncore assets during the year on May 31, 2024. As a result, we believe it is best to look at our business on a pro forma basis, which includes a full year-to-date contribution of FaZe Clan. Comparing our 2024 second quarter pro forma results to prior year, total revenue was $28.6 million compared to $23.1 million. The 24% year-over-year increase in revenue was primarily due to growth from FaZe Clan operations and programmatic advertising. Gross margin on a pro forma basis for the 2024 second quarter was $4.2 million or 14.8% of sales compared to $4.6 million or 20.1% of sales for the same period last year. The decline in gross margin for the year reflects a less profitable mix of sales, which temporarily impacted gross margin in the second quarter. We expect gross margin to improve going forward, supported by a more profitable revenue mix in the second half and actions underway to improve gross margin. As Justin mentioned, we have made significant strides in improving our operating cash burn figures over the last 12 months. On a pro forma basis, adjusted EBITDA loss for the 2024 second quarter amounted to $5.4 million compared to a loss of $10 million last year. As a percentage of revenue, our adjusted EBITDA loss improved from 43.5% for the 2023 second quarter to 18.9% for the 2024 second quarter. We believe the integration activities between GameSquare and FaZe Clan will yield annual cost savings of approximately $18 million in 2024 when comparing GameSquare and FaZe Clan pro forma combined results in Q4 '23 to the combined results in Q4 '24. With this overview, I'll turn the call back over to Justin. Justin Kenna: Thanks, Mike. Before we open the call to questions, I want to review our expectations for the remainder of the year. After a solid first half, we believe we are extremely well positioned to achieve well over $100 million in annual revenue with an annual gross margin to range between 22.5% to 27.5%. We anticipate revenue growth to accelerate in the third and fourth quarters. In addition, we remain committed to pursuing strategies to expand gross margin, reduce SG&A expenses and drive profitability. As we look to the seasonally strong second half of the year, we believe we are well positioned to achieve our guidance and benefit from dramatic improvements in profitability. I believe our strong first half financial and operating performance support our initial success in creating a fast-growing, highly profitable and next-generation media business. I look forward to updating investors on our success on our third quarter conference call in November. So with this, Lou, Mike, and I are happy to take questions. Operator, please open up the line to any questions. Thank you. Operator: [Operator Instructions]. The first question comes from Sean McGowan with ROTH Capital. Sean McGowan: I don't know if this is a question for Mike or Justin or Lou or anybody, but can you tell us if there were any unusual items that drove the gross margin to its level in the second quarter? Because it looks like your target for the year implies a pretty steep rebound in the back half of the year. So was there anything in the quarter that was unusual? And what gives you the confidence that you can rebound that much? Justin Kenna: Yes, I can kick off, and Lou or Mike, feel free to add into this. Sean, the Q2 results had a higher percentage of programmatic revenue within the mix, which is our lowest margin area that kind of drags the blended down. You'll see from some of the recent news, the $3 million that we spoke about and recent sort of brand win, they are from being driven from the agency side of the business, which are much higher in nature. So we do tend to see a fair spike on the agency side and the owned and operated IP side in the back half of the year. So you will see that, seasonally, we are stronger in the back half of the year than the first half of the year, and that tends to come from that higher-margin revenue. So they seem like a bigger jump just based on the numbers, but for each dollar of growth within agency and owned and operated IP, you're going to see a real increase in margins. But we still feel very confident in being able to hit that number. we expect back half of the year margins to be far greater. We still expect revenue to grow, but I think the mix of that revenue will come more from the agency and owned and operated IP areas rather than large sort of growth from programmatic. Sean McGowan: Okay. And two kind of housekeeping questions. Can you remind us of where on the income statement we would see embedded things like the transaction costs? And is stock-based comp in one line or is that kind of spread around? Mike Munoz: Yes, I can answer that. So all stock-based comps and general and administrative expense, we don't spread it between the 3 primary operating costs. And sorry, Sean, what was the former question? Sean McGowan: Yes, where is transaction cost embedded in the P&L? Mike Munoz: Transaction costs, yes, roll off into other operating expenses. Sean McGowan: Okay. All right. And then my last question is kind of a general question, I guess, for you, Justin. We're at economic times. We get good news. Some days, we get bad news. We've got election stuff, a lot of moving parts. What's your sense among your advertising partners as to what to expect as we go into the holiday season? Justin Kenna: Yes. It's certainly been tricky, Sean. I think that there was a lot of discussion earlier in the year that ad and brand spend was back. And we found that our pipeline was really growing, but brands were still quite hesitant to spend that -- we're in a really strong position. I mean we -- that pipeline that we've been working on is starting to really resonate and close and translate into real revenue. Again, we mentioned some of the brands attached to sort of the new $3 million of agency recent wins. I think we mentioned there are a couple of sort of 7-figure deals on the FaZe side that we're in the process of closing out. And there's real pipeline into the back half of the year. So there's definitely mixed stories coming out of ad and brand win. But we're certainly feeling like we're breaking through, and we expect that to continue. So Q3, Q4 is looking really strong for us. We talked about the growth of our events business. There's a lot of events in the back half of the year from a gaming perspective. You have a lot of majors from the esports perspective. There's TwitchCon. We the NFL creator series. So there's a number of real catalysts there, but from -- just from the advertising perspective, yes, we're closing deals right now. And I think that this is certainly a space where we are starting to see those dollars finally kind of flow in. So yes, we feel really good about the back half of the year. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Justin Kenna for any closing remarks. Please go ahead. Justin Kenna: Thanks, everyone, for joining the call today. We sort of touched on the fact that we're very much looking forward to giving you another update in November, and we are -- this is -- certainly, we've been working tirelessly around the integration of FaZe and the cleanup on that front. I think you've seen some of the benefits in the adjusted EBITDA improvement, but we expect that to really continue in a material way. So we're excited to continue sort of putting runs on the board. And this is sort of our first real combined set of financials, and we're very much looking forward to showing that continued improvement and like we talked about, getting to profitability. And we are very aware that, that is going to be key in these markets. So we're well on track and looking forward to catching up with everyone in November. So thanks for joining, and thanks for the continued support. Cheers. Operator: This concludes GameSquare's 2024 Second Quarter Financial Results Conference Call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

Earnings call: IZEA reports strong Q2 2024 Managed Services growth By Investing.com

IZEA Worldwide Inc. (NASDAQ: NASDAQ:IZEA), the premier provider of influencer marketing technology, data, and services, reported its financial results for the second quarter of 2024. The company highlighted a significant increase in Managed Services bookings, which surged by 40% over the same period last year, reaching $10.3 million. This marks the highest total in eight quarters, signaling a robust demand that is expected to translate into revenue growth in the subsequent quarters. However, the company did experience a net loss of $2.2 million for the quarter and a 14.9% decrease in total revenue compared to the prior year's quarter. The decline in revenue was attributed to the departure of a large non-recurring customer in 2023. Excluding this factor, revenues showed a healthy growth of 23.9%. In summary, IZEA is navigating a transition year with a focus on organic growth and strategic acquisitions. While facing challenges such as the loss of a major customer and a net loss this quarter, the company remains optimistic about its growth trajectory and is taking proactive steps to enhance its offerings and customer base. The management team is committed to reaching its revenue targets and achieving sustainable profitability in the long term. In the context of IZEA Worldwide Inc.'s recent financial report, several key metrics and insights from InvestingPro provide a deeper understanding of the company's financial health and stock performance. InvestingPro Data highlights that IZEA holds a market capitalization of $33.82 million, which reflects the market's current valuation of the company. The P/E ratio stands at -4.46, indicating that investors are willing to pay a negative price for each dollar of earnings, which aligns with the fact that the company is not currently profitable. Additionally, the revenue for the last twelve months as of Q1 2024 is reported at $34.43 million, with a concerning decline of 15.91% compared to the same period last year. Among the InvestingPro Tips, two particularly relevant ones stand out. Firstly, IZEA is holding more cash than debt on its balance sheet, which may provide some financial stability and flexibility. Secondly, analysts do not anticipate the company will be profitable this year, which is an essential consideration for investors expecting near-term profitability. These insights are crucial for investors who are considering the implications of IZEA's financial results and future outlook. With a volatile stock price and a recent poor performance, as indicated by a 12.66% decline in the stock price over the last month, the company's prospects require careful analysis. For those interested in a more comprehensive set of insights, InvestingPro offers additional tips on IZEA, which can be found at https://www.investing.com/pro/IZEA. Ryan Schram: Good afternoon everyone and welcome to IZEA's Earnings Call covering the Second Quarter of 2024. I'm Ryan Schram, President and Chief Operating Officer at IZEA and joining me on the call are IZEA Chief Financial Officer, Peter Biere; and IZEA Founder, Chairman and Chief Executive Officer, Ted Murphy. Thanks for being with us today. Earlier this afternoon, the company issued a press release detailing IZEA's performance during Q2 2024. If you'd like to review any of those details, all of our investor information can be found online on our Investor Relations' website at izea.com/investors. Before we begin, please take note of the Safe Harbor paragraph included in today's press release covering IZEA's financial results and be advised that some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. We encourage you to consider these disclosures contained in our SEC filings for a detailed discussion of these factors. Our commentary today will also include the non-GAAP financial measure of adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today and in our publicly available filings. And with that, I'd now like to introduce and turn the call over to IZEA's Chief Financial Officer, Peter Biere. Peter? Peter Biere: Thank you, Ryan and good afternoon everyone. I'll review operating results for the quarter ended June 30, 2024 compared to the prior year's quarter and discuss certain balance sheet highlights. We saw a strong demand from Managed Services during the second quarter of 2024, resulting in a 40% lift in bookings over the prior year quarter and the highest total in eight quarters. This demand is expected to be reflected in revenues over the coming quarters and we believe it indicates a strong potential for our growth. Managed Services bookings for the second quarter of 2024 totaled $10.3 million compared to $7.3 million in the prior year's quarter, a 40.3% increase. The increase was largely attributable to a robust sales pipeline that has continued to develop over the past several quarters. As a reminder, IZEA reports bookings net of cancellations and refunds issued within the quarter. Total revenue for the second quarter of 2024 was approximately $9.1 million or 14.9% below the prior year quarter. Excluding revenue attributable to the large customer, which we parted ways with in 2023, referred to as the non-recurring customer, revenues grew a healthy 23.9% from the prior year quarter. Our Managed Services revenue totaled $8.9 million during the second quarter of 2024, which was $1.8 million or 16.6% lower than the second quarter of 2023. Removing approximately $3.3 million of revenue from our non-recurring customer in the prior year quarter, Managed Services revenue increased by $1.6 million or 21.7% from the same period of 2023, largely driven by improving demand. It's important to note that IZEA's revenue typically lags behind bookings with an average delivery time of seven and a half months between contract signing and revenue recognition. Our Managed Services backlog, which represents unrecognized revenue for contracts that are underway as well as recent bookings that we haven't started to invoice, totaled $15.6 million on June 30th, 2024. This is an increase of $1.1 million versus the first quarter of 2024 and $4 million from December of 2023. SaaS Services revenue totaled $0.2 million in the second quarter of 2024, more than triple the total for the prior year quarter. This growth has been driven primarily by subscriber expansion within izea.com and revenue from the Zuberance customer base. We ended the current quarter with a record number of active SaaS customers, a continuing positive trend. The majority of these customers are actively using IZEA's AI tools. Our total cost of revenue was $5.2 million, or 56.9% of revenue in the second quarter of 2024 compared to $6.3 million, or 58.5% of revenue in the prior year quarter. The current percentage cost decline represents improved margins from our ongoing customer base. Expenses other than the cost of revenue totaled $6.8 million for the second quarter of 2024, up 11.4% from $6.1 million in the prior year quarter. Sales and marketing costs totaled $3.2 million during the second quarter, up 13.2% compared to the prior year quarter, due primarily to higher spending on demand generation activities to drive new customer growth. General and administrative costs totaled $3.4 million during the second quarter, up 6.5% from the prior year quarter, due primarily to higher human capital costs and increased professional and contractor fees. Our net loss in the current quarter totaled $2.2 million or negative $0.13 per share on 16.5 million shares compared to a net loss of $1 million or negative $0.07 per share on 15.6 million shares for the second quarter of 2023. Adjusted EBITDA was negative $1.6 million for the second quarter of 2024 compared to negative $0.6 million for the prior year quarter. As of June 30th, 2024, we had $56.5 million in cash and investments, a decrease of $4.3 million from the beginning of the quarter, primarily due to negative EBITDA and funding higher level of working capital. During the current quarter, we earned $634,000 in interest on our investments. And lastly, we do not have any debt on our balance sheet. With cash on hand and liquidity from our investment portfolio as required, we're in a solid position to execute on organic business growth and acquisition opportunities that lie ahead. And with that, I'll turn the call back over to Ryan. Ryan Schram: Thanks Peter and good afternoon everyone. I'm excited to share the progress we've made in the second quarter of 2024 and to highlight the strides we're making in both our Managed Services and technology enablement initiatives. IZEA is on a solid path towards achieving the three-year plan our management team laid out at the beginning of this year and we're eager to provide you with an update on our recent performance. Let's start with Managed Services. Our Managed Services team made significant headway during Q2. In the quarter, we saw strong organic growth in bookings with our win rate recovering, as we converted a higher percentage of opportunities in our pipeline into bookings. The success in Q1 and Q2 bookings has started to translate into revenue during the second quarter and should continue to have positive impacts on Q3 and beyond this year. We expect to be able to begin reporting year-over-year revenue growth again in the coming quarters as these bookings are recognized. We recently announced the acquisition of 26 Talent and The Reiman Agency. 26 Talent brings a roster of creators and a wealth of creator representation experience to IZEA, enhancing our talent representation business in Australia. 26 Talent has been tucked underneath the Huume umbrella, and we recently just launched a new website and rebranding of Huume, which now lives at huume.com, that's H-U-U-M-E.com. The Reiman Agency, known for its innovative approach to talent brokerage and content creation, will further bolster IZEA's service offerings and expand our reach in the creator economy overall. Reiman has deep relationships with athletes, celebrities, and other top-tier talent, allowing brands to quickly execute programs that may otherwise be cost prohibitive or difficult to execute. These new acquisitions are pivotal in our strategy to both diversify revenue and strengthen our client portfolio. IZEA's acquisition philosophy emphasizes stable operations, manageable risks, and the potential for expense consolidation with post-acquisition upside. We're in the process of migrating our recent acquisition to IZEA systems, processes, and proprietary technologies. And we've identified multiple areas for improvement and efficiency and we'll continue to work with the management teams of those companies to both grow their businesses and contribute to IZEA overall. IZEA's acquisitions to-date have been strategic, but rather small in size. This has been deliberate in an effort to institutionalize the company's M&A capabilities internally and create the framework for a full acquisition life cycle. I'll now turn things over to our Founder, Chairman and CEO, Ted Murphy. Ted? Ted Murphy: Thank you, Ryan. We are operating against our three-year plan to reach $76 million in annual revenue by 2026. In addition to revenue, achieving sustainable profitability in this time frame is absolutely key for management and the Board and we know it is important to our investors. Our intent is to deliver a meaningful EBITDA improvement in 2025 and begin to show EBITDA-positive quarters in the back half of 2026. 2024 is a transition year for us. We continue to experience lower revenue comparisons after parting ways with a large customer last year, but this is now over. We expect to begin seeing year-over-year revenue growth in the third quarter. The loss in revenue has been hurting our profitability as well, but we're progressing nicely forward as we fill the revenue gap with more profitable customers. The bookings growth we've seen this year is beginning to show in higher revenues. We have also been taking measures to reduce some human capital resources and other expenses where appropriate. In Q2, we made a slew of technology announcements ranging from our AI influencer marketing assistant, IZZY, to new budgeting and workflow tools. While these technologies can be licensed by customers, I want to emphasize that our core focus near term is making our own people and processes more efficient through technology enablement. IZEA Managed Services is our first and best customer. With each new release, we help our team accomplish more with less, better leveraging our costs while our end customers enjoy better experience. We have fewer FTEs today than we did at our peak in 2016, but we are generating more than 4 times the annual revenue. Revenue per FTE continues to be a focus of ours and the best way to boost output is through an ongoing focus on automations in every job capacity. Last year, we began rolling out AI tools to everyone on our team. The self-reported efficiency gains, not to mention the increased capabilities, have been felt in every department and seen by our end customers. We believe technology and specifically AI enablement throughout our enterprise is a critical piece of our three-year plan. However, expense management and efficiency gains alone will not drive us to sustainable profitability. Certain baseline costs will continue to increase with inflation, such as healthcare costs and fees associated with being a public company. Sustainable profitability must ultimately be achieved by way of revenue growth through a diverse mix of customers and services. Our strategy for growth remains two-pronged. On one hand, we are committed to driving organic growth by enhancing our product offerings, improving customer experiences, and entering new markets. On the other hand, we are actively exploring further acquisitions that complement our existing services and bring valuable new capabilities and markets to our portfolio. Customer diversification is essential to our strategy. It reduces our reliance on single clients, making us less vulnerable to fluctuations in specific client relationships or industries. Over the next three years, our aim is to attract a broader range of clients across various sectors and regions, fostering long-term partnerships with IZEA. This strategy will enhance our stability, predictability, and profitability. We previously announced a $5 million share repurchase program. While we have been unable to execute against this buyback to-date due to the restrictive windows mentioned in the announcement, we intend to be active buyers when our trading windows are open. We believe our stock is undervalued and this repurchase program reflects our confidence in the company's future growth and value creation potential. This move underscores our commitment to returning value to our shareholders and our belief in the long-term prospects of IZEA with the capital on hand. In conclusion, we are excited about the progress that we are making both in Managed Services and in tech enablement. We are confident in our ability to reach our revenue goals and deliver long-term value to our shareholders. The Board and management are committed to proactive measures to ensure we achieve our strategic objectives. Thank you for your time today. I will now open the call for Q&A from the analyst community. End of Q&A:

Earnings call: ESS forecasts growth amid Q2 shipping delays and funding By Investing.com

In the second quarter of fiscal year 2024, ESS (NYSE: GWH) reported modest revenue figures but expects significant growth in the near future. The company faced delays in shipping its units due to a partner's delay in final approvals and funding. However, ESS is optimistic about shipping and recognizing revenue for those delayed units in the third quarter. The company is also in the process of securing a transformative agreement with the Export-Import Bank of the United States for up to $50 million to expand manufacturing capacity. ESS's long duration energy storage solutions have received favorable attention from lawmakers and regulators, and the company has achieved important certifications for its iron flow technology in California. Despite the delays, ESS is making strides in the development of its Energy Center project and is focusing on increasing shipments in the coming quarters. With a reported revenue of $348,000 for Q2 and $74.4 million in cash and short-term investments, ESS is working towards profitability through cost reduction initiatives and expansion of production capacity. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights InvestingPro Insights In light of ESS's current financial and operational status, several data points and tips from InvestingPro offer a deeper understanding of the company's market position. Here are the selected insights: InvestingPro Data: InvestingPro Tips: For investors looking to delve deeper into ESS's financial health and future prospects, InvestingPro offers additional insights and tips. Currently, there are 14 additional InvestingPro Tips available for ESS at https://www.investing.com/pro/ESS, which can provide further guidance for those considering an investment in the company. Full transcript - ESS Tech Inc (GWH) Q2 2024: Operator: Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a Q&A session [Operator Instructions]. I would now like to turn the conference over to our host, Erik Bylin. Please go ahead, sir. Erik Bylin: Welcome to ESS Second Quarter of Fiscal Year 2024 Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhuys, CEO; and Tony Rabb, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the second quarter of fiscal year 2024. The earnings release is available in the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects, partnerships, financial performance and strategy for 2024 and beyond. The forward-looking statements are also subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors set forth in more detail in our most recent periodic filings filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, issues with our partnerships, the markets, the economy and the current geopolitical situation. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call today are based on assumptions and beliefs as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with US GAAP financial measures provide useful information for both management and investors by excluding certain items that are not indicative of our core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between US GAAP and non-GAAP results are presented within our earnings release. With that, I'll turn the call over to ESS CEO, Eric Dresselhuys. Eric Dresselhuys: Welcome, and thanks for joining us today. Momentum continues to build for our business and for the larger long duration energy storage market. In the last quarter, we've seen continued regulatory momentum to grow deployments of eight plus hour duration storage and direct funding announcements to projects that will accelerate adoption and continued deployment of our technology reinforcing our position as a leader in the field. In the second quarter, we have expected to ship more units but a key partner experienced a delay in final approvals and funding. We have built and had anticipated shipping approximately 12 additional EWs last quarter in support of those projects. But unfortunately, they flipped. Based on the current information provided by the partner and the end customer, we now expect to ship and recognize revenue for those units in the third quarter. So stay tuned for further announcements. These delays are frustrating and given our early stage any shift in project timing has a meaningful impact on the results within any given quarter. In any case, we continue to execute on our strategy and expect to ramp revenue in the back half of the year as we lower cost and increase our capacity. I'm thrilled to announce that we are finalizing the details to close a transformative agreement with the Export-Import Bank of the United States, or EXIM for up to $50 million in funding to help ESS continue to maintain our strong balance sheet while expanding our operations. Provided by the Make More in America Initiative, this funding is long term, low interest nondilutive capital to finance expanding manufacturing capacity. We can use it immediately to add to our cash position, borrowing about $10 million this year, including on a look back basis for previously installed capacity and for the addition of Line 2, which is expected to triple our production capacity to over 1 gigawatt hour of battery capacity annually. Just last week, we were joined by Senator Ron Wyden and EXIM Vice Chair, Judith Pryor and numerous other dignitaries here in Wilsonville to hold the ribbon cutting to celebrate our growing manufacturing capacity. This groundbreaking followed the visit from the Conservative Climate Caucus, a group of Congress people that works to reduce emissions by educating house republicans and climate policies and legislation consistent with conservative values, proving that lowering our carbon footprint through American made long duration energy storage is a bipartisan imperative, something we can all agree upon. We're honored to have gained their support and humbled to hear their praise for what ESS is doing on storage in the US. This support for scaling is important because we're going to need a lot of long duration energy storage. As many of you know, electricity demand in the US and around the world is beginning to increase dramatically as we work to electrify everything and support the massive demand from technologies such as generative AI. After decades of essentially no load growth, the Federal Energy Regulatory Commission or FERC now shows that US electricity demand is expected to grow by 4.7% annually. That translates to 38 gigawatts of growth by 2028, as large customers are expecting it to be clean, driving the demand for green energy PPAs and clean baseload power. Legislators and regulators are hearing the call, resulting in new mandates for long duration energy storage in California, Michigan, New York and other states and across the globe. Ensuring a reliable, cost effective, decarbonized electricity system is our mission here at EFS, and we were pleased to be included in the recent New York Times discussion on the need to ensure the reliability of the grid. Our customers are leading the industry to the future and their work demonstrates the progress we're making in the market, helping position our iron flow technology as the most proven long duration energy storage technology available. These proof points are critical as they demonstrate the value of our solutions across a variety of use cases, unlock future projects with these customers and serve as a critical catalyst to building on an over $1.5 billion in potential projects with our current customers. Earlier this year, we successfully commissioned our first system at Schiphol Airport in Amsterdam, which is installed on the tarmac to phase out diesel ground power units or GPUs that supply electrical power to aircraft while they're parked at the gates. I'm pleased to share that in Q2, we went into operation at the airport and are charging GPUs. This is an extremely meaningful validation of the safety of our technology given the strict standards in commercial aviation while also proving out the functionality and versatility of our batteries. And yet another sign of the imperative behind California's drive to decarbonize and increase resiliency of the electricity system. In July, the California Energy Commission or CEC, awarded a $10 million grant to our long duration battery storage project in partnership with Sacramento Municipal Utility District or SMUD. As a reminder, SMUD signed a 2-gigawatt hour framework agreement with ESS and we have already delivered and commissioned the first phase of this agreement. The CEC's funding, along with incremental investments in SMUD, will be used to fund Phase 2, a 3.6 megawatt eight hour iron flow battery implementation. With SMUD transitioning to a carbon free power portfolio by 2030, a goal which is now a near 5.5 years away, they are clearly taking meaningful steps towards achieving the 13.6 gigawatts of energy storage the California Public Utility Commission believes California will need by 2032. At the end of May, Burbank Water and Power held their ribbon cutting with local elected officials to commemorate the commissioning of their ESS Energy Warehouse, their first long duration energy storage system. EWP is another progressive California utility that recognizes the necessity of pairing LDES with renewables to achieve their aggressive decarbonization goals. Our Energy Warehouse is now integrated into BWP's EcoCampus and connected to a 265-kilowatt solar array capable of powering about 300 homes. Their forward thinking approach to decarbonization will help them increase their use of renewable energy and propel them towards their goal of achieving 100% carbon free power by 2040. I'm pleased that ESS will play such an integral part in this journey and it is gratifying to see the Burbank team so eager to publicize their project, including their planned VIP tour in September. We were pleased to announce that Indian Energy, a native American-owned microgrid developer and integrator, the CEC and the Department of Defense together selected ESS' iron flow batteries to demonstrate the diverse capabilities of LDES technologies for utility scale resilient microgrid. The program is a valuable step forward in proving that LDES can deliver energy security to remote communities like triball nations and military bases. Over the coming months, our project partners expect to demonstrate a variety of use cases for the California energy market, including solar peak shifting and grid ancillary services, after which time it will be placed into commercial operation. And now I'll touch on our progress with the Energy Center project we're developing with Portland General Electric (NYSE:POR) and the transition to production manufacturing. Importantly, as we've shared in the past, we completed production and testing of the inaugural EC and have been cycling it to hone the operations while subjecting it to varied operating demands to characterize and validate its operational performance. As part of this, we continue to conduct additional durability cycling against both the PNNL and [indiscernible] testing regimes. It's great to see the unit performing well and we have transacted more than 140-megawatt hours of energy through this 1 unit over the last couple of months. Importantly, we're thrilled to see our iron flow technology transition quickly to a scaled up form factor through the great work of our engineering and production teams. Building the units is only one part of making a new battery ready for market. In our business, certifications are imperative to our customers. Ensuring our solutions are safe and can withstand the harsh environments in which they operate is critical to enabling adoption. We mentioned last quarter that we were the first nonlithium grid battery [bet] for both the EW and EC achieved IEEE 693 certification, a seismic rating that qualifies new systems for deployment as critical infrastructure across the United States. This is an essential certification for LDES deployment in California. And in the near term, we expect to achieve UL 9540 for the EC, a safety standard for energy storage systems and equipment for fire prevention. Achieving both IEEE 693 and the UL 9540 certifications is critical for utilities, given the ongoing lithium storage incidents in California and elsewhere and an important step in demonstrating the viability of our EC for frictionless deployment across broad use cases and a variety of environments. Given our progress, we incorporated a number of design optimizations from our first EC to enhance manufacturability and begin production of our second unit for PGE in July. We expect this unit to be completed by our next earnings call with grid interconnection and handover to PGE expected to take place soon after. In conjunction with that, we are nicely positioned to begin building the first ECs for commercial deliveries in August. In preparation for our planned shipments to Tampa Electric, followed by SMUD, we have bolstered our operations and assembly lines to accommodate the EC manufacturing requirements and volume expectations. As we've discussed on previous calls, our plan for 2024 was to moderate our builds and shipments in the first half and scale them in the second half after we make progress on our cost reduction initiatives. That plan remains intact and we expect to begin increasing our shipments in the coming quarters, driven by a combination of EWs and initial shipments of our EC. As you have likely seen from many companies in the energy transition space, project timing can be difficult to predict and we've certainly had our share of delays. That said, we continue to see ramping 2024 revenue to multiples of what it was in 2023, which sets us up nicely to achieve our broader expansion plans for 2025 and beyond. So we'll continue to work to keep these projects on track. And with that, I'll turn it over to Tony. Tony Rabb: Thanks, Eric. Unless otherwise noted, all numbers we discuss today will be on a non-GAAP basis. You'll find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our Investor Relations Web site. We reported revenue of $348,000 in the second quarter with the associated cost of revenue reported at $11.7 million. As previously shared, the transition from R&D accounting to inventory accounting results in an LCNRV adjustment that dramatically impacts our current COGS results. This will not be a material contributor to our financials as we reach scale. We continue to make progress towards profitability. However, our COGS results will not fully reflect our cost reduction initiatives benefits, thereby making it difficult to assess our progress through our current financial statements. We're making great progress with incremental cost reduction initiatives through value engineering, supply chain optimization and process improvements for both the Energy Warehouse and Energy Center. As we previously mentioned, during 2023, we lowered the cost to build EW by 60% and we're targeting another 40% reduction this year. With the improvements we're realizing on the cost reductions in 2024, we still expect to reach non-GAAP gross margin profitability on the Energy Warehouse by the end of this year. Our non-GAAP operating expenses for Q2 were in line with our expectations at $9.1 million. Non-GAAP R&D came in at $1.9 million, which we believe reflects the company's run rate and continued investment in our cost out initiatives and product road map improvements on reliability, durability and the efficiency of the EW and EC. With that, we reported Q2 adjusted EBITDA of negative $18.8 million. Turning to cash flow and liquidity. We ended the second quarter with $74.4 million in cash and short term investments. We remain focused on managing our cash burn rate, including driving ongoing efforts to optimize working capital. As Eric mentioned, this quarter, we expect to close on the first tranche of an up to $50 million financing facility from EXIM and from this, we intend to add about $10 million of cash to our balance sheet this year with extended repayment terms and very competitive interest rates. We have invested in another automated line that is planned to come online early next year to produce power modules that should greatly enhance our ability to ramp up in 2025. That capacity expansion comes at a dramatic improvement in cost per megawatt, roughly half the cost we previously expected. And with the EXIM agreement, we expect to fully fund this and future production capacity expansion. We're extremely well positioned to continue to expand our production capacity through this EXIM financing facility, effectively funding all of our production capacity CapEx needs through 2025 and into 2026. This transformative agreement bolsters our liquidity levels and we expect should support our business cash needs well into 2025. We continue to opportunistically look to strengthen our balance sheet through dilutive and nondilutive financing alternatives, to provide the necessary capital to give us operational flexibility to respond to market demand. Our EXIM financing is a great example of a nondilutive solution to bolstering our cash position. Additionally, with such strong market tailwinds, we continue to see considerable investor interest in investing in long duration energy storage, and we remain very confident in our ability to raise the necessary capital to fund us through to cash flow breakeven. And finally, as you may have seen, we filed a proxy statement with the SEC to execute a reverse split of our stock to address a listing notice from the New York Stock Exchange. Once executed, we expect to be in compliance with the listing requirements and continue our operations as a publicly listed company. The current ratio of shares has yet to be determined but we expect to complete the split in late August. And with that, I'll open it up for questions. Operator: [Operator Instructions] Your first question comes from Colin Rusch. Unidentified Analyst: This is Lidya on for Colin. First, we noticed on Slide 20 of the investor presentation that the capital required to produce for ESS is around $20 million per gigawatt hour. Could you maybe talk about what scale you would need to achieve that number? Eric Dresselhuys: You mean the scale to -- that's on a per gigawatt hour basis in terms of the capacity that we need to add. So each of our lines is substantially less than that amount. Tony Rabb: So we can build an increment smaller than a gigawatt. I think Line 2 is about a half, a little bigger than 0.5 gigawatt hour of capacity... Unidentified Analyst: And then maybe for a follow-up, could you speak to the growth in potential customers evaluating your field data and how quickly those customers are moving through your sales funnel? Tony Rabb: It's a mixed bag, as you would expect. We're seeing two things. We're seeing some of the behind the meter applications where customers have kind of follow-on applications, they tend to move through more quickly. They'll often want to run for a year but sometimes less. And for other customers, we have a multi phased approach where we're going through it kind of in order. So we'd expect, as we said, if you look at SMUD to having deployed the first phase, complete the work on that and start moving on to the second phase, which will be an EC phase product. But the third piece that we found is that a lot of the market activity these days from an RFP, RFI perspective, are all targeting larger projects that will be '26 and '27 projects. One of the things about our industry that people who follow other companies would certainly be aware is that the lead times for planning are quite long and that can be influenced by interconnect cues and site preparations as well. So we have a lot of folks that are looking at current customers and visiting them, getting feedback on the product as they're making their plans for very large projects that happen in the out years. And that activity has increased quite a bit in part, as I mentioned, due to things like the need for green PPAs from hyperscalers and folks like that. Operator: Your next question comes from Corinne Blanchard. Unidentified Analyst: This is actually Mike [indiscernible] on for Corinne. My question has to do with your revenue target of 3 times to 4 times in 2024. So this is implying $23 million in the second half at midpoint. Could you maybe break that down between Energy Centers and Energy Warehouses? Eric Dresselhuys: I think that the ramp-up on the Energy Centers we've talked about in the past will start in the -- not until the fourth quarter. So it's going to be, I'd say, I don't know, maybe a split of two thirds EW and a third ECs. As we said in our -- in the prepared comments, not just what we've seen but with other people have seen, we get very interested about the timing of one project versus another if there's any slippage or movement in timing because our numbers are comparatively small number of projects, that can make a pretty big difference. So I wouldn't want to hang my hat too hard on exact mixes but that would roughly be the layout. Unidentified Analyst: And then my follow-up has to do with the growth tied to AI and data centers. You mentioned it in your prepared remarks, I was wondering if you could give a little bit more color around what you're hearing from potential customers in that space? Eric Dresselhuys: So the step back is really on the broader category of data centers. One of the increasingly loud screams we're hearing from the market, both from end users but also from developers who serve that market is that the data center operators have very ambitious plans for building out in support of what they expect to be massive growth in generative AI. And that's got two problems. One, it's just regular use, but generative AI is, depending on who you talk to, kind of 8 to 10 times more energy consuming than, say, a typical Google (NASDAQ:GOOGL) search. So people are anticipating that demand. And what's happening is they're going to utilities, not just here in the US but around the world saying, hey, I'd like to build a data center of this size and I need the power of a certain level. And they're getting the answer back from the utilities that say, I'm sorry, I just can't support that, it's just too much energy. So this is becoming kind of an economic limiter for the people in the business of hosting data centers to say where can I go put a data center that can supply the power I need. In some markets like Ireland, as an example, Ireland, they've come out and just told data center people would love to have you, but you're totally responsible for coming up with your own power. So with that as a little bit long winded background what we're finding is that people are looking at saying, can I do this as a microgrid, can I buy my own renewables, pair it with storage and create a 24/7 green energy system and do that without having a heavy reliance, maybe not no reliance, but without any heavier reliance on the grid operator that I normally would thought about doing. It's early days of this but it's a topic at every conference that happens in the energy industry these days. And there have been quite a few big public announcements from Google, Microsoft (NASDAQ:MSFT) and AWS, they're trying to procure their own green PPAs to get out of the way to not have the reliance on the utility operators. Operator: Our next question today comes from Justin Clare. Justin Clare: So I wanted to start with the manufacturing here. So the second automated line, I think that's expected to come online next year. I was wondering if you could talk about the ramp there. So you talked about getting to 1 gigawatt hour. When could you achieve that run rate and what does the time line look in terms of the ramp-up of that second line? Tony Rabb: So the second line, we anticipate, should be online in the first half or by the end of the first half of next year. And so the way to think about that is that we'll have 1 gigawatt hour approximately of production capacity going forward from that point. So we'll get about half year's worth of that capacity in 2025. Justin Clare: And then just on the manufacturing CapEx, I was wondering when we think about the financing from Export-Import Bank, $10 million this year and then $10 million to $15 million, I think you anticipate next year. Is all of that capital expected to be devoted toward the CapEx spend for that second automated line? And then just wondering how you're thinking about the remaining capital that might be available to you and whether that could be used for a third automated line or what you're contemplating there? Tony Rabb: So the large portion of the first $10 million that we're drawing down is associated with Line 1 and the production capacity CapEx that we incurred to put that in place. So that's that look back component that Eric had mentioned. And then Line 2 will be financed with the remaining parts of the credit facility. And as we mentioned, the CapEx that we need to implement these lines is substantially less than Line 1. So we should be able to add multiple lines with this credit facility well beyond Line 2 and into the capacity that we need into 2026. Justin Clare: And then one more just on the margin profile. So it sounds like you're on track to reach non-GAAP profitability for the EW toward the end of this year. Wondering what the impact could be on the profitability for that product as that second automated line ramps up. Like would you produce EWs on that line and would you expect a margin boost at that point in time? Eric Dresselhuys: Well, what gets produced on those battery stacks lines, those go into both EWs and ECs. It's the exact same product. So it doesn't matter what the mix of product is that we are shipping. Those production lines, the core components and the battery powertrain that goes into the EC is the exact same product. So as we scale up to produce and sell ECs, that's all going to be happening on Line 1. And then as we run out of capacity on Line 1, we'll start producing on Line 2. Operator: Your next question today comes from Davis Sunderland. Davis Sunderland: I wanted to ask if you can talk a bit more about the Honeywell (NASDAQ:HON) partnership, maybe if there's any new traction you can speak to as a distribution channel, maybe if there's any possibility to execute more, I guess, I'll call them individual asset sales rather than your typical kind of framework partnerships you have with, say, SMUD or LEAG or some of the other larger partners? Just anything that's opened up from the Honeywell, and then I have one follow-up. Eric Dresselhuys: So well, things are starting to really get some great momentum with Honeywell. We were very fortunate to host Vimal, the CEO of Honeywell, all Honeywell came out just last week to visit us and -- two weeks ago, I want to be accurate, came out to visit us here in Wilsonville and spent a day with us, which -- he's a busy guy, so I think that's a great sign for the importance that he's putting on the relationship in the space, and we had a great series of conversations across both go-to-market and on some of the joint development activities that we've taken on together to do some things, to add new features, functions and performance, but a lot of it has been driven by just getting to scale more and driving cost out of the system. Honeywell certainly has a great appreciation, as we do, for the market environment and the mandate to get down the cost curve as fast as possible. So we're at the stage now where the go-to-market teams have been organized. They've been off actively engaged in the marketplace. And I think the hope would be we'd have announcements to make. We're putting proposals out to people and our hope would be that we'll be able to translate that into live announcements with people here over the coming months. Davis Sunderland: And then my follow-up is just on raw material costs. And I know there's some one-offs this quarter and probably the rest of this year with LCNRV, the accounting of the higher cost. But just wanted to ask if you guys are suffering from the so-called start-up premium or if suppliers have been able to renegotiate with you guys as you're getting more units out in the field now, or just anything you can speak to on that would be great. Tony Rabb: So we're not seeing any negative impacts from our suppliers in terms of raw materials costs. Most of the efforts that we are seeing is we're either negotiating with our vendors for reduced cost or negotiating and qualifying new vendors for the same materials for lower cost. So that tends to be the primary focus of what we tend to be experiencing with respect to raw materials. Operator: Your next question today comes from Thomas Boyes. Thomas Boyes: Just two quick ones. Do you have a sense on maybe what the financing issues were that caused the delay in EWs this quarter? The reason I asked is we saw something similar in solar complex, where adjustments to the domestic content add or caused some companies to kind of pause for a second reassess, figure out under the new kind of schedule that was put out there, what the ramifications are. Is that something that you're seeing or could you give any commentary there? Eric Dresselhuys: We haven't seen that specific case. Although like you, we've been noting a lot of the announcements made by others on project delays either from site delays or other third party equipment delays. We've been fortunate we've avoided those for this quarter. This specific case was the project is specifically dependent on the government grant. So government funding that was expected to happen before the end of the quarter that would have freed everything up and the government just didn't move fast, this government entity just didn't move fast enough to get it done. So we've talked to the party -- both our partner and the folks at the utility and the government funders, everybody assures us that they're moving through and getting it done, and it's just taken longer than they had hoped. But unfortunately, in this case, it was enough of a timing slip that it held us back from shipping the product. Thomas Boyes: Do you know if that was the PACE program or the newer financing vehicles? Eric Dresselhuys: No, this was just a directed investment. So it wasn't under any sort of a broader program or anything that we'd see be more methodical. Thomas Boyes: And then for my follow-up, just -- it was good to see the project with India Energy, we've talked about some of the traction you've seen in -- for military applications. I'm trying to get a sense of maybe what the size of the resiliency market would be for tribal land, is that maybe a large opportunity, how do you think about addressing that longer term? Eric Dresselhuys: I think it's -- I don't know that I can give you a number specifically for tribal lands. But certainly, resiliency as a market resiliency microgrids, we see as a multibillion dollar US market between now and 2030. And it ties back a little bit to the earlier question on data centers, although that is -- certainly, data centers are very unique use case with some very unique requirements. But it ties into this broader theme of people wanting to have not just green energy networks that they're supplying their own electricity, but they're really starting to ship to see this as a resiliency play where you're obviously going green and hopefully trying to drive cost out but you're worried about your ability to access electricity on a regular basis. And so microgrids for military bases or indigenous communities are great examples of where they frankly have, in the past, either had an underserved community where the electricity distribution isn't good enough or where the cost of having a power outage is so severe, it's beyond the cost of electricity, right? There's operational or application impacts to losing electricity. And we like those markets because those markets also tend to have -- put a big premium on both American made products and on safe products, right? They wanted their -- there's a lot of concern about lithium and some of the problems that lithium batteries have had. And so there's kind of a predisposition, if you will, towards buying a US product or buying a product that is non-lithium in design. Operator: It would appear we are having technical difficulties with Canaccord's lines, I do apologize. But that was our final question for today. I see there aren't any further questions in the queue. So that will conclude today's conference call. I want to thank you all for your participation, and that will conclude today's call. You may now disconnect.

Earnings call: Vuzix faces Q2 challenges, focuses on waveguide tech By Investing.com

Vuzix (NASDAQ:VUZI) Corporation (NASDAQ: VUZI), a supplier of Smart Glasses and Augmented Reality (AR) technology, reported a decrease in second-quarter revenues to $1.1 million, down from the previous year, primarily due to lower sales of its smart glasses. The company experienced a gross loss of $0.3 million and a significant net loss of $40.6 million, attributed to a non-cash impairment charge and decreased revenue. Despite these challenges, Vuzix is actively pursuing strategic partnerships and cost management strategies, including a voluntary payroll reduction and a focus on converting smart glass inventory into cash. The company remains optimistic about the future, banking on its strong intellectual property portfolio and the maturing enterprise market for smart glasses. Vuzix's recent earnings call shed light on the company's financial struggles and strategic focus. Despite a decrease in sales and a substantial net loss, the company is taking steps to stabilize its financial position and leverage its technological advancements in waveguide technology. With strategic partnerships on the horizon and a maturing enterprise market, Vuzix is positioning itself to capitalize on the growing demand for smart glasses. Vuzix Corporation's (NASDAQ: VUZI) recent financial performance reflects a challenging period, with the company navigating through a landscape marked by decreased sales and significant net losses. As outlined in the article, Vuzix is implementing strategic partnerships and cost management strategies to improve its financial health. According to InvestingPro data, Vuzix holds a market capitalization of approximately $61.49 million, underscoring its position in the market amid these financial challenges. The company's Price to Earnings (P/E) ratio stands at -1.23, indicating that investors are currently facing losses, which aligns with the company's reported net loss and is a critical metric for potential investors to consider. A noteworthy InvestingPro Tip for Vuzix is that the company holds more cash than debt on its balance sheet, which suggests a level of financial flexibility despite the reported net losses. This could provide some reassurance to investors that Vuziz has the means to navigate short-term financial obligations. However, another InvestingPro Tip points out that Vuzix is quickly burning through cash, which raises concerns about the company's long-term sustainability if this trend continues. InvestingPro also highlights that Vuzix's stock price movements have been quite volatile, reflecting the uncertainty in the market surrounding the company's future profitability. This is further supported by the fact that analysts do not anticipate the company will be profitable this year. For readers interested in more in-depth analysis, InvestingPro offers additional tips on Vuzix, providing a comprehensive look at the company's financial health and market position. As of now, there are 13 additional InvestingPro Tips available, which can be accessed for further guidance and insight into Vuzix's performance and potential investment opportunities. Operator: Greetings, and welcome to the Vuzix Second Quarter for the Period Ending June 30, 2024 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. And now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Thank you. Mr. McGregor, you may begin. Ed McGregor: Thank you, operator, and good afternoon, everyone. Welcome to the Vuzix second quarter 2024 ending June 30 financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers, and our CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, August 14, 2024. Vuzix assumes no obligation to update these projections in the future as market conditions change. This afternoon, the company issued a press release announcing its 2Q 2024 financial results and filed its 10-Q with the SEC. So, participants in this call who may not have already done so may wish to look at those documents as the company will only provide a summary of the results discussed on today's call. Today's call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the company's filing at sec.gov, which is also available at www.vuzix.com. I'll now turn the call over to Vuzix's CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix's CFO, who will provide an overview of the company's second quarter financial results, after which we will move on to the Q&A session. Paul? Paul Travers: Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q2 2024 conference call. A high-performance waveguide that can be produced in the millions at optimal price points is a critical enabling component for the next generation of smart glasses for the consumer and enterprise markets. We believe there is not a company on the planet better positioned in this regard than Vuzix. Our unique competitive core competencies of extensive waveguide design capability and production scalability, competitive cost and volume manufacturing have been forged from well over a decade of product evolution and technology investment and development in this space. Our conviction, which is stronger than it's ever been, is that Vuzix will play a key role in the supply chain plans of many global product suppliers that intend to compete in the smart glasses industry. We believe our ability to offer and support custom optical and mechanical designs for OEMs and ODMs, and then ultimately produce millions of waveguides to support the broad consumer and enterprise markets is game changing. It's important for investors to realize that we have built a world-class capability around the core technologies and manufacturing facilities needed for design through high-volume production waveguides, a very difficult component in the supply chain for the coming AI-driven smart glasses market. Without solutions like those that Vuzix can offer, the broader smart glasses market, especially for consumer, will be significantly challenged. We believe there is currently nobody else in the market that can deliver the needed waveguides at the rates and at the same time hit the quality and costing models required to meet consumer expectations. We fully understand our cash position and concerns that some of you may have in this regard. I want you to know we are actively working to close with strategic partners a deal that would provide manufacturing assets and value for our partner and provide Vuzix with cash and market access. They understand the challenges to high volume smart glasses manufacturing and believe Vuzix can play a key role in supporting their plans for product development and manufacturing in the smart glasses industry. This sort of commitment to Vuzix would be substantial and part of a multi-year supply strategy that will be game changing for us and the broader industry. We're hopeful we can share more about this relationship in the very near future. Backed with an IP portfolio approaching 400 patents and patents pending, almost double the level of just three years ago, we are on a continual path of innovation, the innovation that is required for the market to evolve with previously stated optical capabilities for see-through waveguides like INCOGNITO, integrated vision correction, low-index, high-performance materials and a second to none production facility with unique Vuzix-developed process capabilities and trade secrets. The micro-touch production process improvement just announced this week will further distance our production speeds, yields and volume capabilities relative to other would-be industry competitors. The consumer smart glasses era is just about to commence and we clearly believe our waveguide technology is a cornerstone component to enabling mass adoption. Meta (NASDAQ:META) CEO predicted a future where hundreds of millions of people are regularly wearing AI-powered smart glasses. What Vuzix has here is unique. The ability to produce waveguides in volume at a fraction of the cost of our competitors is again a game changer. And unlike that of most others, our waveguide technology is flexible and can support a large array of optical capabilities and industrial designs for smart glasses products. Our current facility has the capability to drive capacity to as much as 1 million units annually and is scalable beyond this level with minimal investment in operating costs. These are just some of the reasons why third parties are interested in investing in Vuzix and why we are excited about these potential partnerships to help make this happen. The micro display to drive the image into the waveguide is the second most critical components for smart glasses. Today, there are multiple companies working on new, very compact, LCOS-based display projection engines. They will be a great option until either efficient full-color microLEDs or other display technologies arrive on the scene, which practically could be several more years. Knowing that the fashion-forward smart glasses opportunity is right around the corner, there are a couple of handfuls of companies investing in these LCOS solutions. And it is interesting to note that many of them, like our recent announcement with Avegant, are now working with Vuzix for a viable source of supply for cost-effective waveguides that can be delivered in volume and perform to end customer expectations. Our OEM business opportunities remain robust. We have a backlog of business to deliver against and we expect at least one of our defense contractors and one of our commercial enterprise customers to move into production later this year. Our partnership with Garmin (NYSE:GRMN), with whom we are developing waveguide-based optical systems with full custom projection engines, is another milestone relationship. These products will power solutions for Garmin that will help them to offer significant cost, form factor and space savings versus current deployed technologies. On the waveguide manufacturing front, we will continue to implement process improvements as we prepare to ramp production capabilities to support underlying demand from partners and the broader markets. As the industry increasingly views Vuzix as a waveguide supplier of choice, more and more projection engine partners are lining up discussions and programs to partner with us. And again, we recently announced a collaboration with Avegant to develop optimized waveguide optical modules for use in future AI-enabled smart glasses, and we have a handful of other unannounced relationships currently underway. All of these firms realize that their display projectors can't stand alone. They must be paired with the best waveguide solutions available to optimize the end wearers' viewing experience, most importantly, ones that can allow finished products to be produced in high volumes at affordable prices. Our uniqueness in this space cannot be underestimated. Cognizant (NASDAQ:CTSH) of our cost competitiveness and cash needs, our strategy will be to utilize third-party manufacturers for select Vuzix branded and OEM products based on projected volumes and costs. Of course, this will not include our defense products nor our waveguide manufacturing, which is planned for production right here in Rochester, New York. The enterprise market continues to be challenged just yet, as the market slowly matures. Deploying whole product smart glasses solutions in an industrial environment has proven to be a journey involving pilots, software, IT integration and ROI determination, among other things. That said, we have a nice pipeline of business opportunities and we have a number of enterprise accounts that are on a path to volume deployment of our smart glasses and solution within their operations to deliver improved productivity, lower onboarding times and fewer errors. Although, we are refocusing ourselves, as I said, to waveguides and OEMs, we also remain committed to our network of ISVs and resellers into our end customers. These use case ecosystems continue to evolve with emerging applications, such as artificial intelligence, transcription and language transcription. Moreover, as was the case with cell phones and tablets, we believe advancements and volume penetration in the broader markets will also help attract and accelerate wider enterprise adoption in due course. At the same time, we absolutely recognize the importance of liquidity and cash management. And as a result, Vuzix has made significant reductions across the board to right-size our organization to deliver top-line revenue without losing sight of our core technology aspirations on the R&D side of the house. And as I mentioned previously, we are working to close with strategic partners a deal that would provide manufacturing access and value for our partner and provide Vuzix with cash and market access. Grant will now take you through our numbers after which we will move on to Q&A. Grant? Grant Russell: Thank you, Paul. As Ed mentioned, the 10-Q we filed this afternoon with the SEC offers a detailed explanation of our quarterly financials. So, I'm just going to provide you with a bit of color on some of the numbers. Our second quarter 2024 revenues was $1.1 million, down substantially year-over-year due to decreased sales of smart glasses, particularly our M400, which had benefited in the prior year's period from a very large order from an Asian distributor in our second quarter of 2023. Engineering service sales were $0.5 million for the three months ended June 30, 2024 versus $0.3 million in the prior year's period. As of June 30, 2024, the company had $2.4 million of remaining performance obligations under a waveguide development project, of which approximately 18% we expect to realize in 2024, but the remainder being completed in 2025. There was an overall gross loss of $0.3 million for the three months ended June 30, 2024 as compared to a gross profit of $1 million for the same period in 2023. The gross loss was a result of lower revenues to absorb many of our relatively fixed manufacturing and plant overhead costs. These manufacturing overhead costs as a percent of total product sales increased to 42% from 8% for the same period in 2023 as a result. Research and development expense was $2.4 million for three months ended June 30, 2024, compared to $2.8 million for the comparable 2023 period, a decrease of approximately 17%. The reduction in R&D expense was largely due to a $0.3 million decrease in external development costs and a $0.2 million drop in salary and benefit related expenses after further severance costs implemented at the end of June. Sales and marketing expense was $2.2 million for the three months ended June 30, 2024, as compared to $2.5 million in the same period of 2023, a decrease of approximately 11%. The reduction was primarily due to lower advertising and trade show spending and reduced salary and benefits expense, partially offset by an increase in allowance for credit losses and further severance costs implemented at the end of June. General and administrative expenses for the three months ended June 30, 2024 was $4.5 million versus $4.3 million for the comparable 2023 period, an increase of approximately 5%. The rise was primarily due to a $0.3 million increase in accounting and audit fees related to finalizing our 2023 audit and increased legal costs related to our S-3 filing. Included in our operating expenses for the three months ended June 30, 2024, was a non-cash charge of $30.1 million related to the impairment of intangible assets and our equity investment in Atomistic. Atomistic exercised on July 1, 2024 its option to terminate its previously granted license related to certain microLED technologies it was developing, and as a result of the termination of the granted license, which was effective June 30, 2024, the company determined that the technology license asset, having a net book value of $24.3 million, had been fully impaired as the company no longer had exclusive licensing rights to the technology for its use. The company had a related equity interest in Atomistic, a private French company, and determined that at this point in time, the company is unable to reasonably estimate its future value and therefore recorded a full impairment of its investment in Atomistic preferred shares, resulting in write-down charge of $5.7 million for the period ended June 30, 2024. Notwithstanding our impairment of these assets, we continue to support the development path of Atomistic that it is on, and we have previously indicated, Vuzix is entitled to 49% of distributed assets in the event Atomistic is liquidated as well as certain license royalties. Overall, the net loss for the three months ended June 30, 2024 was $40.6 million or $0.62 per share versus a net loss of $9 million or $0.14 per share for the same period in 2023. Now for some balance sheet and cash flow highlights. Our cash and cash equivalents position as of June 30, 2024 was $9.9 million, and our net working capital was $22.1 million. The net cash flows used in operating activities was $5.6 million in the second quarter of 2024 as compared to a net use of $7.9 million for the second quarter of 2023. Cash used for investing activities for the second quarter of 2024 was $1 million as compared to $6.7 million in the prior year's period, with the current period's investment being all in fixed asset purchase and none for license fee payments. During the second quarter of 2024, the company implemented a voluntary company-wide payroll reduction plan for all individuals with optional salary reductions of 10% to 50% depending upon their expected base salary level for the period running May 1, 2024 to April 30, 2025. The expected savings achieved will be approximately $2.1 million and will result in the issuance of stock awards and stock options for the net cash wage reductions. After the impact of the payroll reduction program for equity and two major rounds of staff reductions in January 24 and June 2024, the company's current weekly gross salary cost decreased 38.4% or $5.3 million on an annual basis. And while we have greatly reduced CapEx plans for the balance of 2024 and into 2025, we intend to reduce our large current investment in smart glass inventories. As a result, we plan for existing products to reduce their selling prices and offer higher volume discount levels to turn as much of our inventory of finished goods and assemblies into cash. We have over $9 million in finished goods and semi-finished products, and we intend to turn that into cash as we move forward with future models and technologies. Furthermore, we have paused further M400 smart glasses production in Rochester and we are actively pursuing the use of external manufacturers for most of the non-waveguide production needs of Vuzix. Currently, we are seeing some good opportunities to reduce our manufacturing costs going forward, especially if we are able to achieve higher production volumes. We are also actively continuing with the pursuit of licensing and strategic opportunities around our waveguide technologies with potential OEMs, which would include the receipt of upfront licensing fees and ongoing volume supply agreements. And as most of you are aware, the company went effective with a new registration statement on Form S-3 in May 2024, which included the sales agreement with an investment banking firm for the issuance and sale of up to $50 million of our common stock that may be issued and sold from time to time in an at-the-market, or ATM, offering. Management monitors the capital markets on an ongoing basis and may consider raising capital via the ATM if favorable market conditions develop. And finally, as of June 30, 2024, the company continued to have no current or long-term debt obligations outstanding. With that, I would like to turn the call over to the operator for Q&A. Operator: Thank you, sir. At this time, we will be conducting the question-and-answer session. [Operator Instructions] And the first question comes from the line of Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet: Yeah, good afternoon. Thanks for taking the questions. I guess, first, you mentioned a couple of opportunities on the engineering services side that should go into production later this year. Can you give us a sense of what level of revenue you expect could be recognized from either one or both of those potentially going in and then anything else in the pipeline that you have that you feel fairly confident will go into production at some point in the future? Paul Travers: So, let's just qualify those first two. One of them is on the defense side and one of them is a commercial opportunity. On the defense side, it's probably going to be $5,000 to $7,000 per asset that we sell into that piece of business. And the first sort of salable or opportunity that it's going to be filling is upwards of 2,000 pieces. So, like, do the math, it's pretty easy. It's $10 million to $14 million worth of business, I think, for the -- and that solution that we've built can go into a multiple different places and this is just one spot that it was initially designed for. So that's a pretty significant revenues for just one project. And then, the other one is an imaging system for temperature-related inside of enterprise operations or it's like maybe places where there's hot equipment around, motors that might get hot. You put the glasses on and they can help you determine whether or not there's maintenance or safety issues or whatever. And that's an enterprise product that could have significant volumes associated with it, upwards of 20,000 to 30,000 pieces. I'm not sure when that's going to roll out in that kind of volumes, quite frankly. We're hoping that it starts to move by the end of this year. Matt VanVliet: Okay. And I think going back a couple of quarters, you had four or five projects in the works and it sounds like these two are may be further along, but do you still have the other ones with long-term viability there? Any update on those? Paul Travers: Yes, we definitely do. I mean, one of them is Garmin, which we mentioned earlier in the call. And yeah, that project is moving along nicely. And there's more than a handful of other companies that are working with Vuzix to develop their next-generation products. Matt VanVliet: Okay, helpful. And then lastly, talking about potential strategic partners, could you potentially give a little bit more detail in terms of what kind of arrangements might be in place? Would it be kind of a pre-order of waveguides or certain blocks of performance for investment into Vuzix? Or what kind of, I guess, overall arrangement are you looking at? Paul Travers: Yeah, Matt, I can't share a whole lot other than to say that for these guys, volume production is key. This business is right around the corner. There's amazing potential. The problem is making waveguides at a price point that works for the market is almost impossible. Competitive solutions today take literally hours to make a waveguide and you can only do just so many at a time. So, the price per waveguide is super expensive. And with those higher prices, it will never enable the mass market. Vuzix can literally make them. Well, our current facility, when it's fully turned on, every six seconds, it ought to be able to pump out a waveguide. And that's what these guys are interested in. There's actually more than one that are interested in that. And it's all revolving around -- well, you hear things like Mark Zuckerberg talk about hundreds of millions of users of smart glasses and it's all revolving around that kind of business and in those markets. So, you might imagine that there's some investments that will probably be part of it and there will be some supply components to it. Operator: And the last question comes from the line of Christian Schwab with Craig-Hallum Capital Group. Please proceed with your question. Tyler Burmeister: Thanks, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a couple of questions. Maybe first just kind of following up on that last question, the last line of commentary there. You talked about your waveguide production being the market leader there. I guess, competitively, if someone wasn't going to come to you to use a waveguide, competitively, what would they do otherwise? Just produce themselves? Have to make that investment and ultimately produce them less efficiently, more expensively? Or, competitively, what would someone do if they weren't going to use you for their waveguides? Paul Travers: So, Tyler, this is a great question. It's more than even manufacturing. You got to know how to do a design. You got to know how to do the production for it when it's finally there. And you have to know how to, in that design, integrate it with the rest of the components that make these optical systems work. And when you come to a company like Vuzix, we offer all of the services associated with that. So, it's soup to nuts. There are other companies that are out there trying to make a waveguide and you're stuck with the one size fits all. You can't get it easily customized for what you want to have. And then, the problem comes down to just literally how do you get a waveguide every six seconds. And then, some of these people we're working with, they want 20 times that kind of volume. If you think about on an annual basis, it could be 100 million to 300 million smart glasses that get sold. That is one pile of waveguides. And you go to a third party to have them produced and they would be expensive or you might buy somebody's property so that you could produce them, but the competitors that might be able to set you up like that today, it's 400 or 500 steps to make a waveguide. And so, the price, the quality, the yield, it's really, really difficult to see how any of that stuff could ultimately get there. We are in a very unique circumstance, our ability to produce in volume the way we can and to offer the services associated with actually making it work in the glasses. Tyler Burmeister: All right. That's perfect. That's very helpful. And then maybe, Grant, with all these cost saving efforts you guys are putting in place, maybe just a summary update, what kind of revenue level are we looking at now to kind of get to a breakeven type point? Grant Russell: Well, it's a lot less and we're still making refinements, but I mean, we're going to -- we effectively going to need about $20 million of margin to achieve breakeven. So -- because I think our goal is get between potentially down to $4 million per quarter in operating costs. So, we're going to need the margin on the top-line of $16 million to $20 million. So... Tyler Burmeister: Understood. All right. Thanks, guys. That's all for us. Operator: Thank you. And at this time, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Paul Travers for any closing comments. Paul Travers: Yeah. Everybody, thank you for listening in. Look, I know it's been a rough ride. The smart glasses industry is a challenge, but this business is coming. It's never been more exciting for us, and I know I happen to be an enthusiastic person, but it is right around the corner and it should be a fantastic fall for Vuzix. So, we really appreciate you hanging in there to the tough times. The better parts are coming. Thanks again, everybody. Look forward to the next call and to share with you as the fall unfolds. Operator: And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

IZEA Worldwide, Inc. (IZEA) Q2 2024 Earnings Call Transcript

Ryan Schram - President and COO Peter Biere - CFO Ted Murphy - Founder, Chairman and CEO Good afternoon everyone and welcome to IZEA's Earnings Call covering the Second Quarter of 2024. I'm Ryan Schram, President and Chief Operating Officer at IZEA and joining me on the call are IZEA Chief Financial Officer, Peter Biere; and IZEA Founder, Chairman and Chief Executive Officer, Ted Murphy. Thanks for being with us today. Earlier this afternoon, the company issued a press release detailing IZEA's performance during Q2 2024. If you'd like to review any of those details, all of our investor information can be found online on our Investor Relations' website at izea.com/investors. Before we begin, please take note of the Safe Harbor paragraph included in today's press release covering IZEA's financial results and be advised that some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. We encourage you to consider these disclosures contained in our SEC filings for a detailed discussion of these factors. Our commentary today will also include the non-GAAP financial measure of adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today and in our publicly available filings. And with that, I'd now like to introduce and turn the call over to IZEA's Chief Financial Officer, Peter Biere. Peter? Peter Biere Thank you, Ryan and good afternoon everyone. I'll review operating results for the quarter ended June 30, 2024 compared to the prior year's quarter and discuss certain balance sheet highlights. We saw a strong demand from Managed Services during the second quarter of 2024, resulting in a 40% lift in bookings over the prior year quarter and the highest total in eight quarters. This demand is expected to be reflected in revenues over the coming quarters and we believe it indicates a strong potential for our growth. Managed Services bookings for the second quarter of 2024 totaled $10.3 million compared to $7.3 million in the prior year's quarter, a 40.3% increase. The increase was largely attributable to a robust sales pipeline that has continued to develop over the past several quarters. As a reminder, IZEA reports bookings net of cancellations and refunds issued within the quarter. Total revenue for the second quarter of 2024 was approximately $9.1 million or 14.9% below the prior year quarter. Excluding revenue attributable to the large customer, which we parted ways with in 2023, referred to as the non-recurring customer, revenues grew a healthy 23.9% from the prior year quarter. Our Managed Services revenue totaled $8.9 million during the second quarter of 2024, which was $1.8 million or 16.6% lower than the second quarter of 2023. Removing approximately $3.3 million of revenue from our non-recurring customer in the prior year quarter, Managed Services revenue increased by $1.6 million or 21.7% from the same period of 2023, largely driven by improving demand. It's important to note that IZEA's revenue typically lags behind bookings with an average delivery time of seven and a half months between contract signing and revenue recognition. Our Managed Services backlog, which represents unrecognized revenue for contracts that are underway as well as recent bookings that we haven't started to invoice, totaled $15.6 million on June 30th, 2024. This is an increase of $1.1 million versus the first quarter of 2024 and $4 million from December of 2023. SaaS Services revenue totaled $0.2 million in the second quarter of 2024, more than triple the total for the prior year quarter. This growth has been driven primarily by subscriber expansion within izea.com and revenue from the Zuberance customer base. We ended the current quarter with a record number of active SaaS customers, a continuing positive trend. The majority of these customers are actively using IZEA's AI tools. Our total cost of revenue was $5.2 million, or 56.9% of revenue in the second quarter of 2024 compared to $6.3 million, or 58.5% of revenue in the prior year quarter. The current percentage cost decline represents improved margins from our ongoing customer base. Expenses other than the cost of revenue totaled $6.8 million for the second quarter of 2024, up 11.4% from $6.1 million in the prior year quarter. Sales and marketing costs totaled $3.2 million during the second quarter, up 13.2% compared to the prior year quarter, due primarily to higher spending on demand generation activities to drive new customer growth. General and administrative costs totaled $3.4 million during the second quarter, up 6.5% from the prior year quarter, due primarily to higher human capital costs and increased professional and contractor fees. Our net loss in the current quarter totaled $2.2 million or negative $0.13 per share on 16.5 million shares compared to a net loss of $1 million or negative $0.07 per share on 15.6 million shares for the second quarter of 2023. Adjusted EBITDA was negative $1.6 million for the second quarter of 2024 compared to negative $0.6 million for the prior year quarter. As of June 30th, 2024, we had $56.5 million in cash and investments, a decrease of $4.3 million from the beginning of the quarter, primarily due to negative EBITDA and funding higher level of working capital. During the current quarter, we earned $634,000 in interest on our investments. And lastly, we do not have any debt on our balance sheet. With cash on hand and liquidity from our investment portfolio as required, we're in a solid position to execute on organic business growth and acquisition opportunities that lie ahead. Thanks Peter and good afternoon everyone. I'm excited to share the progress we've made in the second quarter of 2024 and to highlight the strides we're making in both our Managed Services and technology enablement initiatives. IZEA is on a solid path towards achieving the three-year plan our management team laid out at the beginning of this year and we're eager to provide you with an update on our recent performance. Let's start with Managed Services. Our Managed Services team made significant headway during Q2. In the quarter, we saw strong organic growth in bookings with our win rate recovering, as we converted a higher percentage of opportunities in our pipeline into bookings. The success in Q1 and Q2 bookings has started to translate into revenue during the second quarter and should continue to have positive impacts on Q3 and beyond this year. We expect to be able to begin reporting year-over-year revenue growth again in the coming quarters as these bookings are recognized. We recently announced the acquisition of 26 Talent and The Reiman Agency. 26 Talent brings a roster of creators and a wealth of creator representation experience to IZEA, enhancing our talent representation business in Australia. 26 Talent has been tucked underneath the Huume umbrella, and we recently just launched a new website and rebranding of Huume, which now lives at huume.com, that's H-U-U-M-E.com. The Reiman Agency, known for its innovative approach to talent brokerage and content creation, will further bolster IZEA's service offerings and expand our reach in the creator economy overall. Reiman has deep relationships with athletes, celebrities, and other top-tier talent, allowing brands to quickly execute programs that may otherwise be cost prohibitive or difficult to execute. These new acquisitions are pivotal in our strategy to both diversify revenue and strengthen our client portfolio. IZEA's acquisition philosophy emphasizes stable operations, manageable risks, and the potential for expense consolidation with post-acquisition upside. We're in the process of migrating our recent acquisition to IZEA systems, processes, and proprietary technologies. And we've identified multiple areas for improvement and efficiency and we'll continue to work with the management teams of those companies to both grow their businesses and contribute to IZEA overall. IZEA's acquisitions to-date have been strategic, but rather small in size. This has been deliberate in an effort to institutionalize the company's M&A capabilities internally and create the framework for a full acquisition life cycle. I'll now turn things over to our Founder, Chairman and CEO, Ted Murphy. Ted? Ted Murphy Thank you, Ryan. We are operating against our three-year plan to reach $76 million in annual revenue by 2026. In addition to revenue, achieving sustainable profitability in this time frame is absolutely key for management and the Board and we know it is important to our investors. Our intent is to deliver a meaningful EBITDA improvement in 2025 and begin to show EBITDA-positive quarters in the back half of 2026. 2024 is a transition year for us. We continue to experience lower revenue comparisons after parting ways with a large customer last year, but this is now over. We expect to begin seeing year-over-year revenue growth in the third quarter. The loss in revenue has been hurting our profitability as well, but we're progressing nicely forward as we fill the revenue gap with more profitable customers. The bookings growth we've seen this year is beginning to show in higher revenues. We have also been taking measures to reduce some human capital resources and other expenses where appropriate. In Q2, we made a slew of technology announcements ranging from our AI influencer marketing assistant, IZZY, to new budgeting and workflow tools. While these technologies can be licensed by customers, I want to emphasize that our core focus near term is making our own people and processes more efficient through technology enablement. IZEA Managed Services is our first and best customer. With each new release, we help our team accomplish more with less, better leveraging our costs while our end customers enjoy better experience. We have fewer FTEs today than we did at our peak in 2016, but we are generating more than 4 times the annual revenue. Revenue per FTE continues to be a focus of ours and the best way to boost output is through an ongoing focus on automations in every job capacity. Last year, we began rolling out AI tools to everyone on our team. The self-reported efficiency gains, not to mention the increased capabilities, have been felt in every department and seen by our end customers. We believe technology and specifically AI enablement throughout our enterprise is a critical piece of our three-year plan. However, expense management and efficiency gains alone will not drive us to sustainable profitability. Certain baseline costs will continue to increase with inflation, such as healthcare costs and fees associated with being a public company. Sustainable profitability must ultimately be achieved by way of revenue growth through a diverse mix of customers and services. Our strategy for growth remains two-pronged. On one hand, we are committed to driving organic growth by enhancing our product offerings, improving customer experiences, and entering new markets. On the other hand, we are actively exploring further acquisitions that complement our existing services and bring valuable new capabilities and markets to our portfolio. Customer diversification is essential to our strategy. It reduces our reliance on single clients, making us less vulnerable to fluctuations in specific client relationships or industries. Over the next three years, our aim is to attract a broader range of clients across various sectors and regions, fostering long-term partnerships with IZEA. This strategy will enhance our stability, predictability, and profitability. We previously announced a $5 million share repurchase program. While we have been unable to execute against this buyback to-date due to the restrictive windows mentioned in the announcement, we intend to be active buyers when our trading windows are open. We believe our stock is undervalued and this repurchase program reflects our confidence in the company's future growth and value creation potential. This move underscores our commitment to returning value to our shareholders and our belief in the long-term prospects of IZEA with the capital on hand. In conclusion, we are excited about the progress that we are making both in Managed Services and in tech enablement. We are confident in our ability to reach our revenue goals and deliver long-term value to our shareholders. The Board and management are committed to proactive measures to ensure we achieve our strategic objectives. Thank you for your time today. I will now open the call for Q&A from the analyst community.

Golden Matrix Group, Inc. (GMGI) Q2 2024 Earnings Call Transcript

Brett Milotte - Senior Vice President of ICR Brian Goodman - Chief Executive Officer of Golden Matrix Group Zoran Milosevic - Chief Executive Officer of Meridianbet Group Good day, and welcome to the Golden Matrix Group Second Quarter 2024 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Brett Milotte, Senior Vice President of ICR. Please go ahead. Brett Milotte Thank you, and welcome, everyone, to Golden Matrix Group's second quarter 2024 earnings call. Joining us today is Brian Goodman, CEO of Golden Matrix Group; and Zoran Milosevic, CEO of Meridianbet. On this call, we will review Golden Matrix financial and operating results for the second quarter of 2024. Today's call will contain forward-looking statements, and I will read some brief cautionary remarks regarding certain statements that may be made on this call. Certain statements made on this conference call and our response to various questions may constitute forward-looking information or future-oriented financial information within the meaning of the applicable security law. Statements about expected growth, prospective results, strategic outlook and financial operating expectations, opportunities and projections rely on several assumptions concerning future events, including market and economic conditions, business prospects or opportunity, future plan or strategy, technological development and anticipated events, trends and regulatory changes that may affect the corporation and its subsidiaries and in respective customers, industries. While we believe these assumptions may be reasonable, they are subject to a number of risks, uncertainties and other factors, many of which outside - are outside the company's control and which could cause the actual results, performance or achievement of the company to be materially different. There can be no assurances that these assumptions or estimates are accurate or that any of these expectations will prove accurate. For a complete discussion of these factors, please refer to our recently filed 10-Q, press release and other publicly available disclosures. Non-GAAP measures will also be discussed, and reconciliation of these numbers can be found in the recently filed 10-Q in the earnings press release that can also be found on the Golden Matrix Group Investor Relations website. I will now hand the call over to Brian Goodman, CEO and Co-Founder of Golden Matrix Group. Brian Goodman Thank you, and welcome, everyone, to our second quarter 2024 earnings call. I'm pleased to announce that this is our first earnings report since our successful combination with Meridianbet. And joining me on today's call is Meridianbet's CEO, Zoran Milosevic. On this call, we will review Golden Matrix' operational highlights, financial performance, divisional performance and the overall outlook for the company. Our second quarter delivered exceptional results, driven by operational success across all business units. We have maintained half performance through product diversity and cross-platform initiatives, and our dedicated team has executed on all of our short-term objectives. I am pleased to report that the consolidation of Meridianbet has been seamless, and we have gained strong momentum as a result of the recent acquisition, as evidenced by our successful results since the transformation. We have now confirmed ourselves as a major player in the sports betting and iGaming industry with a robust road map, and we expect to continue achieving strong growth in all sectors of the business. We have not only built on historical momentum but plan to continue to build on new found tailwind as a result of the now completed consolidation. Before we move on to the financial highlights, I'd like to clarify some important items. Due to the relative size of the Meridianbet business in comparison to the Golden Matrix Group, Meridianbet was deemed the accounting acquirer. As a result and in terms of the financial reporting, it is important to note that the financials I'm about to present are a comparison of the consolidated company's results against Meridianbet's historical financials and performance and not against GMGI's historical performance. It is also important to note that a comparison of the consolidated company's performance against Golden Matrix' historical performance would have resulted in much higher growth trends and improved results. However, in terms of GAAP accounting and Meridianbet being the accounting acquirer, the comparisons I will present are correctly stated and are reflective of our new structure. On to financial highlights. As I'm sure everyone is aware, sports betting and iGaming are the fastest-growing segments in gaming, and we are very proud to be part of this rapidly evolving sector. We have posted strong financial performance across the business. Second quarter consolidated revenue grew 75% to $39.4 million, a continuation of the strong trends shown in the last quarter, whilst year-to-date revenue grew by 41% to $64.3 million. Net income in this quarter was $15,000. This was impacted by non-cash items as well as considerable one-off acquisition costs and restructuring and implementation costs related to the recent acquisition. Second quarter consolidated adjusted EBITDA was consistent at $5.4 million after recognizing the non-cash items, one-off costs, the completion and implementation of the Meridianbet acquisition. Second quarter consolidated gross profit increased by 31% to $21.7 million, and year-to-date gross profit also increased by 17% to $39.4 million. Our balance sheet. The company has continued to maintain a healthy balance sheet. As at the 31st of July, the company had over $40 million in cash and equivalents, a 96% increase over December 2023 of $20.4 million. Our debt position remains healthy as well with a net debt leverage ratio of only 1.6. Shareholder equity at the company grew 52% to $89.7 million. Now turning to the business units, where we have continued strong momentum. I'll begin with our high-performing tournament platform, R Kings Competitions. R Kings and its related company, GMG Assets, posted yet another record second quarter with revenues of over $9.6 million, an increase of over 43% over last year. Players now total 386,000 as of 30 June 2024 and over 53,000 new players have been acquired year-to-date. Acquisition costs remain at a very low level of only $7.60 per player. Total active players now total 140,000. A remarkable total of over 5 million tickets have been sold year-to-date through 1.1 million purchases. Turning to GMAG, our B2B aggregator gaming platform. Our recent focus has been on improving our gross margins in this business unit. We are achieving this by distributing our newly acquired state-of-the-art gaming portfolio, Expanse games, through our large number of clientele. We are diversifying our overall portfolio of games by adding the highly popular crash games, which have shown very strong performance in both the revenue generation and high margins. Second quarter wagering grew by 124% to $1.2 billion, and year-to-date wagering also increased by staggering 141% to $2.2 billion. Second quarter gross gaming revenue generated on the GMAG platform grew by 187% to $38 million, and year-to-date growth gaming revenue on the GMAG system grew by 186% to $68 million. We now have over two million active players on our GMAG system, and we continue to sign new operators on a regular basis. We are currently implementing AI tools and state-of-the-art loyalty systems into the GMAG system to improve customer retention and results and revenues, and we expect the positive trend to continue. Now on to our MexPlay, Mexican-licensed casino. Whilst MexPlay is a relatively new casino operation, it has already shown solid growth trends. We have a monthly average of over 9,000 active players. Second quarter cash deposits increased 297% to $1.2 million. Second quarter wagering grew by 100% to $9.3 million, and gross gaming revenues grew by 154% to $422,000. I'll now hand you over to Zoran Milosevic, CEO of Meridianbet, to talk about the Meridianbet results. Zoran Milosevic Thank you, Brian, and welcome, everyone. We are excited to share our strong quarterly results marked by significant achievements and promising opportunities. Let's first review Meridian's key performance indicators for this quarter, which reflect our strong performance, ongoing growth and market expansion. Revenue growth. In Q2, our revenues saw a robust increase of 11.4% compared to Q2 2023. The online segment led with 14% rise, while retail grew by 6%. Total deposits amounted to US$59.2 million, reflecting 16% growth compared to Q2 2023. The number of new online registration also increased to 136,000, marking a 17% year-over-year growth. Online casino success. The online casino sector recorded 17% revenue growth in Q2 2024 compared to Q2 2023, significantly bolstered by the addition of approximately 1,500 new games. A standard achievement in Q2 was the game Super Heli from our Expanse Studios, which ranked second in the player engagement among all others offered. This is particularly impressive given the extensive library of 6,500 games from various providers. Sports betting. Sports betting revenue, including both in retail and online, rose by 7.3% in Q2 2024 compared to Q2 2023. Despite tough outcomes in April and May, we maintained robust growth. Our online sports gross gaming revenue margin for Q2 2024 improved to 9.9%, up from 8.3% posted in retrospective of Q2 2023, thanks to targeted marketing during European soccer championship. Retail sports performance. The second quarter of 2024 retail sports gross gaming revenue margin dropped to 13% from 14.4% in Q2 2023, influenced by unfavorable football results during the month of April and May in the second quarter of 2024. However, June set a new monthly record of 16% GGR, above the average for the first half of 2024. Online casino margin. The online casino margin in Q2 2024 slightly decreased to 3.07% from 3.52% in Q2 2023. This was due to a 34% rise in amount of wagers and our expanded game library. Retail growth. Revenue from retail slot machines in Q2 2024 grew by 16% year-over-year, driven by addition of 120 new machines, enhancing our offerings and customer satisfaction. New jurisdictions. Since becoming part of Golden Matrix in April this year, Meridianbet continues to expand its global footprint. Leveraging our combined strength, we believe we are poised for a next major market entry, Brazil. As one of the select global operators with pending federal licenses, we believe we are uniquely positioned to access Brazilian substantial market projected at approximately US$20 billion with a potential player base of 106 million by 2025. We believe that this access ensures that we are well positioned to leverage potential substantial growth opportunities across one of the planet's fastest-growing betting and gaming market. Our strategic expansion hasn't stopped there, of course. We have secured our new licenses in Peru, and the iGaming industry is valued at US$1.2 billion and is growing at 6.4% annually and South Africa, where digital gaming revenue is expected to reach $828.5 million in 2024. We expect our upward trajectory to continue and believe that we are not just participating in the global gaming market. We are actively shaping it. Investment in tech and AI. This quarter has been marked by our continued investment in AI as well. That's why we are thrilled to highlight our latest innovation, an AI-powered casino game recommender that is already transforming player experiences and driving results steering wise. In just one month, we have seen 3% increase in engagement with recommended games, a 9% boost of new - for new games introduced by AI. It's innovations like this that we anticipate will keep us at the forefront of our industry and position us for continued success. I'm also pleased to announce that we have transitioned our core market operations to our new software platform called Atlas. This marks the most significant software upgrade in our history and represents the final phase of a five-year journey to completely overhaul our gaming infrastructure. With Atlas, we believe we are now positioned to compete with industry leaders like bet365 and Betano, who also utilize the latest generation software. We are on track to complete transition in all remaining countries by Q3 of 2024. Expanse Studios. Expanse Studios is making significant strides in expanding its market presence. We are in the process of entering competitive U.S. iGaming market by applying for the New Jersey casino service industry enterprise license. The application process is well underway and pending final confirmation. Additionally, we have secured a license for Bulgarian market and pursuing iLicense in Croatia and Romania. We believe that these regulatory advancements are key to expanding our footprint in Europe. Notably, Expanse Studios achieved a 30% revenue increase in Q2 2024 compared to Q1 2024, highlighting our strong performance and growth trajectory. This growth is further emphasized by our high-profile participation in major industry events such as SiGMA Americas in São Paulo, SBC North America in New Jersey and SiGMA Asia in Manila as well as completing our integration with SOFTSWISS, supporting our communities and creating impact. On the corporate social responsibility front, Meridian Group remains dedicated to making a positive impact. In the first half of 2024, we were actively engaged in various initiatives, setting us on excellent trajectory to exceed last year record of 225 CSR campaigns. Highlights include our "Scan. Help. campaign, which uses QR codes to fund essential equipment for our - for maternity hospitals in Europe; our participation in global efforts for flood relief in Rio Grande do Sul in Brazil; and our Betting Awareness initiative aimed at educating communities about our business and its potential risks. These efforts alongside donations to local children homes and environmental cleanups underscore our commitment to community support and sustainability. This report is a snapshot of the positive impact we made in Q2 2024, reflecting our ongoing dedication to social responsibility. As we look ahead, we are excited to build on these achievements and continue strengthening our market position while delivering value to our stakeholders. We are confident that the strategic initiatives and investments we've made will keep driving our growth and success in coming quarters. Thank you all for continued support and for being part of this journey. Let's keep this momentum going and move forward together. Thank you, Zoran. I'd like to finish up by emphasizing our belief that we are extremely well positioned to capture the opportunities ahead of us and to maintain significant growth. It goes without saying that we have streamlined and transformed the company. And most importantly, we have a robust balance sheet with significant cash on hand. As at the 31st of July, we had over $40 million in cash, giving us the flexibility not only to be in a position to settle any current debt but also most importantly, we are in a position to make accretive acquisitions and to settle any derivative debt if the need arises. These quarterly results are just improving points of the expected consolidated results to come, and we are continuing to progress towards our targeted annual revenues of over $150 million per annum and adjusted EBITDA of over $13 million per annum by 2025. As part of our strategy, we plan to continue to scale the company via acquisitions and by investing in new markets in order to expand our global footprint. We will continue to take a disciplined approach towards M&A as we have done to date, only planning to deploy capital towards profitable, cash positive and robust businesses. We have an extremely diversified business, what we believe are unmatched market positions as well as cross-platform capabilities. And we plan to focus on operational excellence, driving enhanced shareholder value, and we expect continued and sustainable double-digit growth with healthy margins. Our industry-leading talent across our business units and their disciplined and high-performance culture is no doubt one of the key to our success. And as such, we will continue to invest in our talent. As I wrap up, I'd like to thank all of our employees for their ongoing hard work and dedication. In closing, I'd like to say that these quarterly results are a validation of our expected results to come, and I am very excited about the future. Thanks, everyone, for listening to our call. This concludes today's conference call and webcast. You may now disconnect your lines.