FaZe Holdings Inc. (NASDAQ:FAZE) Q3 2022 Earnings Call Transcript November 15, 2022
Operator: Good afternoon, everyone. My name is Bo, and I will be your conference operator for today. At this time, I would like to welcome everyone to the FaZe Holdings Inc. Third Quarter 2022 Earnings Conference Call. , Corporate Counsel, you may begin your meeting. Please go ahead.
Unidentified Company Representative: Thank you, operator, and thank you, everyone, for joining us. With me today are Lee Trink, Chief Executive Officer; and Christoph Pachler, Chief Financial Officer. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements of FaZe Holdings’ financial outlook, the company’s plans and timing for product development and sales and any other statements other than statements of historical fact. These forward-looking statements are based on management’s current expectations and involve risks and uncertainties. For a discussion of risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent SEC filings, which are available on our website at fazeclan.com.
In addition, during this call, we may discuss certain non-GAAP financial measures. Additional information regarding these non-GAAP measures, including reconciliations of these measures to the most directly comparable GAAP measures, is contained in our third quarter earnings release, which is also available on our website at fazeclan.com. The content of this conference call contains time-sensitive information, accurate only as of the date of this broadcast. Except as required by law, FaZe Holdings undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. With that, it is my pleasure to turn the call over to our CEO, Lee Trink.
Lee Trink: Thanks, , and hello, everyone. Great to have you all here for our third quarter earnings call. While we hosted a short call covering highlights of the second quarter just after our public listing, today’s call is our first full quarter call as FaZe Holdings. I’m excited to introduce our new CFO, Christoph Pachler, to the FaZe team and to the call today. Christoph joined us in October and has a terrific background as an entertainment and media industry CFO. He’s hit the ground running, and you’ll hear from him shortly. First, I’d like to summarize the results at a high level and then get you updated on the FaZe story. We’ve been very busy, and our opportunity set is both evolving and expanding rapidly. Our third quarter revenue totaled $14 million, up 12% year-over-year, driven by increased revenue from brand sponsorships, content and esports.
Historically, FaZe’s revenue trajectory builds heading into the fourth quarter, and our pace of business activity, particularly in the sponsorship category, indicates that, that will be the case again this year. While the timing of deal signings and revenue recognition can be lumpy in our business, our current expectations are that we’ll achieve revenue for 2022, in line with projections provided in our go public filings. Since our last call in mid-August, we’ve announced several exciting partnerships, including a renewal with McDonald’s, a new sponsorship deal with Comcast’s Xfinity broadband service and our new metaverse partnership with The Sandbox, all of which will benefit future results. During Q3, we have also set the foundation to fully deploy our partnership with crypto payments infrastructure leader, MoonPay, which was announced earlier this year.
As I’ll discuss more in a moment, there are some exciting new deals in the pipeline that we expect to be sharing in the very near future. I do want to be clear that we’re not just focused on top line growth. We’re also laser-focused on our cost structure and managing the capital raised in our go public transaction. We reported an adjusted EBITDA loss of $12 million in the quarter. This is an elevated figure that includes public company costs for the first time as well as recent exec hires and expenses related to the go public transaction. The good news is that those transaction expenses are nonrecurring. As for our ongoing operating expenses, we’ve been aggressively tackling spending, especially given the current economic environment. We’re also aligning our expense structure with how we’re positioning FaZe for growth.
Christoph will have more in a moment, but the headline is we’ve already executed on more than $7 million in annualized savings that will benefit our results beginning in 2023. Let’s now turn to positioning and strategy. It’s been an eventful first few months as a public company, more eventful than we imagined, for both FaZe and our industry overall. As the first public company focused on Gen Z and purpose-built for the creative economy, we have generated tremendous opportunities from both inside and outside our industry. The pace of conversations and interest in working with us has ratcheted up quickly. This includes potential partnerships and collaborations as well as M&A opportunities and new ventures. We expect to see the initial fruits of these conversations in the early part of 2023.
We believe the reason for all the activity is that the creator economy is evolving and expanding rapidly. With our talent roster and highly engaged fan base of more than 520 million worldwide, we view ourselves as one of the few and perhaps only companies that not only understands this change but are positioned to capitalize on it. There are multiple inflections happening in the broader entertainment landscape, all driven by the rise of Gen Z. You already see incumbent media models under threat, particularly in video content. Gen Z does not follow traditional consumption habits. They spend more than 8 hours a day consuming digital entertainment, including a healthy dose of gaming, music and social media. And they favor the new generation of creators, the creators who make up the foundation of our business.
These new creators are not captive to legacy media companies and their own business models. They have control of their destinies, and FaZe is uniquely positioned to partner with them as they drive the next few decades of entertainment. Through our deep connection with Gen Z and our strong relationships and understanding with this new generation of talent, we are well positioned to capture more audience attention and revenue as the current trends continue to tilt in our direction. It also means that our business model will adapt and evolve. Some still only associate us with esports, but in actuality, the FaZe opportunity is about something much bigger. Esports will always remain a cornerstone of our brand and a space where we continue to bring home more trophies and see growth as we did here in the third quarter.
But as a revenue-generating business, it will not be as big as revenue streams associated with sponsorship and with talent initiatives. FaZe’s core competency is our understanding and our ability to partner with this new breed of talent that is the future of entertainment. We’ve always known this, but our entry into the public markets has accelerated the opportunity to build a compelling business around this competency. Our brand, our expansive reach and our expertise position us to be an incubator and an accelerator for talent, giving them the tools and resources to create and actualize their business goals. At the same time, we continue to advance our role in helping establish brands reach Gen Z and engage with them. So effectively, we believe the best way to think about FaZe’s future is that we’ve spent 12 years building a powerful brand, the singular position.
Now we are using that brand and our position to both lift up brands who need to reach Gen Z and to create the talent-based brands and businesses of the future. The good news about this for our investors is that we believe FaZe is a capital-efficient business and becoming even more so. And our public status enables us to leverage that even further, such as through M&A opportunities that could broaden our capabilities, our talent network and our geographic reach. As we grow, we expect our monetization streams to focus more on sponsorship and talent-related initiatives. As part of our evolution, you will also see our leadership team become tighter and more focused. As we disclosed today in an 8-K, these moves include our Chief Strategy Officer, Kai Henry, an important contributor over the past 2 years, will now be partnering with us from outside the organization on a number of key business initiatives.
You’ll be hearing more and seeing some key business developments in the coming weeks and months, including our early plans for bringing the gaming generation into Web3. So stay tuned, and I’ll turn it over to Christoph.
Christoph Pachler: Thanks, Lee, and hello, everybody. It’s really great to be here. As Lee noted, I’ve built and managed entertainment industry businesses for a number of years, and the opportunity to help build what could be one of the most innovative brands for the next generation is what convinced me to join FaZe. And since I’ve been here for just under 6 weeks, I can say that the quality of the team and our Board of Directors is truly impressive, and it’s been fun getting down to work with all of them. I have 2 key priorities here in my early months. First, looking closely at our cost structure. We are very mindful that our IPO comes at a time of increased economic uncertainty. We have a lot to do to operationalize the potential opportunities Lee talked about, and that means we need to manage costs.
The $7 million in annualized savings already achieved is a combination of a targeted reorganization and the reduction in spending on original content, both in alignment with our talent-focused strategy. We think we have more to do here, and we will keep you posted. The second priority is leaning into our go-forward business model so that we can leverage the FaZe brand and resources to create and purchase highly cash-generating business lines that will greatly benefit from the FaZe flywheel. We’re currently working on optimizing the business to create an ecosystem around FaZe that is both deeply relevant for our global community and financially valuable. This combination is central to the FaZe opportunity, and it is what personally motivated me to join the team.
We plan on more thoroughly educating our investors about our business and our opportunities over the next several conference calls. I very much look forward to ramping up my engagement with our investors. Now on to the results. And before getting started, I’ll note that coincident with these earnings calls, we are filing our Form 10-Q with the SEC, so I encourage you to review that filing for more detailed information on our performance. Revenues were up 12% in Q3 to $14 million and up 29% year-to-date to $48.6 million. Quarterly revenue performance was led by brand sponsorships, content and esports. Our largest revenue category, brand sponsorships, grew 8% as our sales and talent teams brought in new and larger brand sponsorships. Content revenue increased 20%, though this benefited from a large sale of an exclusive license to certain historical content, offset in part by content revenue earned on YouTube as we pulled back on previously greenlit higher-cost content products in favor of lower-cost, smaller content releases, in line with our content strategy that centers around the next generation of digital creators.
Esports revenue was up 177% year-over-year due to higher price winnings from strong team performances, increased league participation and . We are seeing esports revenue continue to grow as live events return in bigger numbers post COVID. Gross margins increased significantly in the quarter from 9% last year to over 25% in 2022 and 29% on a year-to-date basis as we benefited from the signings of higher-margin new sponsorships and the expiration of certain lower-margin deals. The higher proportion of esports revenue also contributed to stronger gross margin, as did lower activity in both content production and consumer products. Adjusted EBITDA loss of $12 million was up significantly year-over-year, reflecting, in large part, higher general and administrative expenses.
Higher G&A was primarily a function of increased headcount to support the go public transaction, nonrecurring professional service fees, including those associated with the SPAC merger and new public company and other overhead expenses. I would note that a little more than half of our year-to-date adjusted EBITDA loss of $22.4 million was incurred in the third quarter, reflecting the transaction and public company scale-up costs as just noted. As we discussed, we’ve been aggressively tackling our cost structure to align with our priority growth opportunities and in recognition of inflationary pressures in the economy. We’ll have further updates on our outlook on our next earnings call, but suffice to say that we’re refining and managing our cost structure closely.
A quick update on our business KPIs. Total reach, which represents the aggregate number of user accounts or fans that subscribe to or follow FaZe content across key social platforms totaled approximately 526 million at the end of Q3, up from approximately 358 million at the same date a year ago. The largest source of the increase is the addition of Snoop Dogg’s network to our reach totals. Aggregate YouTube subscribers, which is the number of subscribers our talent network has on their FaZe-branded YouTube channels, our own YouTube channel and FaZe-affiliated channels, totaled approximately 137 million at the end of Q3, up from about 115 million at the same time a year ago, with the increase driven by our co-branded and affiliate channels. The YouTube subscriber metric is important as a measure of our brand strength, which in turn signals our ability to attract sponsorship deals.
As we look ahead, we have a solid pipeline of potential new opportunities that could drive future revenue growth and cash flows, but I want to caution that the nature of our business can cause timing to be lumpy both in terms of when we announce deals and when they hit the P&L. That’s especially true in the current macro environment when partners are likely making their own budgeting and spending decisions. At the same time, we are continuing to identify and act on cost reduction opportunities as we set our plans for 2023. We expect to begin sharing more on our financial and business outlook beginning with our year-end call, which will be in March of next year. In the meantime, the best way to keep track of progress is through our announcements and periodic engagements with the investment community, including our filings with the SEC.
And I’ll now turn the call back to Lee for his closing remarks.
Lee Trink:
Operator: Thank you. Ladies and gentlemen, that will conclude today’s FaZe Holdings Inc. Third Quarter 2022 Earnings Conference Call. I would like to thank you all so much for joining us, and I wish you all a great day. Goodbye.
