Allied Gaming & Entertainment Inc. (AGAE) Q4 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the Allied Esports Entertainment's Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded.It is now my pleasure to introduce your host, Lasse Glassen with Investor Relations for Allied ESports Entertainment. Please go ahead.

Thank you, operator. Good afternoon and welcome to Allied Esports Entertainment's 2019 fourth quarter and full year results conference call. Speaking on the call today is Allied Esports Entertainment's Chief Executive Officer, Frank Ng; and Chief Financial Officer, Tony Hung; the Company's President and longtime WPT CEO, Adam Pliska; and Jud Hannigan, who is leading the Esports operations is also available for the question-and-answer session.Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward looking statements. Words such as may, will, expect intend, plan, believe, seek, could, estimate, judge, targeting, should, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements, due to a variety of factors discussed in the company's public filings, including the risk factors in documents filed with the Securities and Exchange Commission.Although the company believes these expectations reflect it and such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.In addition, certain of the information presented in this call represents non-GAAP financial measures. The company's earnings release, which was issued this afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes that non-GAAP financial measures are useful to investors.With that, it's now my pleasure to turn the call over to Allied Esports Entertainment’s CEO Frank Ng. Frank?

Thank you, Lasse. And thank you everyone for joining us this afternoon. I will begin today's call with a review of our operational highlights for the fourth quarter and full year 2019. Tony Hung, our CFO, will follow by providing additional details on the company's fourth quarter and full year financials results. After our prepared remarks, we will open up the call to your questions.Allied Esports Entertainment wrapped up a transformational year that included a strong fourth quarter highlighted by robust top-line growth and continued execution of our strategic initiatives to help business expand into quarters and years ahead. Fourth quarter total revenues of $6.5 million increased 19.5% compared with the fourth quarter last year, driven by growth in both our Esports and Poker businesses. Our excellent fourth quarter results capped off with an impressive performance for the full year which included a 26.5% increase in total revenue along with a 38% improvement in adjusted EBITDA from a year ago.In addition to our strong financial performance, we also continued to make great progress with our existing partnership with Simon Property, and TV Azteca. And with this momentum, we announced a new relationship with Brookfield Properties.With significant and rapidly growing revenues and numerous key strategic partnerships, Allied Esports Entertainment continues to carve out a valuable position in the exciting and voyaging esports industry. At the same time, World Poker Tour, or WPT continues to steadily grow its business and has a very promising outlook. In fact, a number of factors are coming together that gives us confidence that the future of WPT has never been brighter.With respect to esports our focus is not about publishing games or owning teams. In fact, we believe the best opportunity is to drive sustainable and scalable growth through targeting the general populations of gamers and complementing game publishers by catering to the entertainment aspect of esports. As such, our strategy has been built around three strategic pillars, which are: First, in-person experiences. This includes hosting live events at our fixed and mobile facilities around the world where they can be viewed live by thousands of fans and streamed online, significantly increasing the viewership potential; second, we then produce content off of select live experiences that is delivered over multiple distribution platforms with a focus on social channels. This content provides opportunities to increase the overall viewership to tens of millions; and third, we intend to leverage our content by way of embedded messages in order to convert a percentage of that viewership to participate in our interactive services, including out to be built online platform, similar to what we have done successfully at WPT.Importantly, each of the three pillars of our strategy builds on one and another to work synergistically together, which is a strategy with a proven track record of success. In-person experiences, multiplatform content and interactive services have been the go-to-market strategy that the WPT has effectively deployed in the poker industry for nearly two decades and we continue to execute this successful strategy for WPT. We are also applying it to the much larger and more rapidly growing esports industry.With that, let's turn to the highlights of our fourth quarter's results as well as an update on the progress which we have achieved on our strategic partnership. The first of the three pillars, in-person experiences, continued to perform well during the fourth quarter generating solid year-over-year revenue growth. In fact, for the full year in 2019 revenues from in-person experiences grew 36% over the prior year. Without a doubt, this segment of our business is currently the most developed and recognizable due to our flagship facility at Vegas, the HyperX Esports Arena and Luxor Hotel & Casino, our mobile esports trucks and more poker tour events around the globe.During the fourth quarter, we held 70 events at the HyperX Esports Arena. This is up 20% from 55 events in the fourth quarter last year with notable events including the League of Legends All-Star 2019, Capcom Cup North America Regional Finals, Simon Cup Grand Finals, SoulCalibur World Invitational and the Big Buck Hunter World Championship.I'm pleased to report that the total number of proprietary events in the fourth quarter across our esports ecosystem system and participants increased by 54% and [158%] quarter-over-quarter. Respectively, with the largest contribution of our new participants coming from the Simon Cup.In addition, the HyperX Esports Truck in North America and in Europe were deployed at nine events including Simon Cup Qualifiers, Posty Fest, Las Vegas Bowl, DreamHack Atlanta and DreamHack Winter, Gamevention and EGX London. Our trucks have proven to be a very effective method of bringing Allied Esports brand into high profile events, which complements our stationary arena.Also during the quarter, WPT hosted 17 events in seven countries around the globe. That included more than 13,000 participants, an accumulative prize pool of 2.7 million. During the quarter the number of events and participants increased year-over-year by 21% and 27% respectively.With respect to WPT, I am particularly pleased with our expansion internationally, including our first ever event in Australia and Cambodia, which drew participants from 41 countries. Late in the fourth quarter, we signed an agreement with Wanyoo, operator of the largest network of esports centers in China. Wanyoo will become an official affiliate member of the Allied Esports Property Network and further has a valuable distribution channel to enable Allied Esports to sell future products and services into the Chinese market. This includes Wanyoo's 16 million-plus global members in more than 800 locations across China and around the world, including facilities in United States, Australia, Singapore and United Kingdom, and Canada.The Allied Esports Property Network was introduced in late 2018 as the world's first affiliate program for global partners interested in developing esports venues and participating in Allied eSports events, programming and content production. In addition to our partnership with Wanyoo, we also work with a number of venue operators to increase their esports event programming and related offerings or create new dedicated Esports facilities altogether. Fortress Esports, the first affiliate program partner of the Allied Esports Property Network covering Australia and New Zealand opened its first venue on March 13 at Australia's largest shopping mall, Emporium in Melbourne, Australia. At nearly 30,000 square feet, the new facility is expected to be the largest video gaming and esports entertainment venue in the Southern Hemisphere.In addition, Esports Arena LLC, an operator of esports venues and 25% owned by Allied Esports has been successfully expanding its in-store presence in Walmart stores. Earlier this year, the company unveiled that it will be expanding the number of locations with Walmart from seven at the end of 2019 to 18 by the end of the fourth quarter of 2020.Our strategic relationship with Simon Property Group also falls under our in-person pillar as we collaborate with the important partner to deliver esports experiences through integrated gaming venues and production facilities at select Simon destination.During the quarter, we successfully completed the pilot season of the Simon Cup, a U.S. nationwide amateur esports tournament, licensed by Epic Games to include Fortnite. The Simon Cup fans, both online and on mall qualifying events, and was marketed at 13 Simon destinations around the country, supported via a partnership with popular esports influencers, FaZe Clan. Over 10,000 players registered with this initial Simon Cup season, vying for the prestigious championship which awarded a $50,000 Simon shopping spree to the winner. The program was supported by sponsors, Microsoft Stores and Apple Pay.The sequence through the end of the quarter as part of the strategic alliance with Simon, we announced that Mall of Georgia located in the greater Atlanta metro area will be the location for the first Allied Esports venue and a Simon destination. Mall of Georgia, the largest shopping destination in the Southeast features more than 200 shops including specialty retail brands, department stores, restaurants and cinemas.As we will detail in upcoming announcements the two level 13,000 square foot facility will be a gaming and esports destination for players and community members of all levels as part of Allied Esports Property Network. The venue will feature regular amateur and professional esports tournaments and events across a variety of themes and genre. The location will serve as a regional hub in the Southeast. It will have full broadcast and streaming production and capabilities, will also offer PCs and consoles for daily use, full food and beverage options, experiential retail, and Allied Esports brands of daily events and tournament programming.But more importantly, these locations will be able to leverage investments we have already made in our Esports Arena in Las Vegas, and can be built at a fraction of the cost of Las Vegas facility. Construction efforts to convert the current retail space are expected to begin soon, with an opening of the venue anticipated in the second half of the year.In addition to the partnership with Simon, the sequence to year-end, we announced a similar strategic relationship with Brookfield Property Partners. As part of the strategic investment, we will expand the Allied Esports on mall venue concept to existing Brookfield retail locations. Between Simon and Brookfield, we now have accessibility to over 400 premium locations around the globe. Currently, we anticipate opening the first Brookfield location towards the end of this year. We look forward to updating you on our progress with both Simon and Brookfield in the future call.The second pillar of our business model is multiplatform content, where we generate content for consumption on a 24/7 basis. This could be from content that is live streamed, both produced or packaged, where we retain optionality in monetization of content via direct distribution and partnership, use of third-party distributors or various hybrid solutions.World Poker Tour has been effectively doing this for years, being globally broadcast in 25 countries and territories over 17 successful seasons across various networks including Fox Sports Net, where the show currently airs. In addition, WPT's new national syndication deal announced for 2020 includes 22 markets across the country, and increased by approximately 15 million additional homes for the coming year. With the new agreement, the WPT television show will now be available in 102 million households nationwide.Moreover, during 2019, TV Azteca, a leading sports network in Mexico and a global provider of Spanish language content, launched localized WPT programming in Mexico on free-to-air channel 7. We estimate total global reach WPT content at over 200 million households.In addition, on the esports side of the business, the partnership with our strategic investor, TV Azteca continues to progress since June 2019, where the strategic alliance was announced. Allied Esports has brought the esports production expertise, live events experience and industry relationships to Mexico to assist TV Azteca in the creation of original content, and execution of event broadcasts that has reached millions of consumers across the network's digital platform. This includes the launch of the Gears of War Pro League LatAm and the highly successful Gears Major in Mexico City last week, which saw a Mexican team at the top range of a competitive field and effective owned broadcast talents, making a tremendous impact in the esports world.Finally, the interactive services still is model after the successful World Poker Tour interactive services strategy, which includes a subscription-based membership platform, ClubWPT and social gaming models, including PlayWPT, WPTGO and partnership with Zynga. Recent promotions continue to help drive subscriptions. During the fourth quarter we successfully implemented the first subscription planned increase in five years for ClubWPT.On January 15th, we raised the monthly subscription rate by $3 to $27.95 per month. We are pleased to report that we experienced negligible impact on subscriber total after the rate increase. Moreover, January 2020 marked the launch of innovative ClubWPT 1 million bonus promotions where any ClubWPT member who wins a fixed package through a main tour event on ClubWPT and then goes on to win that event will win an extra $1 million. This ClubWPT 1 million promotion, along with other promotions has helped attract thousands of new registrations.On the esports side, although the interactive pillar is in its early days, some of its developments completed for the Simon Cup last year will serve as the foundation for our eventual B2C online esports platform. Longer-term we envision this becoming a subscription-based online platform where esports players and fans can watch, play and win with other members of the esports community and [parties], esports personalities and influencers. This online platform will be closely integrated with our offline experiences to create a comprehensive esports tournament experience for our fans.Apart from the three pillar strategy, we are also very excited about several growth catalysts for WPT. In particular, real money gaming and sports books for which we have generated significant inbound interest and active conversations with outside parties. To this end, we are exploring and evaluating opportunities that utilize WPT assets for real money gaming and sports book application. These opportunities range from developing real money gaming sites, to affiliate marketing programs that allow us to monetize our customers and content library to generate additional leads for real money gaming and sports books.Importantly these opportunities would require low or no capital investment, while potentially generating significant returns. We expect to have more to say on this in future call.In summary, 2019 was a very productive and foundational year for Allied Esports Entertainment. I want to thank everyone at the company for their hard work and dedication during a year of significant change. Momentum is gathering and we are all looking forward to building on this success in 2020.With that, I would like to turn the call over to Tony Hung, on our CFO, for a more detailed update on our fourth quarter financial results. Tony?

Thank you, Frank. Good afternoon, everyone. And thank you for joining us today. As Frank mentioned, we ended the year with strong growth in each of our key strategic pillars and laid the groundwork with our strategic partnerships, which have now expanded to include Brookfield to go along with Simon and TV Azteca. We've also been very busy working on strengthening our capital structure and liquidity, which I will talk in more detail in a moment.Now. turning to the fourth quarter and full year 2019 results in more detail. We had a strong fourth quarter and an even stronger full year. Total revenues for the fourth quarter were $6.5 million, up 19% year-over-year. For the full year total revenues were $26.1 million, an increase of 27% year-over-year, driven by growth in all three key strategic pillars. Looking at these results in greater detail, in-person revenues for the fourth quarter totaled $2.2 million, compared to $2.1 million in the prior year period, an increase of 6% year-over-year. In-person revenue increased year-over-year in our Allied Esports business but was slightly offset by lower Poker event revenues primarily due to timing issues.Multiplatform content revenues totaled $2 million compared to $1.1 million in the prior year period, an increase of 74% year-over-year. Our year-over-year revenue growth was primarily driven by increased sponsorship revenues in the WPT business, as well as higher WPT distribution revenues and music royalties.Interactive revenues totaled $2.3 million compared to $2.2 million in the prior year period, an increase of 4% year-over-year, driven by increased subscriptions and virtual product purchases related to the WPT business.Overall, fourth quarter total revenues derived from Allied Esports grew to $2 million in 2019 as compared to $1.4 million in the same period in 2018, largely a result of increased revenues at the HyperX Esports Arena Las Vegas, as well as increased revenues from the company's gaming truck event.Revenues from WPT increased to $4.5 million in Q4 2019 versus $4 million in Q4 the prior year period, driven primarily by growth in sponsorship and distribution. For the full year 2019, total revenues derived from Allied Esports grew $3.3 million as compared to last year. And revenues from WPT increased $2.2 million compared to last year.Total costs and expenses for the fourth quarter were $11.6 million, flat compared to the prior year period. Costs and expenses in 2019 benefited from lower impairment expense versus the prior year period. This was offset by increased in-person expenses due to our Simon Cup event in Q4 2019 and higher SG&A as a result of becoming a public company.Net loss attributed to Allied Esports Entertainment for the fourth quarter was $5.8 million, an improvement from a net loss of $6.6 million in the fourth quarter last year.And now turning to our balance sheet in detail. At December 31, 2019, our cash position totaled $12.1 million, including $3.7 million of restricted cash, compared to $10.5 million at December 31, 2018. Year-over-year, the increased cash balance was due to proceeds from the merger transaction and excludes an additional $5 million we raised through selling common shares to Brookfield in January. Total convertible debt was $14 million at December 31, 2019.At the end of February, we also announced that Lyle Berman, Chairman of the Board of Directors has committed to purchase 2 million of newly issued shares of Allied Esports common stock through our exercising an option on March 9th. The proceeds from the stock sale will be used for working capital and general corporate purposes.Finally, I would like to spend a moment to discuss the global health crisis. We are deeply concerned for the wellbeing of those affected. We have a strong network of employees and partners across the globe and it is our top priority to ensure the health of our colleagues and make sure they stay safe as they deal with this very difficult situation.To date, we've had to cancel or postpone some WPT and esports events as a result of the coronavirus. Fortunately, this has been isolated to our pillar one business and our pillar two, pillar three businesses remain relatively unaffected. In fact, with traditional sporting events canceled, we anticipate increased demand in pillar two and pillar three for esports content and online esports events.We are currently realigning our resources to accommodate the change and have began to leverage our infrastructure and daily programming to make our esports tournaments available online, kicking off with an event this past weekend. For WPT we recently transitioned what would have previously been a physical event to the first WPT online series that will take place exclusively on the party poker online platform in May. We believe this will prove to be a model for more online events to come, and we'll continue to monitor the situation closely as it unfolds.In summary, we are pleased with the performance of both Allied Esports and WPT, the strength and expansion of our strategic alliances and the progress we're making on our key strategic pillars. Looking forward to 2020 we have a lot of runway for growth and have been involved in in-depth discussions with multiple parties to strengthen our balance sheet and pave the way for future success.We will now open the line for Q&A. operator?

[Operator Instructions]. Our first question comes from Jeff Cohen with Stephens. Please go ahead.

So you hosted 78 events to pyramid this quarter. Could you maybe talk about where that number is against where it’s likely to ultimately be? And then maybe how does that 78 breakdown between tail-end events versus kind of the weekly community events that you run? And where would you expect that engaged ratio to your trend long-term?

Sure. Thanks, Jeff, this is Jud Hannigan. So, the 78 events we had in Q4, these were the total events, our proprietary events out of that number were just over 60 and with the rest being third-party events that happened -- that took place in the arena. I think as we look forward in the operation of our venues, we're going to begin to layer on multiple events per day. And we think that there is a lot of opportunity as we look to do that. Our current plans call for rolling that out this summer where we begin to layer in multiple events per day, which will increase the total number of events that we can do from a proprietary standpoint.

And holistically these are very important for the company because they not only serve our first pillar, eventually, once we have the content play, and also the last pillar, these events will be integrated with the online experiences as well. And as a matter of fact, we have started that process of extending some of those game plays starting this week, and make them online as well.

Thanks, guys. And then just one quickly for Tony. Can you maybe talk about any cost cutting measures you guys are looking just to kind of preserve cash, given the economic outlook, or maybe just a timeline of when we can expect EBITDA breakeven? Thanks.

Sure, Jeff. Let me let me take first part first. Obviously with everything going on right now with the coronavirus, it's a pretty fluid situation. So we're actively looking at a variety of different measures and you'll start to see some coming soon. And then as far as the cash burn is concerned, as we currently stand right now, we have runway to carry us until our debt comes due in August of this year.

[Operator Instructions]. Our next question comes from Derek Soderberg with Dougherty and Company. Please go ahead.

Hi, guys. Thanks for taking my questions. I want to start off with Frank here. I'm wondering if you guys could give us a little bit more detail on the impact of the coronavirus on maybe some foot traffic or utilization at your Las Vegas location and also at your affiliate partners? And then also maybe give us a sense for how the virus has impacted any of your arena developments with your partners? Thanks.

Yes, let me start first, maybe Tony can add some more at the end of it too. I would say out of the three pillars, the first pillar will have impact. But I believe -- we strongly believe that impact will be temporary. Because for example, like World Poker Tour, we do have cancellations, but the number of cancellations so far is very minimum. Majority of that actually is pushing back the schedule and have the events later part of this year when things are clearing up. And like Vegas, the locations we have at all the affiliate partners, we actually have dedicated a purpose-built plug-and-play arena. And we do foresee even at the first pillar level, when things running good as we move along, we will be quickly recovered by having a lot of big publishers, they need to catch up on their lead, their schedules, and we're the most ready to help them to achieve that purposes.So for the short-term, yes I think we will see some impact on first pillar. But second pillar, third pillar, we actually have high hopes that, that should be moving in the right direction, because people are staying home, getting online, watching more content. And we're in the process of realigning the company resources for that purposes right now. We have something exciting to share with everybody very soon.

And then Derek, this is a Tony. Just to add a little bit to what Frank was saying. So throwing some numbers around it, if you focus on the esports side of it, because I think WPT should be relatively unaffected as Frank was saying. On the esports side, if you look at 2019, we did about $7.5 million of revenues. And if you divide that on a weekly basis, you're looking at about $140,000, $144,000 of revenues per week. So that should give you a rough sense.Now, just to highlight a little bit more on that, as you know, we have a variety of different revenue streams. And so some of them will be impacted, obviously, like food and beverage. But others, such as sponsorship should be relatively unimpacted. And then obviously, we also have gaming and ticketing, which is, you heard us say earlier, that's actually going to be moved to an online event. So we hope to be able to offset some of the losses there to be able to supplement in other areas with online events and with online content.And then from an EBITDA standpoint, as opposed to revenues, it shouldn't have as much impact there as well.

Okay, great. And in the past, you guys have kind of spoken to a really strong pipeline of interested, potential customers rolling out arenas, has the virus impacted those talks at all? Maybe not specifically, Simon or Brookfield those seem to be on track. But any additional color on some of the conversations you've had with potential customers? And if that's -- if the virus has maybe pushed out some of those opportunities, I guess.

Hey, Derek, this is Jud again. Happy to answer that one for you. Yes, we've been speaking with folks all over the world about the -- their plans to open and operate arenas and how we can support that as part of our affiliate program. Our first -- as Frank alluded to earlier, our first arena in Australia and New Zealand, opened up this past Friday in Melbourne. So we're excited that, that has opened their doors. And yes, look, the impact of this, I think everybody is -- it's affecting the world, everywhere, globally, in different ways. And the responses locally in those markets have been very different. So we'll continue to monitor but the interest is still there, and I think to what Tony and Frank were saying earlier, I think there's a -- if they are at the timeout pushing it back, not necessarily abandoning those plans. So the conversations are still ongoing and quite active.

And then as a final question, I think on the last call, you guys kind of pointed to some industry growth rates around 20%. And I think you guys alluded to maybe that's a good number to go off of. Is that still the case or, the virus kind of impacted that at all?

Yes, that's an interesting question. I mean, I think right now, it's a little early to tell. Obviously, we're going to be monitoring the situation very closely. And as you said, it is a very fluid situation. But as far as our opinion right now, yes, we believe that, that industry growth still is relevant for us.

Yes, and I would make a guess that the industry numbers would go up. This is actually the moment that the industry may pick up some benefit out of this because people are staying home and we see a number has been breaking records now.

Thank you. I would like to turn the floor over to management for closing comments.

Okay, great. So thank you operator and thank you to those on the phone for your support and participation in today's call. We hope you all have a great day.

This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.