Leaf Mobile Inc. (LEAF) Q2 2021 Earnings Call Transcript

Leaf Mobile Inc.  (TSE: LEAF) Q2 2021 earnings call dated Aug. 16, 2021

Corporate Participants:

Darcy Taylor — Chief Executive Officer

Jim MacCallum — Chief Financial Officer

Analysts:

Neal Gilmer — Haywood Securities — Analyst

Adhir Kadve — VIII Capital — Analyst

David McFadgen — Cormark Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Leaf Mobile Second Quarter 2021 Results Conference Call. [Operator Instructions].

I would now like to hand the conference over to your speaker for today, Darcy Taylor, CEO of Leaf Mobile. Thank you. Please go ahead.

Darcy Taylor — Chief Executive Officer

Thank you and welcome everyone to Leaf’s Second Quarter 2021 Results Call. On the call with me today is Jim MacCallum, our Chief Financial Officer. Today’s call, I will begin by sharing highlights on our performance from the second quarter and six months ended June 30, 2021. In addition to giving an update on our strategy, and key events that have taken place, since we last reported on May 17, 2021. Jim will then go into greater detail on our financial results commentary for the period, before turning it back to myself for some final remarks, before we open it up to the analyst questions.

Before we get started, please note that certain statements made on this call are forward-looking within the meaning of applicable securities law. This call includes references to non-GAAP measures. Please refer to our second quarter press release and MD&A for cautionary statements related to forward-looking information and reconciliations of non-GAAP measures to GAAP results. Additional materials can be found in the Investors section of our website, at www.leafmobile.io, under the Financial Information section, and an audio replay of this call will also be available on our website in the coming days in the same section. If you have any questions, please email ir@leafmobile.io.

Let me begin our call, by highlighting that we are extremely pleased with our business performance in the first half of 2021, as we continue to execute successfully against our three pillar growth strategy. We have worked hard over the second quarter on post-transaction integration of East Side Games and would like to thank the founders, Jason Bailey, Josh Nilson and Galan Akin, for their leadership and studio team engagement in the process. We are focused on streamlining non-core business processes, sharpening our game portfolio investment, improving operations through active involvement and data driven, decision making, organic game title growth through cross promotion, as well as securing new IP and idle kit platform partners.

The second quarter of 2021 was also unique, as the global reopening amplified traditional seasonality effects, and changes in the mobile ad marketing landscape, with the introduction of Apple’s iOS privacy terms embedded into the market. We were well prepared for the introduction of Apple’s privacy changes, and have been evolving our UA marketing approach to address this new environment. Although it did lead Leaf to temporarily reduce our UA spend across both iOS and Android during this transitionary period, as the industry adapts to this new marketing environment, which culminated in fewer players installing our games.

With these unique operating environment factors, we still saw strong Q2 revenue results. Revenue came in at CAD22.5 million, a 28% increase versus Q2 2020, with reported revenue of CAD17.6 million and grew 4% on a pro forma basis, in what historically is a slower quarter across the mobile game industry. These quarterly results set us up for a record first half of 2021, with pro forma year-to-date revenue reaching CAD47.8 million, an increase of 38% versus the same period last year.

Our investments in our games continue to pay off, with profitable organic growth from our existing 10 game titles, delivering an adjusted EBITDA of CAD2.6 million for the quarter and representing an 11.3% margin. Adjusted EBITDA on a pro forma basis for the six months ended June 30, 2021 was up 100% to CAD5.6 million compared to CAD2.8 million for the prior year period, as we continue to outperform our first half last year. Even with the previous year’s extraordinary inflow of new users to our games driven by shelter in-place measures, and challenging comparison numbers from the pandemic last year.

Leaf remains laser-focused on executing our three pillar strategy of combining accretive acquisitions organic game growth and distributed growth through our proprietary IdleKit platform licensing and rev share, and is uniquely positioned for growth going forward. Our IdleKit business continued the momentum we saw at the start of the year, attracting four new IdleKit partners, including Mighty Kingdom Games, which recently listed on the Australian Stock Exchange. These four partners will add up to an additional nine games to our existing pipeline, and geographically expand our development network outside of North America, to include South America and Australia.

We also announced on June 22nd, Leaf’s definitive agreement to acquire Truly Social Games to increase our business scale, competitive advantage and unit economics. Additionally, we entered into the NFT space, non-fungible tokens, launching a collectable NFT card game, Bud Farm Nifty Stash, in partnership with WAX Blockchain as an innovative new way to explore, connect and interact with our beloved characters and create retention in our games. By the end of 2021, we expect the multiple new game launches to almost double our existing portfolio of 10 games, and these new titles will be developed both in-house and by our IdleKit partners. The launch slate includes super marquee IP titles like the highly anticipated RuPaul’s Drag Race Superstar mobile game, from the Emmy Award-winning drag race competition series broadcast globally, and several additional marquee IP games in our pipeline.

Other events within the second quarter included, Leaf Group Studio East Side Games being recognized as a finalist for Awards in two categories at the BC Tech Association’s 2021 Technology Impact Awards. They were finalists in both Company of the Year scale, and Gamechanger Diversity And Inclusion, and also a finalist for best developer at Pocket Gamer’s 2021 Mobile Game Awards. We weren’t able to take home the title this year, though we were very proud to be named as a finalist for the global award, among some of the best world-class developers, such as Niantic, best known for Pokemon Go. miHoYo, the China-based developer of Genshin Impact.

We’re incredibly proud of what our studios have achieved so far this year, as they continue to operate at top level, despite the changes that have impacted all of us since March of 2020. These awards and nominations we have received for both work environment and performance, are further evidence, that our studio group and our people are best in class.

Subsequent events to second quarter 2021 have made notable progress on our corporate structure. Effective August 17, 2021, Leaf will consolidate its issued and outstanding common shares on a basis of up to 10 old pre-consolidation shares for every one new post consolidation shares. As approved by its shareholders at Leaf’s most recent AGM, held on June 29, 2021. The common shares will commence trading on the TSX on a post consolidation basis at the open of markets on 17th August, 2021. The post consolidation common shares will continue trading under TSX, under the symbol LEAF. Management, board and shareholders feel that this consolidation may attract more institutional investor and open up further opportunities for more senior listings, and better reflect the value of the company.

Now I will turn over the call to Leaf Mobile’s CFO, Jim MacCallum, to further discuss our first quarter results. Now over to you, Jim.

Jim MacCallum — Chief Financial Officer

Thank you, Darcy. This quarter is our first full quarter of consolidated operations of Leaf, including its two studios East Side Games and LDRLY. Our MD&A provides detailed breakdowns of revenue, net income and adjusted EBITDA as reported under IFRS and pro forma financial information for the current and historical periods.

As Darcy highlighted, we delivered strong revenue performance in Q2 of CAD22.5 million with approximately 70% of our revenue generated in the U.S. The Canadian dollar increased 12% against the U.S. dollar in Q2 2021 as compared to Q2 2020, which resulted in an 8% decrease to our revenue. In constant dollars revenue would have been CAD24.3 million this quarter. We saw solid advertising revenue during the quarter, with advertising revenue representing 27% of our total revenue, consistent with the first quarter of this year.

We currently published 10 live mobile games. Six of them from the East Side Games Studio and the remainder with LDRLY. We report on two categories of games, active and evergreen. Active games are game titles that have been launched worldwide, with investment in user acquisition marketing, and live operations. Currently we have six active titles across the company and CAD21.9 million of our quarterly revenue was generated from these games. Evergreen games are game titles that are greater than 12 months since worldwide launch, with limited to no investment in user acquisition marketing, and passive live operations. Currently, we have four evergreen titles across the company, and they generated approximately CAD0.6 million, consistent with the first quarter of 2021.

Our cost of sales include platform fees from Apple and Google, which are 30% of our in-app purchases, and intellectual property royalties. The increase over the prior year is due to the higher revenues this quarter. Cost of sales as a percentage of revenues was consistent year-over-year for the three and six month periods. User acquisition costs have increased over the prior year, as we invest in new game launches and grow our user base. However, user acquisition costs decreased as compared to Q1 2021, as a result of changes made by Apple to their identifier for advertisers. In response to this, we scaled back our user acquisition spending to maintain target returns, resulting in fewer players installing our games during the second quarter.

Development costs increased over the prior year quarter, due to increased headcount and higher third party development costs in the current quarter, as we near the launch of several new games. General and administrative expenses increased over last year, due to higher stock-based compensation charges during the quarter, and public company costs. Transaction expenses in Q2 2021 primarily related to the acquisition of Truly Social and for the year-to-date period, also included transaction costs related to the merger between East Side Games and Leaf. Other income for the six months ended June 30, 2021 reflects a CAD5 million gain on distribution of Leaf’s shares to East Side Game shareholders.

Accretion expense resulted from the contingent consideration recorded in Q1, and the unrealized foreign exchange loss resulted from the weakening of the U.S. dollar this quarter. On a GAAP basis for the three month period, the company recorded a net loss of CAD0.9 million, largely as a result of the amortization of intangibles, accretion expense, and foreign exchange loss. This compares to net income of CAD7.8 million in the prior year quarter, which reflected the gain on sale of LDRLY, lower research and development expenses, and lower sales and marketing expenditures.

For the six months ended June 30, 2021 the company reported net income of CAD0.4 million, compared to net income of CAD6.1 million in the prior year period. As Darcy noted, on an adjusted EBITDA basis, for the six month period ended June 30, 2021 we recorded CAD5.6 million a 100% increase as compared to CAD2.8 million in the same period last year. The increase was primarily driven by the strong revenue growth during the years. Key profitability and efficiency metrics to highlight are, gross profit percentage was 62% in Q2 2021 consistent with the prior quarter. Adjusted EBITDA margin was CAD2.6 million during Q2 2021, representing an 11% adjusted EBITDA margin, consistent with Q1. On a sequential basis, our adjusted EBITDA was down from CAD3 million in Q1 2021, as a result of lower sales and a CAD0.8 million increase in development expenses incurred to support upcoming game launches.

From a balance sheet perspective, at June 30, 2021, Leaf had CAD12 million in cash with no debt and access to CAD18 million in credit facilities. During the first half of 2021, we generated CAD3.7 million in cash from operations. We are excited about launching new games, supported by marquee intellectual property in the second half of this year.

With that I will turn it back over to Darcy for some closing remarks before Q&A.

Darcy Taylor — Chief Executive Officer

Thanks Jim. We believe that there is significant upside in Leaf’s future, as we have more games and development than ever before. This year’s game launch, late in the second half of the year, will almost double our game portfolio and these new game launches developed in-house and by IdleKit partners, will bring marquee franchises like RuPaul’s Drag Race Superstar to underserve player bases in the mobile space for the first time, placing us in a very strong position for future growth ambitions.

Thank you for joining us, and we’ll now open the floor for analyst questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Neal Gilmer of Haywood Securities. Your line is open.

Neal Gilmer — Haywood Securities — Analyst

Yeah, good afternoon. Thanks for taking my question guys. And maybe wanted to start on — dig a little bit further on your sort of perspective on the changes with respect to IDFA and as we continue to sort of progress through the second half of this year, how should we be thinking of your sort of philosophy or approach towards spending on user acquisitions? Obviously you commented that you see on the back a little bit in Q2, but just sort of how you are sort of monitoring the situation, as to when you might try to ramp that up, in light of some of those changes in that sort of environment?

Darcy Taylor — Chief Executive Officer

Yeah. Thanks Neal. Very good question. Obviously, we’ve been monitoring and have been sort of ahead of the game, as far as getting prepared for IDFA, as it rolled out. We believe that this is a temporary adjustment in the — I’ll say, the marketing landscape, which will take some time to sort of work its way through and evolve, not only our view on our data driven UA spend, but also the industry serving it. So as stated, we did adjust downward and took some money off the table, as the industry adjusted, and have been seeing improved user acquisition numbers, as we’ve been moving through the last couple of months. Our view is that, we will start to increase that spend, as we enter our new games into market, in the fall, driven by the launch of RuPaul’s drag race, and we will continue to be very data driven on the return on investment going forward, ensuring that we see that continuous return.

Neal Gilmer — Haywood Securities — Analyst

Great, thank you for that. And then I guess maybe my second question, and then I’ll pass the line to others would be, just on our expectations for the timing of new titles coming in the second half. You mentioned that you’re going to be close to doubling the existing game portfolio between now and the end of the year. How should we think of the cadence of that between Q3 and Q4? Should we see more the impact as far as — I’m taking a look at obviously the revenue line in Q4 versus the current quarter?

Darcy Taylor — Chief Executive Officer

Yeah. So if we were looking at that cadence of revenue and the revenue coming online, we see our bigger games launching late Q3 sort of rolling into Q4, and then ramping. Our other titles are sort of scattered in various stages of launches. Those are internal and external IdleKit partners also in the back half. So if you’re looking at that phasing, it will grow through Q4 and continue to ramp through the first half of 2022.

Neal Gilmer — Haywood Securities — Analyst

Okay, great. Thanks very much. I’ll pass the line.

Darcy Taylor — Chief Executive Officer

Thanks Neal.

Operator

Your next question in is from Adhir Kadve of VIII Capital. Your line is open.

Adhir Kadve — VIII Capital — Analyst

Hey guys, good afternoon. Just one quick — a couple of quick questions I should say. Just maybe on some of the titles that you are looking to launch, or anything that’s maybe potentially in soft launch right now, can you maybe talk about maybe some early results, or anything you can talk about, in terms of early performance of any of these games that you can potentially speak about?

Darcy Taylor — Chief Executive Officer

Yeah. Thanks for that question. I think the one we would really like to highlight is, we have some early results from our RuPaul Drag Race Superstar game. It’s in soft launch in some specific geographies, and this game has us very, very excited internally, because the early indications are — is that we were seeing KPI numbers and benchmarks that are above any of the results that we’ve seen from our other successful games to-date, and that is before we’ve even started to enter into any of the sort of live ops or events driven performance of the game. So we’re seeing tremendously strong retention as well as monetization on the, I’ll say, the early stage rollout of the game. So our expectations from this game are high, and so far the indications are that this game is in a good position to deliver.

Adhir Kadve — VIII Capital — Analyst

That’s good. That’s good to hear. And then maybe just talking a little bit about IdleKit and you just mentioned that you obviously had a really good, couple of the studios that were on-boarded. Maybe can we talk about maybe your pipeline of partners that you’re looking to onboard? Are you seeing more internals or anything around that?

Darcy Taylor — Chief Executive Officer

Yeah, absolutely. So right now we have 10 total partners on our game kit at the moment. We added four in the second quarter. The highlight of that is that, we expanded our geography of partners, or basically our development network outside of North America, landing with Mighty Kingdom in Australia, who are number one independent, as well as Bigfoot out of South America. We are seeing a tremendous amount of increased inbound for developers that want to participate on that platform. We’ve been working, I would say, on a very selective invite only, as we scale up our tech stack for servicing those partners, and are very enthused on what we’re seeing, as far as the results from our current partners, but also the evolution of the tech stack going forward, as we will be rolling out an IdleKit 3.0 in the fall, that will push out to our existing platform partners. So altogether, very strong with the current partners, wanting to continue on the platform and launch additional games, but also very robust pipeline of inbound that we’re managing, as we build our tech stack to scale.

Adhir Kadve — VIII Capital — Analyst

Okay, great. And then just one last one for me and then I’ll probably pass the line. Just maybe in terms of M&A, do you plan to still kind of be active on that front?

Darcy Taylor — Chief Executive Officer

Yeah, obviously our — one of our core pillars of our business is acquisition through accretive growth. We have been looking at several potential targets over the last few months in various stages of discussions. Obviously, we just closed the definitive agreement with Truly Social, who was a previous IdleKit partner, so it’s fitting into our model of our three pillar platform working in concert, and allowing us to incubate potential partners, as they move through our IdleKit. So not only we are reaching out for potential acquisitions, we’ve had several inbound coming from tier 1A banks that have been introducing us to act potential targets throughout North America, and also globally. So we — the long story short is, we continue to be acquisitive. We’re looking for the right acquisition. We are disciplined buyers and want to make sure that they fit not only from a cultural portfolio fit works well for us, but also from that view of having an accretive upside to our top line.

Adhir Kadve — VIII Capital — Analyst

That’s fantastic guys. Thank you very much. I will pass the line.

Darcy Taylor — Chief Executive Officer

Thank you.

Operator

Your next question is from David McFadgen of Cormark Securities. Your line is open.

David McFadgen — Cormark Securities — Analyst

Okay. Yeah, a couple of questions. So just on RuPaul, you talked about the game being in soft launch and a couple of geographies, and you said that the KPIs are trending above anything that you’ve seen before. I was wondering, if you could get specific and give us some examples of those KPIs and just want to understand where the excitement comes from in the game? And secondly, just on Truly Social, I know you guys recently completed that acquisition, but I was just wondering, how it’s going and when do you think you might step up and take another equity position to increase your stake? Thanks.

Darcy Taylor — Chief Executive Officer

Thanks David. Let me address the RuPaul results and KPIs. Obviously it’s still early within the soft launch, so I’ll give some general parameters. We usually look for — I’ll say success benchmarks on our retentions that are over and above the industry standard of sort of a D1 of 40%, a D7 of 20% retention and a D30 of 10%. That sort of is the bare minimum. We are seeing our D1 retention numbers, as well as D30 and D7 trend well above that norm, as well as being above any of the existing games that we’ve already had tremendous success with. So that gives us a good indication that the, I’ll say the game balance, game mechanics, extension [Phonetic] of the game are connecting, as well as the IP. And then last, the second piece that we truly look at is, is the average revenue per daily active user. We try to have sort of best-in-class benchmarks of those numbers, upwards of 75% per daily active user. We are seeing these numbers trend over and above that area already and that’s without our live ops, starting to turn on, which is the event driven element, sort of the high engagement elements within the game. So not from a retention level, as well as an average revenue per daily active user, our ARPDAU, both of those are above industry benchmarks and above our, I’ll say, internal benchmarks that we’ve seen from our successful games.

The second question, Truly Social…

Jim MacCallum — Chief Financial Officer

Yeah, in terms of truly social investments, we’ve just really finished integrating the first 20%. We’ll continue to monitor the new games that Truly Social launches and as they hit their targets, we’ll make — or near their targets, we’ll make additional investment decisions as we move forward.

David McFadgen — Cormark Securities — Analyst

Okay. I was just wondering on the timing, is that a 12 month thing, 24-month thing at the monitor [Phonetic], before you decide to step up?

Jim MacCallum — Chief Financial Officer

Yeah, it’s over that time period. Yes.

Darcy Taylor — Chief Executive Officer

We have two hurdles within that. One for them to hit a certain milestone target in the first 12 months. Obviously those targets are dictated by their game launch cadence. So I think if we — looking at the timing, it would be sort of at a later end of that 12 month window that we’ll be making that decision.

David McFadgen — Cormark Securities — Analyst

Okay. Okay. That’s great. Thanks guys.

Jim MacCallum — Chief Financial Officer

Thanks, David.

Darcy Taylor — Chief Executive Officer

Thank you.

Operator

[Operator Instructions].

Darcy Taylor — Chief Executive Officer

I think that’s all we’d like from our Q&A, Blena.

Operator

There are questions at this time, sir. Please continue.

Darcy Taylor — Chief Executive Officer

I think there is no more questions — sorry. Yeah. Thank you. There is no more questions at this time. So I’d just like to thank everyone for attending the call. Again, we are tremendously excited about the back half of this year. Very simply, we have more games in development than we’ve ever had before. We have our super marquee IP games such as RuPaul, showing tremendously strong, early KPI indications that have us very confident in the delivery of those games in the second half of the year. We continue to see very strong revenue growth and profitability from our existing 10 game portfolio, and we’re excited about our IdleKit partners and their game launch pipeline coming online in the back half of this year as well.

So we feel that our continued execution on our three pillar portfolio of strategy portfolio is delivering and we will continue to focus on that throughout the back half of the year, to ensure that our accretive acquisitions, organic game growth, as well as distributed growth through our game kit and platform licensing, positions us well to benefit from the strong tailwinds of the market industry, and its growth.

So with that, I’d like to thank everyone and have a great end of your day.

Operator

[Operator Closing Remarks].