ImageSource: GameSquare Holdings

GameSquare (GAME) is a vertically integrated digital media, entertainment, and technology company that operates in the esports industry. It helps brands and esports play together by providing strategy, consulting, content strategy, and production services.

The company was growing nicely but still losing significant amounts of cash, but in March 2024 they engineered a company-changing acquisition and bought FaZe Clan for $14M in shares.

This is a company-changing acquisition, that has already paid for itself multiple times over. It is providing the combination of instant scale and reach, becoming a much more attractive partner overnight which is already resulting in a flurry of deals and producing $18M in cost synergies.

This is setting the company on a path to reach adjusted EBITDA profitability as soon as Q4 this year. The balance sheet has also been improved greatly by selling two parts of the newly created FaZe Media for $20.5M.

The share price doesn't reflect these fundamental improvements and is way too low in light of the recently increased guided $105M-$110M FY24 revenue and the near-term adjusted EBITDA profitability, giving the shares a ridiculous 0.2x EV/S multiple.

But first things first, let us describe the company because it has a lot of moving parts.

Businesses

Basically, GameSquare consists of a portfolio of businesses that collectively enable GameSquare to provide comprehensive services ranging from esports team management and influencer marketing to data analytics and creative production, positioning it as a leading player in the rapidly evolving gaming industry. These can be divided into three categories:
 

SaaS and technology business: Live streaming data analytics serving nine of the top ten global game publishers, influencer marketing, and managed services capabilities.

This is the data analytics platform Stream Hatchet serving now 9 out of 10 largest global game publisher and the influencer platform Sideqik.
 

Media and agency business: Full-service creative agencies that provide global brands with content campaign management, leading strategy, and placement services and connect them to gaming and Esports audiences.
 

Owned and operated IP business: including content creation (live streams on Twitch and YouTube, shows, podcasts), FaZe Media, brand licensing (licensing the FaZe Clan brand to other companies for use in merchandise, products, and other ventures) and the live events business.
 

Subsidiaries

The company has multiple subsidiaries, here is a short description and their main source of revenue as a source of reference.

FaZe Clan is one of the most recognized esports organizations globally, and it is known for its competitive teams across games like Call of Duty, Fortnite, and CS:GO. It also has a strong presence in content creation. Revenue Sources are:

• sponsorships, such as partnerships with brands like McDonald's (MCD) and Nissan (NSANY), for promotional content.
• Merchandise Sales: Revenue from branded apparel and accessories.
• Competitive Earnings: Prize money from tournaments, totaling over $20 million
• Content Creation: Monetization through platforms like YouTube and Twitch.

Gaming Community Network (GCN) focuses on connecting gaming communities with content creators, influencers, and event operators, producing live-streamed content. Revenue Sources:

• Advertising: Revenue from ads placed on its media network.
• Sponsorships: Collaborations with brands to promote products through gaming events and streams.
• Content Production: Creating tailored content strategies for brands.

Zoned Gaming is a marketing agency that bridges gaming with pop culture, helping brands navigate the gaming landscape. Revenue Sources:

• Consulting Fees: Charging brands for strategic marketing services.
• Campaign Management: Revenue from managing promotional campaigns for clients in the gaming sector.

Code Red Esports assists various stakeholders in the esports ecosystem, including publishers and investors. Revenue Sources:

• Consulting Services: Providing insights and strategies for entering or investing in esports. 
• Event Management: Organizing tournaments and events for clients.

Fourth Frame Studios is a creative studio focused on producing engaging content for audiences interested in gaming culture. Revenue Sources:

• Content Production Fees: Charging for creating multimedia content tailored to client needs.
• Brand Collaborations: Partnering with brands to produce co-branded content.

Mission Supply specializes in merchandise design and marketing for esports teams and organizations. Revenue Sources:

• Merchandise Sales: Selling high-quality team merchandise.
• Consulting Services: Assisting organizations in developing their merchandising strategies.

Stream Hatchet provides analytics and insights into live streaming viewership across platforms like Twitch and YouTube Live. Revenue Sources:

• Subscription Fees Charging clients for access to its analytics tools.
• Data Insights Sales: Selling detailed reports and insights to brands and game developers.

Sideqik is a creator relationship management platform that helps brands connect with influencers across various platforms. Revenue Sources:

• Subscription Model: Charging brands for using their CRM tools to manage influencer relationships.
• Campaign Management Fees: Earning revenue from managing influencer marketing campaigns.

AI

The company is using AI in several ways, mostly in its subsidiary Stream Hatchet (data analytics for live streaming) which has developed a proprietary AI system that provides:

• AI-Powered Insights and Analytics: Analyzing billions of data points daily to offer relevant insights and trends in gaming, esports, and social media. This system helps users filter data by categories like channels and games, offering a personalized dashboard for actionable insights
• Dynamic Content Delivery: Generating daily articles and insights based on industry intelligence, allowing brands to make informed decisions by understanding emerging trends and audience behaviors.
• Personalized Dashboards: Providing the ability for users to customize their experience on Stream Hatchet's platform based on their preferences.
• Game development and design: We're not aware of any species, but generally AI is used in game development through stuff like improving gameplay experiences by creating dynamic environments and personalized challenges for players
• Player Performance Analysis: Informing game design and marketing strategies. This includes real-time analytics that help developers understand player engagement and optimize game features accordingly
• AI-driven influencer matching tool: New tool linking brands to the right influencers.

The AI-powered analytics enable Stream Hatchet's clients, which include major game publishers, esports organizers, and brands, to optimize their marketing strategies, secure lucrative sponsorships, enhance esports performance, and build successful tournaments.

There are recent additions (Q2CC):

we have developed an innovative AI-supported solution that leverages our data and technology stack to uncover influencers and creators based on unique search criteria.

Growth strategy

The more immediate (FY24) strategy goals are:

• Complete the FaZe Clan acquisition and reduce the cost structure
• Strengthen the balance sheet and divest non-core assets
• Leveraging the platform of owned and operated IP, agency, and media and SaaS technology assets to drive profitable growth.

The company is making significant progress on all three.

Divestments

Over the past six months, the company has divested four non-core assets for a total consideration of nearly $16M:

• Frankly's Content Management Software and Frankly's PR distribution business for $2.2M (and removing $2.3M in OpEx per year (May 31).
• Complexity Gaming for $10.36M (March 1, 2024)
• The company sold two parts of the recently acquired FaZe Media, a 25.5% stake to an entity controlled by Banks for $9.5M and a 49% stake to Matt Kalish for $11M (see below).

The company raised $10M in a private placement and another $6.5M (and up to $20M possible) from a prepaid advance agreement with Yorkville

Recent financings

• October 2023: a total of 7,194,244 units of the Company were issued at a price of US$1.39 per unit, for gross proceeds of US$10 million. Each unit consists of one common share of the Company and 0.15 of a common share purchase warrant of the Company, resulting in a total of 1,079,136 warrants being issued.
• July 2024: A $20M pre-paid advance agreement with Yorkville Advisors, $5.7M of which will be used to pay off the convertible notes with King Street Partners and just $6.5M was actually taken up.

FaZe Clan acquisition

The company acquired FaZe Clan in April 2024 for $14M in an all-stock transaction. From the Q2 10-Q:

FaZe produces engaging content, merchandise, consumer products and experiences, and create advertising and sponsorship programs for leading national brands. FaZe has several revenue streams including brand sponsorships, content, consumer products, and Esports.

FaZe now consists of two businesses, the newly created FaZe Media and FaZe Esports, GameSquare has 100% ownership of the latter while it sold a 25.5% interest in FaZe Media to an entity controlled by FaZe Banks (an original FaZe founder) for $9.5M.

GameSquare retains voting control of the transferred shares for two years, and FaZe Media will remain consolidated within GameSquare's financial statements during this period.

Concurrently, GameSquare secured an $11M  investment in FaZe Media from Matt Kalish, a founder of DraftKings, who joined the FaZe Media Board, giving Kalish a 49% stake in FaZe Media. The idea here is to foster a creator-led environment within FaZe Media, supported by Matt Kalish's leadership and GameSquare’s resources.

As a result of the FaZe merger and Private Placement, there will be approximately 30.3 million common shares outstanding.

In connection with the acquisition of FaZe, an aggregate of 909,490 RSUs will be issued to three of the founders of FaZe, representing a total of 3% of the issued and outstanding shares of common stock of the company.

Alongside its involvement with FaZe Media, GameSquare retains 100% ownership of FaZe Esports, presenting a substantial opportunity for profitable growth by replicating strategies used to achieve over 220% growth with a previous esports team. 

Benefits

GameSquare had proven success developing revenue streams for its previously owned gaming business Complexity, which experienced significant sales growth under GameSquare's ownership (over 220% from 2021 to 2023, per the Q1/24CC).

FaZe Clan, despite having a huge reach, was struggling with this so at the outset this seems to be a very good fit. At a stroke, the company managed to:

• Massively scaling up its audience, engagement, and activities, propelling itself into a whole new league, becoming a much more attractive partner for brands seeking to engage younger audiences. The flurry of deals subsequent to the acquisition illustrates this point.
• Greatly improving its balance sheet, as the company sold two stakes in FaZe Media for $9.5M and $11M respectively (further aided by divestments and a financing).
• Accelerate the path to profitability by taking out $18M in costs, reducing FaZe's headcount from 100 to 30.

We think the market hasn't appreciated the acquisition, with the company raking in deals post-acquisition and on a path to achieving adjusted EBITDA profitability by Q4 (which has already begun), the shares are very attractive here.

A flurry of deals

The FaZe Clan acquisition closed on March 8, but we didn't have to wait long before the combined company started to leverage it greatly enhanced attractiveness as a partner, closing a flurry of deals since.

• Zoned, a GameSquare Company, Announces Six-Figure Retainer Deal with Clout to Gamify Watching Esports October 3.
• Topgolf Comes To Fortnite September 24.
• GameSquare Announces Record Monthly Contract Wins of over $14 million in September 10.
• FaZe Media, a GameSquare Company, Announces New Multi-Year, Multi-Million Dollar Sponsorship and Licensing Deal with G Fuel September 3.
• FaZe Clan and Rollbit Announce Multi-Million Dollar, Multi-Year Expansion in Historic Esports Sponsorship Deal Augustus 28.
• FaZe Clan Esports, a GameSquare Company, Announces Largest Ever Esports Tournament Winnings of $2 million and Strong Performance at the Inaugural Esports World Cup Augustus 26.
• Zoned, a GameSquare Company and 5-Hour ENERGY(R) Partners to Host First-Ever Fortnite Streamer Community Competition Augustus 13.
• Zoned, a GameSquare Company, Announces New Project Wins Under New President Augustus 8.
• GameSquare and the NFL Partner to Launch New Traveling Creator Series "NFL 4 THE FANS LIVE" August 6.
• Stream Hatchet, a GameSquare Company, Announces Riot Games Renewal and Expansion June 26.
• FaZe Clan Continues to Expand Global Reach with SteelSeries Co-Branded Product Line Launch to Retailers Around the World May 29.
• GameSquare and Dairy MAX Partner to Launch UEFN World Building Map Campaign in Fortnite’s Farm Tycoon April 30.
• FaZe Clan is Building a Licensing Empire at Retailers Across the Nation March 21.

This isn't likely to stop anytime soon, management spoke of a robust pipeline of 7-figure deals on the Q2CC.

There were other feats, like FaZe came third winning $2M in the Esports World Cup (August 26). Management was pleased with the initial results which are indeed impressive (Q2CC):

A couple of highlights include 4 of FaZe's talent roster were in the top 50 most watched streamers worldwide in July. FaZe's created roster has gained 4.5 million stream followers since May and now have 173 million followers in total. FaZe's roster garnered over 1.2 billion total views in Q2 '24, a 28% increase in 3 months. And finally, from April to July, FaZe Clan's weekly viewership has increased from 1.5 million hours watched to a peak of 4.8 million hours watched, an impressive 3x increase in just 4 months since the brand's reboot.

Brand business

GameSquare already has numerous partnerships with well-known brands:
 

These deals bring in license revenue, producing high-margin royalties, increase brand visibility for both partner brand as well as GameSquare, and offers opportunities to sell additional products (merchandise) and services (marketing and creative services).

Faze Clan also had a successful brand business, generating over $75M of gross co-branded revenue and some $7M in net royalties from 2022 to 2023. Some of FaZe Clan successes:

• FaZe Clan collaborated with Nike for FaZe LeBron NXXT Gen, which was the top selling basketball shoe in the world in March 2023 with 70,000+ units sold.
• FaZe Clan partnered with Totino's for the FaZe Buffalo Chicken Pizza Rolls which then became Totino's top-selling co-branded product in ten years.
• FaZe has partnered with the popular toy company Zuru for a series of respawn blasters that have sold 1+ million units to-date across major retailers such as Target since 2021.
• FaZe teamed up with SteelSeries, the leading gaming accessories business, to launch an exclusive range of peripherals, including headsets, keyboards, mice, and mousepads, at Best Buy, which have nearly sold out in the first four months since their debut.

We can add the energy drink FaZe Pop, which was the no.1 best-selling new energy product in 7Eleven (SVNDY) in 2023 and sales continue to climb in the first months of 2024. There were additional recent successes:

• A multi-million dollar sponsorship deal with Rolibit, a cryptocurrency platform (August 29).
• A multi-million dollar licensing and sponsorship deal with energy drinks brand G FUEL (September 3).
• A strategic partnership with the NFL for NLF 4 THE FANS LIVE events series (August 6).
• An expansion of its co-branded product line with the premier gaming accessory company SteelSeries. (May 29).

From the Q2CC:

Just last week, we announced the $3 million of total new brand partnerships with renowned brands, including Topgolf, 5-hour ENERGY and Dairy MAX as well as multiple soon-to-be-announced projects with leading global sports media and entertainment companies.

These deals often produce multiple revenue streams with royalties and sponsorships the most prominent.

Competition

The company does have competition in different segments, but no competitor can offer the breadth of services that GameSquare can offer:
 

Finances

It's useful to see which segments generate the most revenue and gross profit:
 

GAME Q2/24 10-Q

Not too many conclusions can be drawn from the figure below as these are GAAP figures that contain effects of divestments and acquisitions (as well as some macro headwinds in FY22 and FY23):
 

Data by YCharts

Management argues it's more useful to compare pro-forma figures where acquisitions are fully included (also in the comps) and divestments are fully excluded.

What's more significant is this:
 

Pro-forma adjusted EBITDA improved $6.4M to a loss of $7.9M in the seasonally low Q1 and $2.5M to a loss of $5.4M in Q2.

Management guides FY24 revenue at $100M+ with a gross margin between 22.5%-27.5%. The $100M seems an easy target, Q1 revenue was $23.5M and Q1 is the low season, Q2 revenue was already 22% higher at $28.6M and they announced some notable contract wins ($14M) in Q3 in higher margin segments already.

In fact, they just upped the guidance to $105M-$110M as preliminary Q3 results are very encouraging with revenue coming in at $26.5M, gross margin increased from 14.8% in Q2 to 18% in Q3 and adjusted EBITDA loss improved another $3M to $2.4M. Very likely they'll reach adjusted EBITDA breakeven in Q4.
 

OpEx was nearly on a $50M run rate in Q2 but this is a GAAP figure and they also argue they see opportunities for additional cost reductions. The CEO also argued this:

When we acquired FaZe, they were burning around $5 million per month, with a headcount of 100. We’ve since reduced that to 30 employees and have made significant improvements to reduce our cash burn,” he said.

So it seems many if not most of the cost reduction measures are already included in the Q2 figures but management claims the company can reach adjusted EBITDA profitability in Q4 by a mixture of:

• Revenue growth, H2 is seasonally stronger and deals are already coming in.
• Margin improvement as the growth will mainly come from the higher margin businesses (owned and operated IP and its full creative agency).
• Additional cost cutting. 

At the end of Q2 the company had $14M in cash, an additional $4.75M will arrive from a recent divestment (from the Matt Kalish/FaZe Media transaction). The company had $5.3M in debt.

Valuation

There is more to come, from the Q2 10-Q:

GAME Q2/24 10-Q

So fully diluted there are 38.2M shares, at $0.7 per share yielding a market cap of just $26.7M. With $107.5M (midpoint) in revenue expected for FY24 that's a very low valuation multiple.

Why buy?

• The company operates in large and fast-growing markets
• The acquisition of FaZe Clan is a near-perfect fit, combining GameSquare's monetization capabilities with FaZe Clan's reach.
• The company has actually managed to shore up its balance sheet with the acquisition of FaZe by selling stakes in FaZe Media for $20.5M.
• The acquisition of FaZe gives the combination a greatly enhanced profile and reach, becoming a much more attractive partner overnight, and this has already resulted in a flurry of deals.
• The acquisition has led to $18M in cost synergies, putting the company on a path toward adjusted EBITDA profitability by Q4 2024.
• The shares seem very cheap to us.

See also the GameSquare articles by our fellow TalkMarkets contributors Story Trading and Avisol Capital Partners (containing an interview with the CEO, Justin Kenna):

GameSquare: At The Peak Of Its Game
GameSquare Surges Towards Profitability After FaZe Clan Acquisition

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