Meet the CEO, Part II

In Part I of our interview with GameSquare Esports’ CEO Justin Kenna, he shared:

  • the size of the esports market and the opportunity that lies ahead for GameSquare [CSE:GSQ];
  • his perspective COVID-19 has had on the esports industry and GameSquare, and;
  • why GameSquare has chosen to focus on the agency business.

We continue the interview and learn how GameSquare’s Merger and Acquisition (“M&A”) strategy, and execution – which is already off to a great start – could further accelerate the company’s growth in this secular growth market.

Q: How important is the customer targeting aspect to maintain and build a moat in a digital marketing business?

A: It’s critical. That’s how we differentiate, and it’s what large brands are looking for. By focusing specifically on this segment of the market, we can offer a brand a dedicated way to reach a certain group of consumers through several traditional and non-traditional channels. As we continue to build out our service offering over time, either through organic growth or M&A, we think our ability to be highly targeted will only increase and our moat will grow larger.

Q: It sounds like you are looking at some additional M&A. How soon would you look to do another deal?

A: M&A is an important pillar of our growth. GameSquare’s business model is to operate, and acquire, digital media agencies that bridge the gap between global brands and the large gaming and esports communities. We are building a highly scalable, profitable esports company with a global reach, which sets us apart from every other esports company that we know of. Our agencies are growing quickly, rely on relationships built over decades of professional careers, and importantly, are profitable with healthy EBITDA margins.  We expect to be highly acquisitive as a business. We have a robust pipeline of deals we are looking at and think we can get more deals done this year.

Q: Would those targets you’re looking at be similar to Reciprocity?

A: We really like the digital marketing business generally and believe the sector is highly fragmented within esports. Each agency has something unique to offer. We look for great people, strong customer relationships, broad professional networks, great clients, high revenue growth potential, and EBITDA margins in the 20% to 40% range. Compared to other esports businesses, we view agencies and digital media groups as attractive, and we think our ownership of agencies makes GameSquare highly investible.

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Q: Would you look to structure the deals in a similar fashion? And maybe just give us a sense on sizing?

A: Typically, we look to offer a combination of cash and shares with an earn-out component. As potential partners, the founders of target businesses believe in the long-term opportunity in the industry, and we want them to be compensated in shares so they can participate in GameSquare’s upside. A lot of the companies we are in discussions with can benefit from additional capital to accelerate growth. Additionally, plugging them into the GameSquare ecosystem can offer meaningful cross-sell opportunities and access to the outstanding network that we are growing within our company to help them grow faster. We are generally targeting companies with revenues in the $5 to $25 million range, that generate positive EBITDA and cash flow. We think it’s a great place to be.

Q: Are there opportunities to integrate these businesses over time and increase the margins?

A: When you think about digital media groups, the margins are already quite healthy so it’s less about growing margin and more about increasing the size and number of contracts.  We are already seeing that with the clients that we are working with. Typically, brands are dipping their toe in the water as a test, and as they see results in the esports realm they commit more dollars because there is great ROI for them. So, while we do not need to look for cost synergies in the acquisitions that we are doing right now, as we buy bigger businesses with larger financial profiles there are likely opportunities to reduce costs across the businesses that we own.

Q: What about on the talent/influencer side?

A: Again, right now we are focused on growth not acquiring companies where we have to fix expenses and operational problems. Much of this comes down to the fact that operators that we are looking at have been very prudent about how they’ve built up their businesses, so cost containment has always been a priority to them. This is also why the businesses that we are looking at tend to be generating EBITDA. We believe that the market is going to put a lot more emphasis on profitability in the next 12 to 24 months and we think that we are incredibly well positioned to be in a leadership position in that regard.

Q: What does the overall pipeline on the brand side look like today, and how quickly do you see that having an impact?

A: The brand pipeline is very strong. Reciprocity has a very healthy pipeline, and we were already in discussions with a number of new brands and partners that could present meaningful seven-figure opportunities. We are very excited about what the next 12 to 18 months look like and think they start to materialize in the near term.  

Q: Going back to the M&A strategy, do you have the balance sheet to pursue your acquisition targets?

A: As of February 28, 2021, our first full quarter of operations as public company, GameSquare held $1.1 million of cash on hand and had about $357,000 of working capital. After the quarter, we closed an oversubscribed $7 million bought deal, putting us in a strong position for growth and acquisitive expansion. And as I mentioned, companies that we are in discussions with are willing to take some cash with a high proportion of shares so that they can participate in GameSquare’s share appreciation. Also, since our subsidiaries are EBITDA positive, we are not burning cash to keep our existing businesses running. We are also open to looking at acquisition facilities to fund future acquisitions which is another reason that we are focused on EBITDA positive businesses or those that have breakeven in their near-term plans. In short, our balance sheet can be harnessed to implement our acquisition strategy.

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Q: You reported your first full quarter of financial results as a public company at the end of April 2021. What were the highlights?

A: We are pleased with the progress made in the influencer segment by Code Red in the first quarter. This reflects upon the attention the company has been devoting towards the segment. And we are seeing the benefits continuing to improve with new headcount added in the UK to support the influencer segment. We believe that this segment can continue to make progress as brands are recognizing influencers as a viable marketing and engagement channel. Our consulting business also had a great quarter, partly on the back of our relationship with Bud Light Europe which has resulted in some really interesting work. As mentioned previously, we closed on the acquisition of Reciprocity in mid-March and are very impressed with what we’ve accomplished there in a short period of time. Prior to the acquisition, we were hard at work integrating the businesses and the priority has been optimizing  GCN’s operations. We pre-funded the company to enable some key hires, and that has led to some great early contract wins, including the Van Wagner deal which will see GCN producing and promoting the largest national collegiate esports tournament across 10 NCAA conferences and multiple gaming titles. In my view, this is a tremendous example of the quality of projects and clients that GCN brings into the GameSquare family of companies. 

Q: When you put it all together, how do you see the business evolving the next couple of years?

A: Well first off its important to understand that we only just reported our first quarter which only included Code Red results. I am looking forward to Q2 when we will be able to provide a first glance at GCN and Reciprocity’s performance. It’s too early to provide outlook, but if we extrapolate Q1 results at Code Red and add in the potential US$7 million earnout target at Reciprocity you get to a pretty healthy topline before we add in additional M&A opportunities or new lines of business that we are contemplating within GCN and Code Red. We have big plans, and we think there is a meaningful opportunity to own the digital media vertical of a rapidly growing industry.

Q: Justin, thank you for introducing us to GameSquare Esports [CSE:GSQ] and sharing your plans for the company.

A: You’re welcome, Nik.

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