6 Things I Learned From Luminosity’s Financial Statements

Earlier this year, Luminosity Gaming, one of Canada’s largest esports orgs, was acquired by a company affiliated with the Aquilini family (owners of the Overwatch League’s Vancouver Titans, and the new Seattle CoD franchise), as part of a larger transaction pursuant to which Enthusiast Gaming (TSX:V:EGLX), another company affiliated with the Aquilinis, went public on Canada’s TSX Venture stock exchange.

As part of the transaction, Luminosity had to publicly disclose financial information relating to its operations, including audited financial statements for the team, allowing the public a rare look inside the financials of an esports organisation. I’ve had a look through these documents, here’s a few things I found interesting:


1. Luminosity was sold for $21.5 Million (Canadian).

In February of 2019, the 100% owner of Luminosity, Steve Maida, agreed to sell the team for $3.5 million in cash ($2 million of which was deffered), as well as what would become 7.5 million shares in the new Enthusiast Gaming. These shares were deemed to be worth $18 million at the time of the sale (at Enthusiast’s current market price of $2.05 per share they are currently worth about $15 million), meaning he essentially received a total of $21.5 million CAD for the team in cash and stock.

Given that Luminosity was founded in 2015, that’s not bad for four years work by Maida, but well short of the valuations in the hundreds of millions for larger teams in the space on the most recent Forbes list.

It’s also worth noting that this $21.5 million sale price represents about 5.5x Luminosity’s 2018 revenue of $3.8 million. This is much less than the 10x – 20x multipliers used for most of the teams of the Forbes list. Again this indicates that, even accounting for the higher brand value of those orgs, Forbes may be overestimating what the teams on its list would sell for if they actually went on the market.

2. Streaming Can Be a Big Income Earner…

In 2018, streaming was by far the biggest source of cash for the team, accounting for $2.3 million in revenue, or over 60% of the team’s total revenue of $3.8 million.

It’s notable that the 2018 revenue number represented a huge spike over what the team brought in for streaming revenue in 2016 ($300k) and 2017 ($600k). This may have had something to do with the fact that from early 2017 until August 2018 Ninja was on Luminosity’s roster. It makes sense that having the biggest content creator in the world on your roster, right as he was blowing up in late 2017/early 2018, would help your streaming revenue numbers.

The terms of Luminosity’s deal with Ninja are not set out in the financials, and his name doesn’t appear anywhere in the materials released to the public. There is only a cryptic reference to the fact that “The contract from which the streaming revenue is generated expired in Q1 2019 and is currently being renegotiated by the Company.” Whether this means the contract with Ninja (who is reported to have left Luminosity in August 2018) or a completely different contract is unknown.

3. …But Sponsorships and Merch Often Aren’t…

In that same year (2018) sponsorship revenue for Luminosity was a fairly modest $200k, while merch sales were only $14k. These numbers are surprisingly low, especially for an org that had Ninja on its roster, and would be concerning to me if I was an investor in the esports space.

Of course, Luminosity was a relatively small org, and I’d be curious to see what these numbers look like for an org whose strategy is more focused on developing their brand and merch sales, like 100 Thieves.

4. …Except When You Win

In 2016, Luminosity’s CS:GO team won the MLG Columbus Major, a big accomplishment at that time. This caused a huge spike in both sponsorship revenue and merch sales. Sponsorship revenue was $850k in 2016 (compared to $350k for 2017 and $200k for 2018) and merch revenue was $230k in 2016 (compared to $60k in 2017 and $14k in 2018).

Luminosity itself confirmed that the CS:GO victory was behind these spikes, stating in the analysis accompanying the financials that: “The CS:GO team’s victory at the MLG Major Championship in Columbus in 2016 resulted in significantly increased sponsorship revenue for that year/sales of the Company’s merchandise.

It looks like, just like with traditional sports, in esports results on the field of play can drive financial results. Indeed, given that Luminosity was founded in 2015 and was just getting off the ground at the time of its MLG victory, you have to wonder if the team would be where it is now if its’ CS:GO players’ reflexes had been just a little bit slower at that major in 2016.

5. League Fees Can Be Surprisingly Lucrative

In 2018 the team brought in approximately $500k in “League Fees.” As far as I can tell, the only leagues that Luminosity’s teams participated in during 2018 were the ESL Pro League for CS:GO and the CoD World League operated by Activision/MLG. I’m not sure if league fees for ESL or the CoD league have been made public anywhere else, but if they’re on the order of $500k per year then that’s pretty surprising.

6. The Team Was Profitable

The team’s primary costs between 2016 and 2018 were payments to “contractors,” presumably referring to player salaries and other related expenses. These were between $2 million and $3 million per year. Over the three year period from 2016 to 2018, these costs covered just under 75% of Luminosity’s total revenue.

After accounting for these costs, as well as office overhead expenses and travel (which were between $200k and $700k per year), the team earned a profit of $185k in 2018, suffered a small loss of $23k in 2017 and made a larger profit of $846k in 2016 (the year of its MLG victory).

While the team was in the black over this period, you can’t really say it was wildly profitable. If we ignore the spike in profits caused by its MLG victory in 2016, it brought in $160k in profits on $6.5 million in revenue over 2017 and 2018. While just the fact that it was profitable during this period is an accomplishment in itself, those numbers probably aren’t going to make potential investors do backflips, especially given that the team’s revenue wasn’t increasing exponentially over this period or anything like that.

You also have to consider that these numbers would probably have looked a lot worse had the team not had two pretty significant (and not necessarily replicable) strokes of luck during this period, namely (1) having Ninja on its roster as he was becoming the most famous streamer in the world, and (2) winning the 2016 MLG CS:GO major (calling a tournament victory luck may be a bit disingenuous of course, but I think it’s hard to deny that even if you’re the best-prepared and most skilled team in the world, you’re not winning anything 100% of the time, and luck is a significant factor in results).  A similar org without these two “lucky breaks” may have bled money and gone under during this same three-year period, rather than being sold for $21.5 million.

All in all, this is probably more evidence that, despite all the rosy projections for the industry’s future, people are still figuring out how to make money from esports, and this is not an easy business to be in on a day-to-day basis for most orgs (especially the ones that aren’t backed by tens of millions in venture funding) nor it currently the cash cow many expect it to be.

Data:

Selected excerpts from the financials are set out below:

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As well as a pie chart showing the breakdown of the team’s revenue sources for the 2016 to 2018 period:

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