theScore Inc.'s (TSCRF) CEO John Levy on Q1 Fiscal 2017 Results - Earnings Call Transcript

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theScore Inc. (OTC:TSCRF) Q1 Fiscal 2017 Earnings Conference Call January 12, 2017 8:30 AM ET

Executives

Tom Hearne – Chief Financial Officer

John Levy – Chairman and Chief Executive Officer

Benjie Levy – President and Chief Operating Officer

Analysts

Rob Goff – Echelon

Greg MacDonald – Macquarie

Nikhil Thadani – Mackie Research

Vahan Ajamian – Beacon Securities

Operator

Good morning, ladies and gentlemen and welcome to theScore First Quarter Results Conference Call. [Operator Instructions]. This call is being recorded on Thursday, January 12, 2017. I would now like to turn the conference over to your host, Tom Hearne, Chief Financial Officer. Please go ahead.

Tom Hearne

Hello and good morning, many thanks for taking the time to join us today on today’s call in our webcast for theScore’s fiscal 2017 Q1 results. On the call with me today is Score founder and CEO, John Levy; and President and Chief Operating Officer, Benjie Levy.

At this time, I would like to caution our listeners that this presentation contains forward-looking statements. There are risks that actual results could differ materially from what is discussed and that certain material factors or assumptions are applied in making these forward-looking statements.

Any forward-looking statements contained in this presentation represent the views of management and are presented for the purpose of assisting theScore shareholders and analysts in understanding theScore's financial position, objectives and priorities and anticipated financial performance. Forward-looking statements may not be appropriate for other purposes.

Additional information on the items of note, theScore's reported results and factors and assumptions related to forward-looking information are all available in our annual information form and our MD&A for Q1 2017, both of which are available on SEDAR. And with that, let me turn the presentation over to John.

John Levy

Thanks, Tom and welcome to everyone and thank you for joining us today for this review of our first quarter fiscal 2017. During Q1, revenue grew from $7 million to $8.5 million. This growth combined with reduced expenses has led to our best ever quarter in terms of our bottom line, with our EBITDA loss narrowing by nearly $2 million from $2.3 million in Q1 of fiscal 2016 to $400,000 in the current period.

Consistent with our previous disclosures, we remain well on track to achieve EBITDA positive in fiscal 2018. Our total quarterly revenue of $8.5 million was also a new record. Underlying this revenue growth in Q1, we secured an impressive raft of direct sales deals in the U.S. and in Canada, with brand partners including NBC, Enterprise, Chevy, Meeton, GM, The Keg, Kellogg, Bacardi and Microsoft to just name a few.

Our sales, ad operations and analytics teams also continue to work in unison to optimize our U.S. programmatic strategy helping us further scale this part of our business while also enhancing our advertising targeting capability.

When it comes to our audience, engagement in our apps is stronger than ever, with users opening us on average 98 times a month. Average monthly app sessions we're also up to 459 million from 414 million. In other words, when sports fans install our app they make us a part of their daily lives.

Our average monthly active users were slightly down at 4.7 million versus 4.8 million a year ago. Our clear priority, today is meeting the challenge of App user growth head on. Revitalizing user growth is our number one priority and this is an area, where we believe there continues to be tremendous opportunity for growth.

As we continue to be the number one challenger to ESPN on mobile in North America with the second largest user base for sports news and data apps we have an incredible position of strength. Leveraging this, we have a tremendous opportunity to invigorate growth through the introduction of new product features on the app combined with our marketing initiatives.

At the same time, we continue to strongly monetize our existing user base and drive increased revenue. For the past few months, we've been developing an exciting new strategic and data driven feature roadmap for our flagship app theScore.

We've also made some immediate changes and improvements to our product development process, while continued development of theScore app is our priority and is the main focus over the next number of quarters. We also continue to explore opportunities off platform and in areas that we also believe have high growth potential for us like bots and eSports.

I’ll now turn the presentation over to Benjie to summarize some of our product specific initiatives.

Benjie Levy

Thanks John, Q1 saw us make significant changes to the way our product development team operates with the goal of being more responsive, nimble and efficient in the way we ship product updates. We've moved to a two week development cycle for theScore app down from six weeks allowing us to get new versions of the app in to the hands of our users faster than ever while also improving performance and stability. This has provided us with renewed focus to spearhead the execution of an ambitious product roadmap for our flagship app.

Broadening and deepening our news and event based coverage, strengthening our community of users and better presenting and surfacing the vast amount of amazing original content produced by our editorial and social content team.

All of this is designed to positively impact both engagement and audience growth of the theScore app. Combined with continued strategic marketing efforts to raise awareness of our offering in the U.S. were excited to roll out these new features during this fiscal year.

We also continue to dive deeper into areas that we consider to be potential high-growth opportunities. While theScore remains our primary focus, we’ve continued to make great strides in our supporting products.

We're excited by the early traction of our bot platforms capitalizing on a large and entirely new channel to serve our content in a deeply personalized way on mobile devices something we do better than anyone.

As the first sports and media bot on Facebook Messenger we’ve gained an early foothold and a significant presence on a platform that has more than a billion monthly active users. And has been able to quickly roll-out new features and offerings, including college sports and cricket. As well as the smarter on-boarding flow to encourage personalization. Delivering what we believe is the best sports bot experience on the market. Bots are barely six months old but we are very well positioned to exploit their potential and we’re closely alongside our platform partners.

Like bots and esports is an industry, is also very young. But similarly we have been able to achieve a market leading position with the largest and most dedicated coverage in the esports media.

As the organizational structure around esports as an industry continues to evolve, so do we, branching beyond our app with initiatives like building a dedicated video team to adapt and capitalize on the needs of the market.

In addition we are also working on enhancing our desktop web presence which remains a big opportunity for our esports audience. And tapping into the larger and more casual gaming audience with content that not only entertains but also aims to make our viewers better gamers themselves.

On top of this we continue to test our fantasy sports game Squad Up in a live environment. Only a few months in, we’re are very pleased with the initial results from our user base as we look to offer a totally new and entirely more accessible pipe of daily fantasy games.

Our team has already done a great job of building a game that is fun and easy to play and we’re now focused on further iterating on that game play and strategizing how to take it to scale.

I will now turn things over to Tom, for a discussion of our financials.

Tom Hearne

Thanks Benjie. Q1 2017 revenue compared to Q1 2016 revenue grew from $7 million to $8.5 million, which was an increase of 22%. The entire increase is related to increases in our advertising revenues. Our app user base continues to be more engaged. Engagement grew to 459 million user sessions per month in Q1 2017 compared to 414 million user sessions per month last year.

Sales growth was led by this increased engagement, as well as the execution of both our Canadian and U.S. direct sales team. In Q1 2017 Canadian ad revenue grew from $1.7 million to $2.5 million year-over-year, while U.S. ad revenue grew from $5.3 million to $6.0 million year-over-year.

In Q1 2017 expenses declined to $9.5 million from $10.1 million. This decline is mainly driven by our reduced marketing expenses related to fantasy sports offset by our growth in personnel and our new product initiatives. This expense level should be an approximate base of expenses for the remainder of the year.

In Q1 2017, personnel costs increased to $4.6 million compared to $4.4 million in the prior year. Direct marketing costs were $1.3 million in Q1 versus $2 million in Q1 last year. Most of the decrease was related to reductions in marketing related to fantasy sports. There had been an overhead cost of $1.5 million, or flat year over year.

Our EBITDA loss in Q1 was $0.4 million versus $2.3 million in Q1 fiscal 2016. The combination of revenue increases and expense savings allowed us to make significant improvements in our profitability. We've finished the quarter with $11.7 million in the bank and we have an additional $5.2 million that we expect to collect in early Q3 with respect to our digital media tax credits.

Cash used for the quarter was $3.9 million versus $7 million last year, our bottom line improvements directly contributed to significantly lower cash usage. It's also important to note that Q1 is usually our highest cash used quarter with Q1 sales generally being collected in Q2.

Our working capital at quarter-end was $21.2 million, as we have $7.7 million on accounts receivables and a $5.2 million in tax credits recoverable at our current assets.

And with that operator we will now turn the call over for questions.

Question-and-Answer Session

Operator: Thank you ladies and gentlemen we will now begin the question and answer session. [Operator Instructions] Your first question comes from Rob Goff, Echelon. Rob please go ahead.

Q - Rob Goff

Good morning and thank you for taking my question. John could you dive deeper into your number one priority as you stated. In terms of the user growth, in terms of some of the marketing push and issues you may have to accelerate that growth or as you said on the new product roadmap?

John Levy

Okay, Rob morning. Yeah this is something that we’ve been really addressing and working on over probably the better part of the last couple of quarters. As we’ve sort of seen this flattening in the universe app downloads and it is our user growth sort of grew from where we were two or three years ago to the 4 million to 5 million average monthly users.

We recognize that the way that we're going to continue to push user growth and that's really at the heart of what are our future opportunity is, because as you know once we get the users we were able to monetize them probably faster and better than even our expectations have been over the last year or so. And part of the initiative really relates to enhancing the product looking at how our users use our app today, where the engagement is, looking at the competitive landscape as to how users are perhaps using sports content and consuming sports content in other platforms.

And adapting our current offering without jeopardizing the fundamental reason why people love our app and why we’re the number two most popular app in North America, which is because we provide things so quickly and so efficiently through the interface that we've developed over the last number of years.

We are not going to talk specifically about some of the new exciting features that are coming out over the course of this year because that would be quite silly actually and in the context of telling people, in terms of – other people who are in business what we're about to do.

But we're very, very excited by it and based on the research and the data analytics that we've accumulated over the last little while we're very, very confident that – does not only be able to maintain our position but also attract a whole host of new users, grab users from other sports properties and regain and I think we've talked about before double-digit growth as we move into the future.

Rob Goff

And again a follow-up, could you perhaps give any more color on what you're seeing through Facebook in the bots. I know that you can't release information but just if there's any additional perspective you can provide.

Tom Hearne

Thanks Rob, what we're seeing on Facebook is very interesting and I think we can’t get into too much specific’s in terms of numbers but we are starting to see the makings of a very positive pattern of consumption and engagement and that’s perhaps not at the full level of our app but we never, well we didn’t expect it to be that quite high but we're starting to see significant numbers of users on the bots who are following teams, who are coming back multiple times a day to check scores and news and to engage with our content.

So while it is very early days we’re starting to see a very positive pattern of repeat usage of engagement.

Rob Goff

Okay, thank you.

Operator: Thank you. Your next question comes from Greg MacDonald from Macquarie. Greg please go ahead.

Greg MacDonald

Thanks, good morning guys. Hi Tom, so again on the issue of user growth, maybe I can phrase it this way. It sounds to me very much, like this is a marketing challenge and almost entirely focused on that but it might be wrong. Is there anything from a product perspective that you feel the Company is missing, or the main app is missing that could be content. It could be features anything like that. I know you might not be willing to share but it would be interesting for us to know if there is still more that you think you can do to the main app to be able to drive penetration.

John Levy

Yeah Greg, I mean it's John and I think you sort of hit the nail right on the head. It really the way we are approaching this it’s really product first and we've – continuing to revitalize the product make it exciting, continuously trying surprising the – there our users and be sort of ahead of the curve so.

But it's that combined with the marketing initiatives that we're undertaking in terms of how we're going to push the product out. So, but first and foremost I think it really is a question of how we continue to iterate on the existing product to make it more exciting and to make it more useful. Just from 60,000 feet, you know we kill it in terms of our data.

I mean our alerts go out faster than basically almost any other sports publisher in North America. Probably the world and we see that in terms of our engagement. On the app itself people are now hitting us over a 100 times a month and that’s from 60 to 70 times a year ago and probably 40 to 50 times 2 years ago.

So we're very, very proud of the engagement and the additive behavior of ours users. Where we're pushing and revitalizing is in terms of our content. You have been to our office, you’ve seen the amazing content thing that we have, creating this content. And what you're going to see from us over the next sort of while again without going into much detail is sort of a reformatting of some of this content revitalization of this content, picking up queue’s from our user bait and from others, how people are consuming sports in the universe inside our app and outside of our app.

So what you're going to see is this new development in terms of how we’re pushing and surfacing this content and we think it's going to be pretty dramatic in terms of acceptability. And then the last thing of course is layering on the ability for our strong user base a 4 million to 5 million user base to be able to help us amplify through existing platforms and other platforms this content that we're creating.

So it's first and foremost the product and secondly the marketing in terms of how we get the message out.

Greg MacDonald

And we've tended to think simplistically that marketing is a function of spend, marketing is a function of turning taps on, turning taps off at the right time. Are we being too cynical thinking about it that way, are there ways to leverage up or.

John Levy

The answer is yes, you are being too cynical to think about it in the context of just spend. I mean spend is part of it, and we will go to the market and buy users quite frankly, when it is efficient for us to do it. I mean our marketing team and our analysts are basically looking at this on a day to day basis. And pricing it, and we have notions and ideas as to do the valuation of our customers and what we're prepared to pay for them.

Benjie Levy

I will add to that Greg, I mean we’re not going to outspend ESPN and CBS and Yahoo. And our marketing spend isn’t why we fit number two in the market today. And that is a function of the product and engagement that was created. Marketing today for us is two prong, we will do some very smart tactical performance marketing where we are doing paid user acquisition marketing. But the bigger opportunity for us in the U.S. market is to really get our brand up there. Because I think that is the one – as we are sitting number two to ESPN from a minute a sports fan is two years old ESPN is engrained in their head from being inundated across platforms.

Our challenge is how in this digital age do we undertake smart and efficient brand building that’s not the traditional spend a $100 million on a television campaign and because not only do we not have an aspect to that, we are not sure that today that is effective and would accomplish our goals.

And so that is what we are working on with our marketing team. We are working on a couple of interesting social content initiatives that are getting our brand out in front of tens of millions of people through some social content we are producing.

If you follow us on Facebook and Instagram you will start to get a sense of that type of content that works well to build our brand and overtime again without getting too much into product we are working to very much expand the content offering in our app and better align what you are seeing across all of our platforms.

Greg MacDonald

And do you think that we are going to see an MAU impact in calendar 2017 from the efforts or is this a longer term initiative.

Benjie Levy

I wouldn't want to get into kind of specifics in terms of forecasting when these new features are going to roll out it will be a certainly – our product efforts are certainly a multi-quarter effort that we are undertaking, this isn't something that’s just started last week. This is something that there's been a lot of research, that's been ongoing over the past – probably the better part of the last six months in terms of our app our positioning, what our users like. Where our users think we can improve and what we're seeing in the marketplace and so we're busy working on that. Things will be rolled-out gradually but it will be we are talking quarters not months.

Greg MacDonald

Okay thanks and final question for Tom. I know you guys don't give guidance. I am trying to get a sense of the revenue advertising revenue outlook. Is the most recent quarter at 22% year-over-year growth kind of a number, that you're comfortable with for the year or are we looking at a further scale-down because you’ve only mentioned double-digits.

Tom Hearne

Your prefix was probably the most accurate part of the whole question in that I don’t give guidance. And frankly it’s just I wouldn't want to – I won’t want to comment on that specifically.

Greg MacDonald

Okay appreciate it thanks guys.

Operator: [Operator Instructions] Your next question comes from a Nikhil Thadani, Mackie Research. Nikhil please go ahead.

Nikhil Thadani

Thanks guys. Congrats on the record user engagement and EBITDA in Q1. I had a few questions that I wanted to dig into, going back to your previous comments John I think Tom you may have alluded to this, in the past you've hinted at sort of a EBITDA and cash flow breakeven in fiscal 2018. Should we still expect that given your push on growing the user base in calendar 2017. Is that a fair expectation to sort of expect the cost base to remain relatively constant from here on out?

John Levy

Yeah I think that is a reasonable expectation, I mean as we guided or as I commented in my prepared comments. I think that expense base that you say Q1 is a good base for the future quarters. And obviously we have a lot of initiatives to plan to still continue to drive growth. Certainly we have a lot of new product initiatives as well and we expect continued efficiencies and bottom line improvement out of each of those so that we can improve our bottom line constantly. So fiscal 2018 is a comfortable period for us to get to break even and we expect cash flow breakeven in the same timeframe.

Nikhil Thadani

Excellent and just as a sort of high level, how should we think about monetization of new products in the existing user base certainly other mobile ad guys like Facebook have sort of hinted at ad loads being saturated. Is that something you guys are running into as well or given your high sort of user engagement. We should expect the …

Operator: Looks like his line did drop your next question comes from Vahan Ajamian, Beacon Securities. Vahan please go ahead.

Vahan Ajamian

Good morning guys. Just a quick question anything tangible you can give us on esports number of monthly active users on that app. Revenue contribution in the quarter. Thanks.

Tom Hearne

It is early days for esports still and so we are not separating out any of their numbers yet. We continue to look at kind of initiatives both from an app perspective and on the web as to what we can do. We see in this space overall that it's early nascent days in esports and we've established ourselves well I think as a good media company there and we're working away at how we and where we find the best user base, engage user base for it. So I think as we do it and it gets bigger we'll be in more a better position to talk about it but at the current moment it's still in its early stages and we're not going to separate it out.

Vahan Ajamian

Thanks.

Tom Hearne

No problem.

Operator: Thank you. Your next question comes from the Nikhil Thadani, Mackie Research. Nikhil please go ahead.

Nikhil Thadani

Thanks guys I'm not sure what happened to my question there. What I was meaning to ask was, are you seeing any sort of saturation on the ad load side on your properties somewhat similar to what Facebook has alluded or given your high user engagement there’s lots of inventory in terms of page views that you guys can leverage going forward.

John Levy

So I think in response to that certainly I think one of the things that helps us with respect to that is the breath of customers that we have from a revenue perspective. We have multiple networks who will bid on different inventory, we have a direct sales capability. Certainly it is a [indiscernible] point with respect to the one ad network, want to hit the same user twenty times a day with the same ad. No they don't and so they certainly have frequency capping and all of that other types of stuff but I think there's enough breadth from programmatic certainly in the U.S. market that prevents that being an issue for us in the way that we engage our users today.

Nikhil Thadani

Okay, great. And just one sort of housekeeping question before I let go the line here. What was the headcount and share count at the end of Q1.

Tom Hearne

Share count was about $295 million, headcount is just a little over 200.

Nikhil Thadani

Thanks guys.

Tom Hearne

No problem.

Operator: Thank you. There are no further questions at this time. Please proceed.

Tom Hearne

Great, well thank you everybody for joining us this morning on our Q1 call. We look forward to speaking to you either today at our AGM, which is that 11:00 A.M. this morning here in our office at 500 King Street West or on our Q2 conference call which we anticipate being sometime mid-May in 2017, excuse me mid-April in 2017. Thank you very much.

Operator: Thank you, ladies and gentlemen this concludes your conference call for today. We thank you for participating and I ask that you please disconnect your lines.

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