Enthusiast Gaming Holdings Inc (CVE:EGLX) Acquires The Sims Resource

Enthusiast Gaming Holdings Inc (CVE:EGLX) (OTCMKTS:EGHIF) Founder and CEO Menashe Kestenbaum explains the importance of the video game industry and the growth of esports. Kestenbaum reveals that the industry is worth $150 billion annually, with esports constituting $2 billion of that revenue by 2020. Enthusiast Gaming is a lifestyle brand for gamers that has grown from 75 million community members in October to 125 million members today. When Enthusiast Gaming launched in 2016, it generated $350,000 in revenue and Kestenbaum anticipates generating $10 million this year. Kestenbaum acknowledges that different types of gamers have different lifetime value to Enthusiast Gaming. This understanding informed the company’s decision to purchase The Sims Resource, a Sims gaming online space. The Sims Resource has 90 million users, the vast majority of who are female gamers, and generates $5.25 million EBITDA.

Transcript:

James West:   Menashe Kestenbaum joins me now. He’s the CEO of – are you ready for this? I don’t know, where did it go? The Gaming company, goddamn it.

Menashe Kestenbaum: Enthusiast Gaming.

James West:   Enthusiast Gaming. Are you a gaming enthusiast?

Menashe Kestenbaum: Yes.

James West:   That’s an understatement? All right, let’s start off with –

Menashe Kestenbaum: Let’s start off with what is an enthusiast gamer, because you asked am I –

James West:   Tell me what an enthusiast – boy, you interview me! Okay, what is an enthusiast gamer?

Menashe Kestenbaum: James, what do you consider a gamer? What do you think when you think of the word gamer, classify themselves –

James West:   Gamer? I think it’s somebody who front runs stocks without telling anybody. Is gaming the stock.

Menashe Kestenbaum: That’s true, that’s a form of gaming.

James West:   Right. But that’s not what we’re here to discuss.

Menashe Kestenbaum: So is gambling.

James West:   Right.

Menashe Kestenbaum: Playing sports, is a game.

James West:   Okay. So anybody who –

Menashe Kestenbaum: But video games.

James West:   So this is an e-sports play?

Menashe Kestenbaum: This is an e-sports play, but it’s a little broader. Like, we, you know, gaming is $150 billion industry right now; the video game industry is double the size of film and movies, and e-sports is projected to hit $2 billion by 2020. So that’s a little piece of the whole gaming, video game sector. So we’re the whole video game sector; we’re one of the largest entities or platforms in North America right now, and we also have a big e-sports focus. But it’s not just e-sports.

James West:   All right. Tell me about your business/revenue model.

Menashe Kestenbaum: Okay. So if you think about gamers, I look at it as a spectrum of, there are people who look at video games as like a nice little distraction on the side to play on the subway, you know, like, a Candy Crush, so gaming as a distraction.

Moving up the slide, there’s people who think of it as a hobby. You know, they could blow off some steam once or twice a week playing a bit of Call of Duty. It’s a hobby.

Then you move up the scale more, it’s passion. Video game is a passion, they believe in it, they love it, they go online, they’re doing a lot of hours of gaming.

But then there’s one notch above that, where gaming is a lifestyle; that’s what I call a gamer. And that’s how I lived my whole life. It was my lifestyle. We are creating a company, or we’ve already got a lot of traction and momentum in this, we’ve built a lot, in becoming kind of the lifestyle brand and community, online and offline, for gamers.

So currently we have something like 125 million visitors online.

James West:   And how many did you have the last time we had that conversation?

Menashe Kestenbaum: 75 million.

James West:   So you’ve basically almost doubled your gamer participation in your community.

Menashe Kestenbaum: Yeah.

James West:   So – and you’re monetizing that community in variety of ways.

Menashe Kestenbaum: Yeah. The simplest form of monetization is the advertising play, right? So many people right now are trying to find a way to target the Millennials and this younger generation; like, you know, in the olden days, like when I was growing up, back when the dinosaurs roamed…

James West:   You don’t look that old to me!

Menashe Kestenbaum: We had our rotary phones and our newspapers.

James West:   Oh, okay.

Menashe Kestenbaum: So that was where our attention was spent on, right? You know, we communicated like we’re doing right now: face to face. That doesn’t happen as much nowadays. Now it’s on WhatsApp, attention is divided elsewhere. The largest amount of attention is going to video games.

So all these advertisers want to find a way: how do we get the attention of the gamer?

James West:   Get them to buy a car instead of wasting his time on our game!

Menashe Kestenbaum: Yeah, they need an apartment, they want to take a vacation, they want a credit card, or, of course, they want another video game.

James West:   So the ecosystem that you have created with 125 million gaming lifestyle people, you can advertise to them? And is that the e-sports model in a nutshell? Because e-sports is kind of new to me, and I’m not entirely sure that the e-sports moniker is actually definitive of anything except for the fact that it’s a play that involves video games somehow.

Menashe Kestenbaum: That are competitive. So the difference there is, all video games have challenges in it, right, whether it’s Tetris and you’re trying to create a line at the bottom of the screen –

James West:   I always viewed video gamers as people who like to play with themselves.

Menashe Kestenbaum: Oh. Thank you, thank you.

James West:   Because they generally do. I grew up playing Pong; I wasn’t playing anybody.

Menashe Kestenbaum: I’m touched. I’m flattered.

James West:   No, what are you thinking? I didn’t mean it that way! I thought that that was how you got started; before you get to the community, you play with yourself a lot.

Menashe Kestenbaum: Right. I guess you could throw [laughter]

James West:   All right.

Menashe Kestenbaum: In e-sports, you could throw a ball against the wall and catch it; that’s playing by yourself. Playing with yourself.

James West:   Playing by yourself, right, that’s the right designation.

Menashe Kestenbaum: By yourself. But yeah, they do like to play more and more now with other people.

James West:   Sure.

Menashe Kestenbaum: And it’s gone beyond just playing against one other person, like Streetfighter; now there’s like 100 people on Fortnite or, there’s a lot of connected gaming. Because of that, it creates competition, and seeing these elite people that can, like, move their fingers within a split second and read what you’re about to do and predict and beat you, that has created this whole new system that’s like sports, where it’s very competitive.

James West:   A whole nation full of future mass shooters.

Menashe Kestenbaum: Yeah, I guess.

James West:   No, I mean in the video game sense, I don’t mean in the public sense! Not like that. Go on. No, okay, so you grew the community from 75 million to 125 million; how have your revenues scaled? Do they scale at exactly proportionate rate?

Menashe Kestenbaum: Proportionate? Well, there’s economies of scale. Like, I’ve found, since we’ve grown the business, you know, in 2016, we launched this whole network, and we had $350,000 in revenue. With 10x the next year, 3.5 million, because we hit certain economies of scale that just opened up new avenues, new advertisers willing to talk to us, new opportunities. So every little while, I’ve been seeing this like unlocking a new door, where instead of – you know, I keep on trying to show everyone that, don’t just do a linear growth chart, because sometimes – and you don’t know when exactly to predict it – you hit that economy of scale and then it just grows to a whole new league. So that has been happening for us every so often.

James West:   So you’ve basically experienced a 10x growth in revenue; in the same time period you’ve experienced, call it, a 75 to 80 percent growth in customers?

Menashe Kestenbaum: Yeah.

James West:   So does that dichotomy continue to separate, where your margins are going to get bigger as your costs remain more or less even or they increase only slightly, incrementally, relative to the growth in revenue?

Menashe Kestenbaum: Yeah, well, it’s quite interesting. Like, we do a lot of deep dives into data, because we have access to so much technology data. So we’ll come up with quotients of, here’s our formula of what our editor should look at. If I create a piece of content, how do I measure how good this content is, you know? An editor-in-chief of mine can say, My gut feeling is we’re doing this at a 7 out of 10 on this site. And then I want to grow it to 8 out of 10. But instead we’ll say, can you look at how much time is the person staying on the page? Are they clicking other stuff? Are they engaging with it? Let’s put that into a formula, and then we can map that out.

So that’s kind of something where it’s very hard to say we’ll automatically have a linear growth that we can map out easily, because sometimes we get access to a different type of data, and then suddenly we see a new opportunity that changes the margin somehow.

James West:   Right.

Menashe Kestenbaum: And then we might say, Hey, we’ve just grown our margins X amounts, but why don’t we reinvest in a stronger tech team, because they’ll do more with the data, and then six months down the line, it’ll grow again. So we’re dynamically working at the growth by analyzing the models, seeing where the opportunities of growth are. So we’re not just sticking to one business model and just doing the same thing over and over; we’re always optimizing, trying to evolve it, be kind of at the forefront of this whole play.

James West:   Sure. How do you value your community on the balance sheet of your financials?

Menashe Kestenbaum: Like, I wish there was like a one-to-one of lifetime value for a user, but it’s constantly changing, and it constantly depends per site. So I’m not sure if you saw this major acquisition we announced of the Sims?

James West:   The Sims resource, okay.

Menashe Kestenbaum: It is the main community online for this game.

James West:   Ah.

Menashe Kestenbaum: That’s been around – this franchise of Sims has been around since the 80s.

James West:   You didn’t buy the Sims game? That’s one of the only games I actually know.

Menashe Kestenbaum: We didn’t buy Sims; that would be a multi-billion-dollar acquisition if we did that. This is the main place that they live online, and they have 90 million users; they have between 200 and 300 million paid use a month. You know, we did a deep dive into due diligence, and they’re doing about $5.25 million of EBITDA.

So this is a really vibrant, female-dominant community.

James West:   Female dominant?

Menashe Kestenbaum: Female dominant, yes.

James West:   There are lots of people I know who would like a female dominant. Anyways, that’s almost inappropriate, but not quite.

Menashe Kestenbaum: Right. You said it, not me.

James West:   We skate a fine line, here. Okay, so now, what –

Menashe Kestenbaum: So they have a different value, that’s what I was going to get. There’s female users that might have a different lifetime value to us than a mobile game user. A RPG versus an e-sports user, they all have different lifetime values to us, so I can’t really give a, you know, one-off and say this guy’s worth $15 to us. Everyone’s a little bit different.

James West:   So I guess over time we’ll be able to extrapolate a per-dollar value RPU that’s more homogenized, once you’ve been in business for a number of years more?

Menashe Kestenbaum: Yeah. And I think a lot of the upside for us is the fact, not sure how much time we have, but –

James West:   All the time in the world. [laughter]

Menashe Kestenbaum: Okay, great, I like to hear that.

James West:   The show’s about you now, not about me.

Menashe Kestenbaum: I’m just hogging everything.

James West:   Why not? This way, I don’t have to talk.

Menashe Kestenbaum: Make your job easier.

James West:   I don’t have to talk to Ed anymore today.

Menashe Kestenbaum: So there’s a company called The Score, right? They have something like 5 million unique users a month, right, and we looked at how much revenue they’re doing, call it $30 million or so? I haven’t looked at it for a few months now, so it could be it’s changed, but that means that they’re taking their users, which are similar to ours, and extracting a certain amount of value that’s worth $30 million.

Now, we were, you know, saying we’re projecting for this year $10 million for the year, and we have something like 125 million uniques. So why are they making so much more from that?

Now, we started off two years ago as a start-up, and we’ve grown rapidly, but essentially we got to a point where now we’ve raised funds, we’re bringing on these high-level VP of Sales who are introducing us to big advertising companies, because, you know, you could sell against these users and it gets much, much higher the value that you’re extracting from them.

So if you look at someone like The Score, they’ve already been around for 10 years, slowly building up their sales to the point that they’re getting maximum lifetime value of their users. If we never even grew to a single additional user in our network, the value would be coming from organically growing how much we could extract in our advertising sales.

That said, we’re continuing to aggressively grow the user base as well. So there’s a lot of different forms of how we’re growing, for now.

James West:   Sure. Okay, so it’s hard to actually put a wrapper on the whole revenue model at this point because it’s continuously evolving. What is going to happen in the rest of this year that is going to be representative of shareholder value?

Menashe Kestenbaum: So there’s several things. The vision of the company, how I’ve always seen it since I started it, was really, we want to be the number one gaming lifestyle and community brand. If you’re a gamer, and you live that lifestyle – maybe in cannabis the equivalent would be a stoner? I don’t know what’s – somebody who lives it and really is passionate about it. An investor.

James West:   Well, there’s all kinds of micro-communities within the cannabis community. Somebody who smokes pot all the time is generally called a loser. No, just kidding, I’m not serious! Somebody who smokes pot all the time probably is underemployed, put it that way.

Menashe Kestenbaum: We have many employees that smoke as recreationally. Not at work.

James West:   Well, I imagine being high and gaming kind of is a compatible sort of mindset.

Menashe Kestenbaum: But funny enough, the guys who we employ are not sitting and playing games all day. We have financial people; you know, we just had a Director of Finance join from Brookfield Asset Management. We have salespeople, we have tech people, like, there’s very few people who are just sitting and, you know –

James West:   The guy left Brookfield Asset Management to join your firm?

Menashe Kestenbaum: Yeah.

James West:   Is this one of the people who smokes a lot of weed?

Menashe Kestenbaum: No, he’s great.

James West:   Okay, I was gonna say, what was he, high or something when he made that choice. No, obviously people move around for different reasons. Okay, well, so, you know, you use the example of The Score, and I’m just going to challenge you a little bit on that, because The Score is a publicly traded entity, has generally been an underperformer in its 10-year history, with some periods of exception. So is that a result of the structure of the company? Is that a result of the lack of uptake by investors of the e-gaming concept at this point? Or is that a result of something that has nothing to do with Enthusiast Gaming?

Menashe Kestenbaum: So The Score has mostly been about sports, getting updates on the score in sports, and it’s one publication. We are definitely video game focused. They have recently pivoted somewhat to e-sports and then pivoted again towards expanding towards gambling. So they’ve been looking, I guess, for their model. They also have high costs. But then again, I think as a company, they have been growing, so they have their vision. I haven’t done a deep enough dive into them to see whether they’re hitting that vision or not, but for us, it is different. We also have our Convention, right, which is the largest gaming convention in Canada, and we’re looking to expand into the US right now.

We’re also going to be – can’t discuss it much, potentially in little bars in many cities across North America. So we want to really have this membership of all of our users, really having a place for them that they can call home anywhere – online, offline, something they can really plug into and really accommodates their lifestyle. And we want to be kind of that brand that they live with, whether that expands into merchandise, there’s a lot of opportunities that we could expand into.

But I think that they have their app, which is for the score, seeing the sports games, and, you know, I guess they have their vision of how they want to grow that. I don’t think it’s the same as us.

James West:   Interesting. Okay, well, doubling the size of the community in what was it, three months, six months, that we last chatted?

Menashe Kestenbaum: Yeah.

James West:   That’s obviously valuable, and so we’re going to leave it there for now, because I could actually, as I think we did last time –

Menashe Kestenbaum: We could sit for an hour or two.

James West:   Exactly! You could educate me.

Menashe Kestenbaum: We’ll have to do this over beers sometime.

James West:   Oh, that’s great. Now you’re speaking my language. Anyways, Menashe, we’ve got to leave it there for now, because we’ve been yakking too long. Thank you very much for the update and we’ll come back to you soon.

Menashe Kestenbaum: Thank you.

Original article: Enthusiast Gaming Holdings Inc (CVE:EGLX) Acquires The Sims Resource

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