Firy Inc. (SKLZ) Earnings Call Transcript & Summary

Great. Thanks, everyone, on the line for joining. This is Alex Giaimo. I cover the U.S. gaming sector here at Jefferies. Thrilled to be joined today by Andrew Paradise. Andrew is the CEO and Co-Founder of Skillz. Skillz is a platform that allows players to discover mobile games and compete against each other. It also allows developers to build mobile games. Andrew founded the company about 8 years ago. It recently merged with Flying Eagle Acquisition Company or is in the process of merging with FEAC, which are the same folks behind the DraftKings SPAC. So Andrew, we're thrilled to have you today. What I'll do is I'll run through a series of Q&A and then we'll go to the lines for client questions. The best way to ask is directly through the Zoom portal. That will come through to me, and then I'll relay it over to Andrew. So Andrew, great to have you today.

Thanks for having me. Excited to be here.

Absolutely. So maybe to begin with the folks who might not be as familiar with the story, it would be great to just be -- it would be great to get a high-level overview of what Skillz does, how it fits into the gaming ecosystem and then maybe we can go from there.

Sure. So Skillz is a B2B2C technology platform that's powering over 2 billion tournaments every year. We're enabling game makers to monetize through competition as an alternative to in-app purchasing or in-game advertising. And what our platform is really doing for the game community is we're democratizing and leveling the playing field for access to building esports inside of video games. We have this belief that esports are for everyone, and our goal is to make it as fair and as accessible as possible to build that technology into each game and for every competitor out there. If you think about where we are in that journey, we're enabling developers now of all sizes to monetize their art to the tune of, this year, $1.6 billion in GMV. And we're enabling players to engage. They're engaging on average 62 minutes a day in fair, fun and meaningful competition. When you think ahead, the broader vision for what we want to build is we're expanding from mobile gaming to all gaming, all gaming to all competition on the Internet. We believe that, over time, this company will be the defining company in the future of competition for the Internet.

That's great. And maybe before we go into company-specific questions, I'm sure the question you're going to get is, why take this route with Flying Eagle Acquisition Corp. as opposed to the traditional IPO process? Maybe why were they the right team to combine with?

Well, we had always planned to go public in Q4 of 2020. When I came onboard 7 years ago, so 1 year into the company's history, I laid out a 15-year plan for the then 5-person staff. And I'm sure they thought it was pretty wild to plan ahead 15 years into the future of what we've built. We're actually 7 years in now against the plan we laid out, and actually on track. It's one of the more remarkable things about Skillz and our partner on the SPAC transaction, Flying Eagle Acquisition Corp., so the Chairman there, Harry Sloan, he and I met about 3.5 years ago, and I showed him our plan and part of that was to be live in terms of public Q4 2020. So we're, I would say, fortunate to have met them. It was a fortuitous thing as we approached Q4 2020. We chose this background because it's letting us go public faster with minimal cost difference in our case. It's also allowing us to choose our partners. We were able to work with Flying Eagle Acquisition Corp. or FEAC, which they just recently executed, I would argue the most successful SPAC of all time with DraftKings. We also got the benefit of being able to go with them and go out to partners that we had longer relationships with. So kind of the shortest relationship was with Neuberger Berman, who partnered into our pipe, that was 3 years. But it ranged from 3 years to 10 years as we talk about the partnership that we built on the pipe with Neuberger Berman, franklin Templeton, Fidelity and Wellington. And we were, I'd say, really honored to bring them into the business and to get them partnered ahead for the future of what we're building. Going public, it's an awesome milestone, but it's really just the beginning of the journey for us in terms of redesigning the mobile gaming ecosystem and our broader vision of the future of competition.

Yes. And you mentioned changing the ecosystem. And Skillz is an interesting company in that you're in the fast-growing mobile games segment, but you're sort of coming at it with a different approach to monetization, right? So maybe just walk us through why the competitive games model works? What's different about it? What are the advantages when compared to the traditional monetization paths like in-app purchases and advertising?

Yes. So when you think about the gaming ecosystem, we've gone from a world in 2009 where there are 30,000 entities making games to a world this past year where there are 10 million different developers building games. And that's really because of enabling technologies like Unity and Unreal as well as other open source game engines. They've enabled the next generation of content creator to focus on building interactive content and interactive content subsequently has just absolutely exploded. The reality of that is it's also for the consumer. There are more games than ever and the games market has massively expanded in terms of monthly active users in mobile gaming. Specifically, there are 2.7 billion monthly access as of this last month. When you think about it from a developer standpoint, it's become very crowded and noisy. It's really hard to stand out. And the monetization models for the category have been relatively static. So the 2 ways that mobile game makers make money from their video games, they either run ads in the game or they do what's called in-app purchasing or in-game purchasing, where they're recently locking the user out of content. And they're getting on to this more or less content treadmill where they're building out more and more content for smaller and smaller portions of paying users. You're average in-app purchase game monetizes at 2% of audience. So think of that as 20 people on every thousand, right? The reason Skillz is really different is we're enabling the developer to monetize the competition by charging transaction fees against entering into competitions. And so when you think about the value prop to the consumer, we're, on average, getting 10% of every 1,000 to monetize, so 100 of every 1,000. You're getting -- when you get that many more consumers to participate in paying, it's not surprising that we might outmonetize other forms of monetization. And the results of that, I'd say, is the developers are uptaking the model through a self-service platform. It's like a Shopify for mobile game makers where they can self-service, sign-up, integrate and deploy. They can build out, I would say, more sophisticated art because they have more time to invest in their art and they don't have to invest in building out all of this infrastructure that they had to before Skillz. And then even better, I would say, the live operations technologies and machine learning that really live at the heart of our business. They are -- we're able to manipulate data science and create, I'd say, a better outcome for all the game makers on the platform than the previous monetization models. And it's a really interesting time because I would say live ops has become an important barrier to entry for many of the bigger developers against the smaller developers in the market. And this is the disrupting of that.

And the business is two-sided, right? You built this platform for the developers, which you touched on over 10 million of them globally. Very few have left, so I guess the question is, what do the developers like so much about the platform? What are you offering them that maybe they can't get elsewhere?

Well, I think when you look at Skillz versus other companies that are moving towards this type of product offering, I think the real differentiator is the level of care and technology we put into building out trust and fairness. When we launched the platform in 2013, we were actually seeing about 10% of all volume per day in cheating, hacking and fraud. When you're saying, "Hey, I'm going to enable a payment system inside of video games." Hackers love payment systems, and they also like hacking video games just for fun and fame. And so you're offering fame and fortune in one hack. And so it's probably not surprising that we had such a massive adoption curve from the dark web from the early days. We had to get really good at stopping cheating, hacking, fraud. I would just give you 2 fun anecdotes. So first major fraudster. We'll never know his real name, his name -- his first screen name was [ Mr. Beamer ]. He went on to create 24,000 fraudulent accounts in the first 12 months of operations. We were tiny back then. If we hadn't figured out how to stop [ Mr. Beamer ], we would never have gotten to where we are today. If you think about the -- another vector, I'll tell you about, it's amazing when you think about the level of care people will put into cheating in any competition. We look at the world of off-line sports, I was actually referencing it this morning to a different investor. I was telling him about some people might say deflategate was cheating, and others might say, Tom just likes his balls that way. But the reality is when you introduce competition and money into video games, what you're really doing is you're incentivizing some people to really push at the fringe of where competitive edge meets cheating. And we've seen that over and over again. Actually, I have a great video I can share with anyone who's interested afterwards of a CTO of a well-known venture-backed company. He built a room-sized robot that actually sits on top of his phone to play for him. And we have to catch every different type of cheating, hacking and fraud because at the end of the day, the payback periods in this business, they take hundreds of payments transactions and can't get a consumer to achieve hundreds of payment transactions without trusting the platform. It's why many would-be entrants into kind of building out this technology stack for the game making community have failed.

Got it. And one of my favorite slides from your -- the presentation that you put forward with the deal was the demographic breakouts, right? A pretty even male-female split, income split, just a balanced demographic split. So curious what it is about Skillz games that are attracting such a wide audience?

Well, I think competition is truly universal. When most people hear the word gamer or gaming, unfortunately, that harkens back to my early days of video games, where it really was all about the hardcore male in the parent's basement. I was that guy. But it's not just that person anymore, it's really everyone. Our demo, the reason it's half women is very content-dependent. So we have games on system that absolutely appeal to that 25-year-old male in their parent's basement. Sports games, for example, are very male-centric with 90% male, for example. If you think about across the board and look at what women are playing on the platform, puzzle games, for example, appeal very much to the 35-year-old midwestern housewife. There are -- we have games that are typically 80-plus percent women when you think about that category. The adoption of the platform and the growth of the platform, we've certainly explored and seen multiple vectors in terms of content and maybe I'll use a movies or film analogy. Imagine you're at the very early days of creating the future of the film industry, and people have only ever made a comedy or they never tried an action movie. They've never tried many of these other genres that we now know and love, Westerns, for example. We're going to continue to see development of genres and subgenres on the Skillz platform, I think, for many years to come. We are definitely seeing that from the game making community now. We have 30,000 registered game developers on the platform who are building out games. They've brought thousands of games live. But having said that, like the very nature of creative is one where people are constantly pushing the edge of competition and trying to find that next amazing competitive video game to either attract a demographic that's on system away from a different game or to bring new demographics onto the system. I'll give you an example of that, actually. They're one of the first venture-backed companies where they raised venture capital solely to build on Skillz Their business plan is actually we're going to build the best games on the Skillz platform. I remember seeing their first stack and I was like that is really cool. Game industry veterans with 100 years of experience collectively across them that had left bigger companies to raise venture and build. And they built, believe it or not, of all things, they built competitive Bingo. They created a game called Blackout Blitz -- or Blackout Bingo. And they were able to build a tens of millions revenue business in only 18 months by really thinking about a new demographic that they thought was underserved that would love this type of competition. And you might not think it with Bingo, but there we were, and there we are. And where we've gotten to in terms of the network now, I mean, we're still only 2.6 million monthly active users in a 2.7 billion monthly active user market. If you think about the context of that, like compare the size of the monthly active user base of Skillz, against a company like Zynga at 70 million MAU, the implications of bringing this type of monetization to the larger audience that are really quite amazing when you think about the current revenue of the business versus where it will go.

Got it. And just on the topic of MAUs, it's interesting. I think in the traditional mobile gaming market, you tend to see low single-digit percent of folks actually spend money within the games. And on the Skillz platform, I believe it's about 10%. So curious why you think that is that more people are prone to spend real money when it comes to competitive gaming rather than the traditional business model?

Well, this actually taps into the primary research that the company conducted before I joined. I was a Director at Intuit prior to this. I am the technology inventor behind Skillz. So I actually didn't join the company for about a year. I seeded it with $1.3 million along with some investors I've worked with in the past and helped assemble and build out the founding team. My co-founder on Skillz, Casey Chafkin, he and I have worked together 12 years now across 2 ventures. But when I looked at joining -- the reason I mention this little prelude is when I looked at joining the company, I really wanted to understand what level of willingness to pay we have in consumers for this type of service. And the primary research the company conducted showed that about 40% of people would be willing to pay on a 5 or 4 out of 5 for price competition in their favorite video games. And what was remarkable is that study, we -- actually after I joined, we commissioned a much larger study. First, with a smaller independent research firm and then with Frank N. Magid, if you're familiar with them. And they're a pretty famous primary research firm in video games. And they actually found the same number. So each study found 39%, 40% and 41% of consumers. Those were the 3 numbers, very similar, would be willing to pay. What we've actually seen in -- as we've gone forward into building out content on the platform is there are actual -- there are games on the platform that are running at 35% payer per day. So when we say the 10% payer, it's really exciting. On average, like 10% payer on average versus 2% in IP, you're saying 5x. But when you're actually saying there are video games on platform at 35% payer, you kind of think about your best converting mobile game in the world before us, it's probably 7%, maybe 10% payer. The very best video game in the world outside of Skillz. And so it's like really amazing to say we've created a service that consumers like so much more that they're willing -- that 4x as many people are willing to pay than the best video game in the world. And I just -- I go back to it. It's really about Skillz, if you have a takeaway as investors, it's about building game-centric monetization. The types of monetization that were in games prior to skills, they weren't designed originally around interactive content. They were actually borrowed from other media formats and ported across to the video gaming industry.

Got it. That's super helpful. And one question we're getting a lot, and I'm sure you're getting a lot, is just around the regulatory risk to the business model. Why is competitive gaming different than gambling? So just curious to get your take there and then maybe just walk through what you think the regulatory risk is.

Yes. No, it's a great question. I think regulatory was one of the most important facets of my analysis before coming in full time. The framework that govern Skillz is the same one that governs off-line sports and competitions and one that creates the video game industry as a whole. In fact, prize-based video game competition has been around for 40-plus years. One of the first ones ever was the -- is the, I believe, the first prized video game competition, I hesitate almost to say in front of Alex as the analyst because he'll probably call me on it. But I'm pretty sure it was the $20,000 Space Invaders competition by Atari in the 1970s. And If you think about where we are today with that, there are actually quite a number of companies that have run prize-based competition in video games. So we're not really novel in that. What we're novel in is we're novel in making it very easy for a developer to run that type of business at scale. That's really the innovation here. It's about a technology that makes it much easier to do something that they were already doing. And by making it so much easier, so many more developers now can access it and use it as a way to monetize. So they don't have to make this trade-off. If you think about the world before Skillz, running prize-based competition in your game to monetize your game was such a massive endeavor that, that literally was the only focus of these businesses. And I'm happy to reference some of them if people are interested. But when you think about the history of prize-based competition in skill-based games, It brings us back literally to the beginning of mankind's recorded history, right? Like the Colosseum in Rome was a prize-based competition actually with paid entry fee. A lot of people don't know that. And it ranges to the more modern era where things like the New York City Marathon, the National Spelling Bee, chess tournaments, rodeos, pie eating competitions. With Skillz, like these other forms of competition, the outcome is being determined by people's skill and their performance, not by chance. And then -- so that's a little bit of the framework that we set inside. And I'd say in terms of the diligence and how we thought about building the business, we ran a really detailed and recursive process around finding every leading mind in legal and in math in the world to weigh in. So the way we did that is, is really looking at getting -- building out a pure voting system out of the best skill-based lawyers and the best mathematicians and statisticians to find who their peer -- they thought were the best out of their peers. We worked with actually the very best minds in the world. One of them, he actually contributed a significant portion of the early IP,, Professor Peter Winkler out of Dartmouth, who built a -- he's really a leading computer scientist and statistician in the world, probably top 3. I think you have to talk to him. It gets hard to know who's #1. But if Peter is listening, you can be #1 in my book, my friend. But I think the IP and the technology that he built was really around how to analyze and understand skill versus chance by analyzing gameplay. And it's that data and technology that we really brought to the process of how to understand skill versus chance to each of these games. The other thing I'd just comment on since we launched the business and look at the landscape even just in the United States, 41 states plus the District of Columbia, they explicitly permit skill-based video game, which is about 90% of the U.S. population. When we launched, there's actually -- it was 5 states less, there's 36 states. So in the last 6 years as we've been building the business, 5 states, they evolved to explicitly allow skill-based video games without Skillz being involved in lobbying. So I would say not only is the current framework one that we understand very deeply, but it's also the regulatory trends for our business are only positive even without us being engaged in that discussion.

Got it. Okay. And maybe I'll ask one more, and then we'll go to the client questions because we are getting a few in here. Well, look, I think the revenue growth in 2019 was 135%. I think your forward CAGR that you kind of released with the initial presentation was 65% 3 years forward. So what's giving you the confidence that you continue to grow at these extraordinarily high rates, especially considering the addressable market here is -- it's pretty new. You essentially created this market. So I would assume that visibility into growth might be a bit more difficult. So I'd just love to hear your thoughts there.

Yes. Well, the addressable market for the business is incredibly massive. It's one of the reasons we're so bullish about the future. The mobile gaming now today in the U.S. alone is 203 million, right? It's 2.7 billion globally. In our -- and that means in our home market where we've really been building our business, we're 1.5% penetrated. We're 0.1% penetrated globally. Even in our largest genre categories, if you think about the -- if you go down to the specifics of categories where we're really dominating and outmonetizing peers, we'll take the card game category. So cards, a game like Solitaire, it's just 1 subcategory of the card game genre. Even in Solitaire, we're about 5% penetrated in the U.S. or 2% worldwide. Even though we don't see -- we don't really like to forecast when we think about our business, new genres coming on board, new games working. We actually really just look at existing games, in existing genres, in existing markets in terms of how we think about the forecast forward. So our financial model really thinks about the things that we know and understand. And how do we really predict those at a very accurate level. And that's more or less the mentality we've always had in the business. I was actually -- I was in a meeting very recently where the person said, "Wow, it's amazing. You guys only look at through your LTV, even though you have 7-year LTV and climbing, and you've never had a pain cohort of users stop paying. Like why are you guys only looking at through your LTV?" And I said, look, it's the level of discipline. We have a level of depth of data on our 3-year LTV cohorts where we're really comfortable forecasting them. We will, maybe, at some day, not -- in the non-distant future be comfortable forecasting 5-year LTV, 7-year LTV. But you're really touching on the core of what it means to be a Skillzian and to understand our company, which is we're a company with an incredible level of discipline and where we -- where some people will say they're data-driven companies, we would be like data super freaks in that world because we are so deeply steeped in data that it is the true core of the differentiation of the platform as well as the business. And when you think about the roots of the business, the mentality of build a great product first, build strong new economics, then systematically scale it year after year, you can create a business that continues to grow. And the way we actually think about it, Alex, is more about how much do we grow each month and how much user behavior really grows per month. And I know that multiplies out to these fantastic numbers, but it's actually much more about the predictable growth of the cohorts acquired into the business over time.

Got it. And I do want to get to the questions from the folks on the line because we do have quite a few and hopefully, we can get to all of them. The first one is, I'm sure you're getting this one a lot, why are Skillz games not allowed on the Google app store? And then is there any risk, longer term, that Apple could do the same?

So we actually distribute on Android on multiple other app stores. Google Play, it's a very interesting history there. One of the things I have to be really comfortable with is that we thought when we started this business, that people would have a cultural misconception about video games being a skill. Not surprisingly, some of the partners early on in the business like Google Play, have the same misconception. It's been a long discussion of trying to help them build out the right regulatory framework on their app store. Having said that, absent of Google Play, we're actually growing footprint twice as fast on Android as on iOS. So our revenue footprint is actually growing twice as fast and with over 10% of footprint already on Android. So clearly, there are other means for our business to grow outside of Google Play. I look at it as more or less unpriced upside to some extent on the business of that will change over time. I think it's more or less inevitable because there are some examples of individual skill-based game applications on app stores today, like daily fantasy sports, for example, there are multiple apps that are very in a U.S. invite-only beta that's been going on for 5 years. And I have to think that at some point that beta is going to come to an end, and they're going to more broadly open up the platform.