Super League Enterprise, Inc. (NASDAQ:SLE) Q4 2023 Earnings Call Transcript

Super League Enterprise, Inc. (NASDAQ:SLE) Q4 2023 Earnings Call Transcript March 27, 2024

Super League Enterprise, Inc. misses on earnings expectations. Reported EPS is $-3.47 EPS, expectations were $-1.23. SLE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Super League Fourth Quarter and Full-Year 2023 Conference Call. Please note, this conference is being recorded. Before we begin, I’d like to caution listeners that comments made by management during this call may include forward-looking statements within the meaning of applicable securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statements due to numerous factors. For a description of these risks and uncertainties, please see Super League’s financial statements and MD&A for the fourth quarter and full-year 2023 ended December 31, 2023, available on the SEDAR and EDGAR. Important qualifications regarding forward-looking statements are also contained in Super League’s earnings release distributed earlier this afternoon and also available on EDGAR.

Furthermore, the content of this conference call contains time-sensitive information accurate only as of today, March 27, 2024. Super League undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. I’d now like to turn the conference over to Ann Hand, Chief Executive Officer.

Ann Hand: Thank you very much for the kind introduction, and thank you all for joining us this afternoon to hear more about Super League’s progress. I’m really proud to report our Super League fourth quarter and full-year 2023 financial results and provide an update on our company’s tremendous operational progress. 2023 was a game changing year for us highlighted by record revenues, balance sheet fortification, streamlined operations and a materially reduced operating expense structure. And it is worth to mention, our largest single contract in company history, specifically related to our record revenue performance, fourth quarter revenues grew 34% year-over-year, a quarterly record of $9.5 million, resulting in full-year 2023 record again revenue of $25.1 million, an increase of 27% from full-year 2022.

More importantly, what became evident over the course of the year is that brands are catching on to the imperative to meet Generation Z and Alpha in immersive entertainment platforms. These are the next great marketing channels where brands can reach massive young audiences and speak to them in a highly customized and personalized way to ultimately drive brand preference and conversion. There’s a historic template for what’s going on right now in advertising. Audiences shifted from linear TV to streaming, and now ad dollars have caught up. Similarly, audiences moved to social media 15, 20 years ago, and those brand dollars inevitably followed. We are about to see another seismic shift as large audiences already exist in these immersive social platforms and brands are racing to catch up.

Super League offers scalable solutions through our deep strategic and creative capability, coupled with our suite of proprietary products and measurement tools that enable brands to speak this important language of 3D engagement and respond to this sizable audience migration that’s moved again towards immersive platforms. Our rising numbers speak for themselves as we continue to execute in 2023. We served over 100 brands and IP owners with pretty impressive highlights. 11 custom builds with peak engagement at times as high as 30.5 minutes, you often hear me say this is like product placement on steroids. 15 custom integrations into existing popular experiences on Roblox, Minecraft, and Fortnite, generating more than 330 million visits, again, let’s underline that, 330 million visits across 15 custom integrations.

We delivered over 180 media campaigns on Roblox and Minecraft. So these are campaigns that are in that mid five to seven figures range. They’re on-platform media buys that provide advertisers with large reach and often serve to amplify and drive traffic to our immersive experiences. And additionally, we did over 40 supportive media campaigns across video, mobile, social media and influencer marketing to further amplify our experiences off-platform. We generated 340 pieces of video content, generating tens and millions of views across TikTok, YouTube and Snap for campaign amplification. And even in the consumer side, the direct-to-consumer side, we had 81 million try-ons on behalf of brands promoting branded Avatar items. Blue chip brands such as L’Oreal, Visa, Toyota, we’re just naming a tiny few here of that north of 100, sought out Super League as a partner.

As for key trends, investors often ask me about the importance of artificial intelligence, obviously, a very hot topic these days that can either accelerate a business success or challenge its overall model. Super League is a clear beneficiary of AI. We already use the technology to accelerate our creative development process and other operational workflows. However, we’re riding in other key trends as well. The rise of co-creation platforms, like Roblox and TikTok, that empower everyone to be a content creator. And another mega trend is just how the next generation’s shift is occurring in consumer behavior. This is the first truly digitally native audience that increasingly expects, in fact, demands brands to first meet them in digital spaces where they commune and socialize and then transfer that brand affinity into real-world preference in commerce.

If we come up a little higher, in-game advertising is expected to be $150 billion-plus market by 2027. Roblox alone reaches 71 million active users a day with an astounding 156 minutes spent daily per user. That’s larger than any other social digital platform. That beats TikTok even by almost 2x. And they have a bold goal of climbing to 1 billion users. Currently, Roblox is trading at 10x their revenue. Our opinion is that Roblox is a sleeping giant, and this provides the potential for Super League to benefit from their success and greater secular growth. And another way to think about the market opportunity, traditional experiential advertising, that’s in real life experiential marketing, is a $50 billion annual market in its own right. And while it offers high touch and trial, which can often lead to better conversion, think about it, you get to taste a great wine or drive a new car model, but it’s challenging to scale.

It’s costly, very expensive, and then there are the obvious geographic constraints. As a simple example, imagine the tens of millions of potential car buyers that could test drive a BMW or a Toyota just over one weekend digitally first, without the impediment of driving distance to a local dealership, operating hours or even just availability of test drive slots, the opportunities for immersive experiences offer so much more than a better replacement to traditional digital marketing. Immersive experiences can transform business models. Immersive digital spaces can offer scale and cost efficiency and can upend the brand’s approach to R&D, learning development, supply chain and logistics and so much more. And this is where we live, where we thrive and why we are poised to add enterprise value to brands and IP owners aside from just smarter deployment of marketing dollars.

So let’s turn to our pipeline health as a key leading indicator. Our continued traction and growing operating leverage are reflected in the increase in our average deal size, now approaching that $400,000 range. We closed on six, seven figure deals in 2023, including, as I’ve already mentioned that largest deal in our history with Kraft Lunchables valued at nearly $4 million across the second half of the year. We continue to have a strong repeat buying percentage in that 70% range, but more importantly, we’re also continuing to diversify the breadth of our global brand and category reach as well. As I’ve previously shared, these larger deal sizes and more predictable brand programs are shifting our business model from one that is short term and campaign centric to revenues that are larger and more recurring in nature, revenue streams connected to a brand’s long-term strategy to interact with these social digital communities in a persistent way, just as they already do in traditional social media channels like TikTok and Instagram.

As we grow and deliver on these larger programs, it verifies our unique position as the enterprise solution for brands to implement persistent omnichannel marketing and commerce across a variety of immersive platforms, ultimately driving consumers back to a brand’s own owned and operated immersive website and commerce experience. Now it’s worth reiterating how we view the brand journey as this underpins not just how we scale and measure success, but also how that business model of ours does transform over time. First, we introduce a brand to our immersive engagement offerings to help them achieve singular campaign objectives. We measure our success by the number of new brands that enter the funnel. Next, we become the immersive marketing solution of choice for our brand’s various ongoing marketing campaigns.

An interior shot of a gaming operators facility, gaming machines reflecting the lights.

So think about, in that case, it’s the fact that Universal Studios came back time and time again last year and kept putting money to work every time they had a new family-friendly movie release. We measure that success by repeat percentages, but also larger aggregate annual brand spend, that’s one of our seven figure partners from last year. Then we guide brands to create persistent, immersive strategies and presence. We measure our success based on the number of larger deal sizes because these are now annual in nature and longer-term brand programs. Again, that is what makes those feel less like an ad model because those are easy to forecast and they start to smooth out the seasonality in our business model and become revenues that feel much more recurring and predictable in nature.

And then finally, the ultimate vision of the company is to evolve into being, again, the enterprise solution and help brands build out their omnichannel immersive strategy with crossover to their own websites. We measure our success there through multiyear and multi-platform brand spend and believe there is a potential to participate in new revenue streams over time, such as technology licensing, first-party data and direct-to-consumer monetization. And we don’t stop innovating. To accelerate new brands’ adoption through collapsed development cycles, making for just a more easy, accessible entry point for new brands, we continue to productize repeatable elements of our custom experiences to convert more deeply inside of key verticals. Super League pop-ups, or also think of them as drag-and-drop modules, that can be easily re-skinned for a use of a wide berth of brands and IP owners.

From turnkey fashion runways and make-up counters to kitchens and concert stages, experiential products offer scale and higher margin profiles. And let’s go back to that car demo example I mentioned earlier as that was not just a hypothetical. This week, we’re launching a virtual drivable car demo product. We are excited to get out and start pitching it to carmakers. Finally, closing the loop on commerce, we continue to claim a leadership position in driving digital to physical commerce for brands as proven with our programs with Chipotle, Clarks and even Kraft Lunchables. We are currently launching a white label loyalty and reward center to drive more connected online and off-line engagement and ultimately, again, more physical conversion and purchase for brands.

So now let’s move on to some recent operating highlights. As brands advance in their knowledge and imperative to enter in these new immersive marketing channels, we’ve implemented several key organizational enhancements to align us with escalating demand. This entailed optimizing the company’s workflows, enhancing internal and external communications and further iterating our team structure and responsibilities. These adaptations are a testament to the company’s significant growth, having successfully executed nearly 200 immersive activations in the past year. And this organizational transformation mirrors the evolution of the market where we have established our leadership position. And it’s time now to meet that increased demand that we’re seeing from brand partners.

And beyond just the realignment of the organizational structure, we continue to realize the significant operating cost reductions gained from a set of decisions we started to take over the course of really 18 months ago. We took another step in material cost reductions earlier this month with the announced sale of our Minehut business. The transaction allowed us to further focus our product road map and streamline our already lean operation. It takes about $2.4 million of additional annualized OpEx out of our cost structure with minimal top line impact. On the commercial side, we’re expanding our offerings to consumers and brands, most notably into Fortnite with a recent partnership announced with Chartis. Chartis is a network of independent Fortnite creative developers with more than 157 million monthly plays on their various Fortnite worlds and nearly 1 billion monthly impressions.

Together, we can provide unparalleled opportunities for brands to launch new Fortnite Creative Islands or custom integrations just as we already do with scale in Roblox. Additionally, Super League is honored to be a part of a broad collaboration with the launch of Boombox across the Roblox platform. Boombox presents a pioneering opportunity for music labels to curate, distribute, and monetize their offerings on Roblox. Players can share and collectively enjoy music, with each instance of music playback being a monetizable event for the contributing labels and artists, again, a new source of revenue for labels and for the artist. This industry milestone was the result of a yearlong collaboration with Universal Music Group, STYNGR and, of course, our partners at Roblox.

And we create powerful content that is not just for play, but highly engaging for viewing audiences as well. Our recent announcement of a partnership with GSTV becomes a new distribution channel for our content across their national network of 29,000 fueling and convenience screens across the country, reaching 115 million unique adults a month. Again, taking the content we’ve already generated and find new ways to further monetize it for the company. And finally, yesterday, we announced a really exciting partnership with Common Sense Networks. They are a singular leader in age-appropriate content moderation and standards for younger audience, and they offer global scale across major gaming and video platforms. Connecting and communicating with young consumers in a safe, appropriate, and compliant manner has always been a key tenet of Super League brand.

The combination of Super League’s custom and scalable content experiences and immersive entertainment platforms with Common Sense Networks’ video channels and proprietary child-safe data and distribution tool offers an unrivaled solution in our point of view for the safety of young consumers. Looking ahead to 2024, with macro tailwinds demonstrating a nice trajectory, we are uniquely positioned to be a one-stop shop and that omnichannel solution for brands entering immersive entertainment spaces. We continue to push on sales force effectiveness and operating leverage. In fact, our top two sellers in 2023 reached about $4.5 million in annual booked revenue each. That is 2x the individual sales capacity or benchmark that was established in 2022.

We look forward to another year of strong revenue growth with the trend of larger, longer-term deals, driving us towards breakeven in the second half of the year. So with that, operator, we can move to Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Scott Buck. Please go ahead and unmute yourself and ask your question.

Scott Buck: Hi, Ann. Just a couple of questions from me. First one, it looked like gross margin kind of moved back towards closer to 1Q and 2Q levels during the fourth quarter. How should investors be thinking about gross margins given the shift in strategy moving forward?

Ann Hand: Clayton, do you want to take that?

Clayton Haynes: Yes, I’ll take that. Yes, thanks, Scott. Yes, certainly, as we’ve discussed on previous calls, margins, in any particular quarter are really going to depend upon the mix of products that are contributing to revenues each quarter. I think we highlighted this in Q3 as well. We took a strategic decision to take on a fairly large program with a marquee brand that just happened to have a higher cost profile than the revenues that were generated, for example, in the prior year quarter. And so we thought that it was beneficial because it gave us an opportunity to really take on this large program and demonstrate to brands that we have the ability to kind of provide a one-stop shop for their campaign objectives. And so in Q4, that program certainly is contributing to bringing down the overall average margin. If we were to exclude that particular program, the Q4 margins would be closer to that 44% or 45% level that we saw in the prior year in the third quarter.

Ann Hand: Yes. And that’s one, Scott, I’d say we would do again and again, because if you think about it, prior to that, our largest program we had run was in that kind of $1.4 million range. So to do a $3.9 million program with a huge global brand, and it’s an intricate program, too, because it’s about online engagement. There is consumer and digital monetization opportunities we built for the brand. It’s connected to physical retail and QR codes on packaging, so and it has a kind of rewards loop that feeds from digital to physical and back to digital. And so the power of that, what I said, I think, on the last call is, “Can you imagine if we had 10 of those deals or 12, we’re talking about a $50 million, $60 million a year for the company.” So that’s why operating leverage is so important.

And being able to hold this big program out and really use it as a way to demonstrate to large brands and agencies that, we believe we are a rare company that could deliver that type of a large program.

Scott Buck: And you said if you had 10 to 12 deals of that size, how many deals of that size are out there?

Ann Hand: That’s a really good question. It’s a very fragmented ecosystem. And in this case, Lunchables and their agency Publicis, that we have a nice growing strategic relationship with, we’re trying to chop it up. And it was being chopped up between a few different partners kind of spread out in that ecosystem. They’re partners, for the most part, that do less revenue than us. But equally, there’s a couple that are more kind of large, kind of ad agency types. But there came a point where they looked at the complexity of that program, and they turned to us and said, “We think that you’re the right company to run the whole program.” So the question that you’re asking is how many more programs out there are we getting a piece of but not the whole kind of campaign.

I would say right now, probably kind of that brand journey I talked about, I think right now, the strike zone that we’re in is probably step two. It’s where brands, a lot of them, have tasted in small ways these campaigns and are starting to consistently put dollars to work as part of all their marketing campaigns, like the Universal example. And so I think we’re still in that zone where they’re smaller campaigns. But I think the opportunity, to use the Lunchables case study, which we plan to put out that case study here soon, I think will drive bigger investment dollars because the results speak for themselves. So I can’t totally estimate the exact dollar amount, but I really think two key trends. One is you’re going to see brands putting bigger amounts for singular campaigns to work; and secondly, it’s going to become a recurring part of their marketing strategies over the course of the whole year.

Scott Buck: Great. That’s helpful. And then last one for me, what’s the plan going forward with the direct-to-consumer business? It feels like it’s being kind of left out in the wind, I guess.

Ann Hand: Yes, I think we’ve done the right thing in not overinvesting in it out of the gate. It’s hard to launch new games, mini games, inside Roblox. It’s a little bit like digging for oil, a lot of speculating on what can be the most successful game worlds. And we also operate game worlds inside Minecraft. And so what you continue to see over the last couple of years is modest revenues in that space, kind of in the $2 million to $3 million range, but not really a lot of growth. We’ve actually been really exploring very different strategies, ways that we can roll up perhaps existing games and almost build verticals around games. Imagine, if you knew that there were three or four games inside Roblox or Minecraft that really spoke to somebody who’s interested in fashion or makeup, those could become things that we could own, that already exist and have success.