Firy Inc. (SKLZ) Earnings Call Transcript & Summary

Good afternoon. My name is Brian Maier. I'm a Vice Chairman at Wells Fargo in the Investment Banking Division. And we are thrilled to have the CEO of Skillz, Andrew Paradise with us today, to give us a fireside chat and talk about all the really cool things he's been up to with his company, not just recently, but for the last several years. So without further ado, just to kick it off, Andrew, welcome to our Technology summit. I appreciate you're taking the time. I know you're busy in the middle of quite a few -- quite a significant transaction. So we appreciate you taking the time out to talk to us.

Yes. Thank you for having me. We're pretty excited. We were made effective yesterday right after the bell. So we'll hopefully initiate the IPO in the next 2 weeks. But for those of you who aren't familiar with Skillz, Skillz is a B2B [indiscernible] technology platform that powers more than 2 billion tournaments a year. We enable game developers to monetize through competition. And our platform is really democratizing gaming by leveling the playing field for multiple constituencies. So we really believe that e-sports are for everyone. And our goal is to make it fair and accessible for the developer, but also for the gamer. We're enabling developers of all sizes to monetize their art, and we're enabling players or gamers to engage in fair fund and meaningful competition. We think more broadly about the company, we're really focused on this long-term vision. We call -- we talked about our 100-year vision about building the competition layer out for the Internet.

Andrew, maybe just to give a little bit of background. You've gotten a lot of attention because of this SPAC transaction, the thing you just mentioned is on track to close before year-end, all of which has gone very, very well. And obviously, a lot of great sponsorship and support. But Skillz wasn't created yesterday, it wasn't created a year ago, it wasn't created 3 years ago. Maybe you could start with kind of the backbone and the history of the company, how you got here and maybe interweave the competition because others in the industry, other big names in the industry have tried to do and failed at some of the things you've done. So maybe give that context that this isn't -- is anything but a flash in the pan. It's a company that's been very purposeful for some period of time.

Yes, yes. So we focused on building out e-sports and even more perhaps crazy back in 2012 on mobile e-sports. I remember the first meeting we had with a venture capital firm, we talked about building and advancing this technology space. And they said, what's e-sports? And then I explained to them, and they said, I don't know if it's going to be called that or if you should come up with a different name, it's kind of weird. I said, no, no, I really think e-sports is going to become a meaningful thing. What's been amazing if you think about the journey of the business we've been on -- so in terms of Andrew coming into the company, I'm the inventing technologist behind Skillz. I've been the inventor behind 5 companies that created different industries. My company, prior to this, we invented mobile self-checkout. The company is called IO Buyer. We were acquired by Intuit. I was a director at Intuit when I actually seeded the technology with $1.3 million and brought in my co-founder on Skillz, Casey Chafkin. Casey was an early employee of my prior company. So I've actually been working now with Casey, who's our Chief Revenue Officer today for 12 years. And about 1 year in, he wanted me to come in and to run the company as CEO. I told him, I've done it twice and sold twice, and I don't really want to sell another company. If I do this, I really want to build a long-term independent company. And the part of that would mean eventually, we take the company public. I said the tech companies I admire the most, the platform ones, they have taken 8 to 12 years, whether it's Eagle or a Facebook, to get to that level of and so I asked him if I came on board, would he sign up for a decade against our plan to build out the future of competition. And I laid out this 15-year plan for him of what we'd built together. We're actually -- so year 7 in now. So not quite 8 years, 8 to 12 years, if you think about it. And we're right on plan to hit the go public milestone. Really exciting in that sense. But I think when we think about going public, we'd always planned on going public in Q4 2020. We've been planning it for several years. Actually, I met the SPAC sponsor who -- Harry Sloan, who is building a different stack in 2017. And I showed him my plan for the next 3 years. We actually -- we included in the financial segment. We actually beat metric for the last 3 years since you saw it. And I know, Brian, when your Wells Fargo got involved in 2018, I think we've been -- we've watched our journey as we've been building out and outperforming pretty long-range forecast. So it's been pretty exciting. I think this background, it's really -- it's letting us go public faster. It gives us sort of a minimal cost difference. It allows us to choose our partners and specifically have allowed us to partner with Wellington, Fidelity, Franklin Templeton and Neuberger, who are all the groups that I've met ranging from 3 years ago to 10 years ago. We wanted to have as long-term partners for the business. They are -- I'd say ideal partners for us as we approach the concept of building for 100 years.

So that's great background, Andrew. In the context of your core business, there's a lot written about and talked about the size of the gaming market. How do you see the size of the gaming market? And how does your entry from a competitive game standpoint entry fee-type of model sit within that larger -- so what's the macro? And how big is your component of it?

So the gaming industry is really massive. Even when we started it was -- mobile gaming was actually -- it was the runs of litter. It was an $8 billion sector, probably part of the reason why the venture capitalists we met with said we shouldn't focus on mobile. But we told them we really believed it would be the majority of the industry over time because we thought these computers would become the most widely proliferated computer in history. And it's played out that way. It went from an $8 billion sector in '12 when we started to $68 billion as of this past year. It's projected to be $150 billion in 2025, and I think excitingly, what we saw back when there were 800 million smartphones in 2012 was that 60% of the usage was mobile games. As we fast forward to today, still 60%, but there are now 4 billion devices instead of 800 million, and the projected count of devices in 2025 is 10 billion devices between mobile and tablets. So it's a really staggering scale. When you go within that and you look at competitive mobile gaming, it's a smaller section of the $68 billion. We would define the current market for casual e-sports, where we are really the dominant platform. It's an $8 billion sector. And it's incredible when you think about that because that's really just looking at -- the U.S. is just looking at mobile e-sports today. Both your end market is going to nearly triple over the next 5 years. But also going international for us. Today, we're 90% North American revenue, international is 4x the size of the market. So there's this massive opportunity for our business as we move past the go public milestone, and we have I would say, a growing amount of financial capability to expand geographies.

Great. Fundamentally, your business is driven by the number of gamers that come on to your platform and the number of developers that put games on to your platform. Maybe you could give us a sense of the size and depth of each and how you see those trends kind of going forward?

So the value proposition for the developer, it's -- if you think about the world of game making, it's gone from 30,000 makers in 2009 to 10 million different game developers building content as of 2019. And the reason for that is the proliferation of open source game engines, whether it's very well-known ones like Unity or less so, like Corona, actually kind of funny in some ways. But the way to think of Skillz is, we are enabling developers to monetize through a game-centric acquisition technology that we have invented in this industry. You should think of us as like a Shopify for the mobile game developer. The explosive growth in terms of content has made it harder for these developers to get their games discovered and monetized. And as a result, the cost to acquire a user in the industry has continued to rise. So these developers need new model for in-app purchasing versus in-app purchasing or in-game advertising. Our platform is really easy to integrate. It allows and enables the developer to access a technology stack that would be -- I would say if they were to try and build internally, it would be cost prohibitive for a mobile title, not to mention most of these developers wouldn't have the capability even if they have the financial resources. And then as they integrate and they build, they're getting not just the ability to have game-centric monetization. So this third type of monetization, they're getting a LiveOps engine, which -- where LiveOps is really this new technology stack that's become the barrier to entry for many of the small and medium-sized game makers when they compete as the largest developers in the market, whether it's Zynga or others. With Skillz, the developer can make the content, we run the business for them, and it really allows them to focus on what they do best, which is making great teams.

Great. To date, you've been really a God-sent to a lot of the developers and a lot of the smaller developers as a way to launch their games. But you haven't done a lot with some of the big name publishers, the Activisions, the Take-Twos, EAs, all of those. How do you view that market? Do you need them? Do they need you? Can you each kind of grow separately? Or do you think there's a path where you can partner and work together and you'll find their games on your platform 1 day?

Well, I think the evolution of the content on the platform is inevitable. If you think about a couple of facets of the business. One is, in 2015, we really had kind of our first -- I'm going to air quote Hit, and the reason I say that is it was a very small game, it's our first multimillion revenue game on the platform. What's amazing about this type of technology and monetization is that we actually have maintained -- that game hasn't shrunk in revenue. It's actually grown in revenue since then. So just to give you some fun stats. So if you think about our 2016 #1 total, it's grown 268% in revenue since 2016. Our 2017 number 1 title has grown 110% in revenue since 2017. The reason that's remarkable is, typically, in mobile gaming, all of the monetization from the user cohort happens in the first 6 months, if not 1 year. And you have complete death of a paying cohort by 1 year. What you see on Skillz is you see actually all of the cohorts continuing to play and pay 7 years out. We've really conditioned the players to engage in this amazing behavior of paying every time they play almost like an Arcade. And the result of that is we're getting -- we're seeing a Net Promoter Score of 45 on average versus 0, which is the industry average. We're seeing these players paying 7 years out and the LTV on every cohort continuing to grow. Some actually growing past the first month of revenue from a cohort. So actually, what people often call in Silicon Valley the smile curve, where they're coming back up over 100% a month on revenue. But when you think about the bigger developers, of course, they're going to be attracted to this type of monetization. I think the question will be, will they try to buy or build? I can tell you a little bit about the competitive landscape of technology, if that's interesting, Brian.

Please. Please go ahead.

Yes. So when you think about the competitive landscape and who Skillz competes with, we really -- as I touched on the vibe [indiscernible] build, that's certainly one part of it, but we've really built a business that's very hard to replicate. The core IP of our technology is not content. It's deep technology really about data science, and it's a data moat that is protected by not just 58 pending and issued patents, but it's actually a data science technology stack that is constantly improving itself. So I'll tell you about a little bit of the different areas of the data science. So we equaled the anti-cheat, anti-fraud player matching, player rating systems to name areas of data science for every game on the platform. If you think about the first piece, the anti-cheat and anti-fraud, this is really building out the equivalent of McAfee. So it's a technology stack defined around stopping people who would hack or cheat on the system. Believe it or not, when we launched in 2013, 10% of all volume per day was cheating and fraud. And if you think about our average consumer that tries around the games in the platform, they take about 4 months to achieve a payback. So they're going to experience hundreds of payment transactions with Skillz in order to break even on the platform, right, from an acquisition standpoint. And if you're being defrauded at 10% of all volume per day, and you're playing in, actually, the average consumer plays about 15 tournaments in a day to make up a 62-minute gaming section. That means you're probably going to experience broader cheating almost every time you play. And we have to somehow help you through that journey for 4 months just to break even. And so when you think about the competitive landscape and entering, you have to understand that really -- like thinking about the hacking, if you will, of a system like this. It's so interesting to the hacking community out there to be at one hand, hacking games, I would say hackers do like to do that for fame in their community. And of course, hacking financial institutions for money. So you're offering all the best things when you're engaging this endeavor. And I think we've seen that as companies have tried to enter. Some of the largest technology corporations in the world whether it's Sony trying to enter and failing to replicate what it built in shutting down or the 50 venture-backed private companies that have raised funding to chase us. It's been really hard for others to enter into this space because I think it's not about getting someone to transact once. It's about building trust with the consumer and a lifetime of transactions.

Switching back to what you referenced right at the beginning, which is one of the things we've certainly observed is that you've got a number of growth initiatives. And at the same time, you've actually been pretty disciplined as a company about focusing on the right things and not too many. So you make sure you get them right. But when you look forward from here, you're going to be public shortly, what do you see as the top 3 growth initiatives? You mentioned international. You haven't really talked about it, but one of the things you've done very well is brand-sponsored contest. There's all sorts of partnerships, your Bowlero game, kind of reinforcing their own brand on your platform. But when you look at all the things you could do, and I know personally, there are a number of them, you could do, what do you see as the most important kind of next 3 avenues for growth for Skillz?

Well, I think we are a company well-known for being very careful to prioritize and really follow a careful set of initiatives. It's a long journey to 100 years. You can imagine that over that period, we would own all competition on the Internet. I sometimes refer to this as surely as there is the Internet of Things or IoT. I think there will be the GOT or the gamification of things. And as we are expanding forward and you think about the growth opportunities for Skillz. The video game industry is very much a hit-driven industry that comes from a long tail. The creativity in the video game industry, the people who take the risk, it's always come from the communities. And if you think about this facet, so 8 of the top 10 games in the last decade all came from the long tail. So as we keep expanding to new genres in new geographies, our addressable market is strong substantially. We're going to be addressing going from $8 billion to $15 billion, just as you go from iOS only casual e-sports in the U.S. to Android. So -- and we're now at 10% android footprint in terms of revenue. But it's growing twice as fast. And then as we're expanding beyond casual genres, we expect the market to expand to $24 billion. So you're going to see a significant amount of growth as you go into other genres of video teams. As we go to international, you're talking about literally 5x-ing that. The market size, I mean, it's 80% of the markets outside of the U.S. It's pretty incredible. We've actually already announced our plans to enter into India in 2021 and are well underway there. We don't have any of the Indian revenue forecast into the business. But if you can kind of break this, there are 300 million smartphones now in India, with an average household income of about 1/3 of the U.S., about 200 million smartphones in the U.S. So the Indian market is worth about 50% of the U.S. market. So it's a massive thing just to enter into India at current scale. More exciting perhaps is there are literally almost another 1 billion people in India who do not yet own smartphones or tablets. So it's not a fully penetrated smartphone market. So it's a very rapidly increasing smartphone population over there. We're -- so as surely as geographies are important. Shortly as genres are important, we plan to expand beyond video games. We are thinking a lot about the distraction of competition from many, many different activities but to give you a couple that were near and dear and in the, call it, a 5- to 15-year Q, we're working on fitness and education and making the experience better through gamification. So just to give you an example of a company that's built linearly, that's very focused on fitness. If you think about Peloton. Peloton is basically a Nintendo power pad with wheels. I don't know if you remember the power pad, but it was a -- a device you plugged into your Nintendo, it was like $50. And it was a -- you can play this game Track and Field, where you'd run in place on the track. If you think about, Peloton does not have wheels in many ways, that's a $30 billion market cap company right now that provides a competitive stationary bike that in many ways, you'd argue, is really just -- it's an internet of things device, right? And we look at that and we think about how can you really extract the software away from the hardware and enable more software makers to build fitness type experiences. The addressable market for our business is really massive. It's why we're on a 100-year journey to build a future of competition.

And in all of that, do you see the -- you mentioned the brand-sponsored contests and other brands that you've helped to activate and I gave Bowlero as an example. Is that a small part of the business or something that you think has a lot of potential?

So talking about the brands and brand sponsor competition. Look, I think brand sponsor competition is a truly massive opportunity for the business. So let's look at this in a few facets. Working with brands -- am I frozen?

You're good.

Okay. Sorry for that guys if I froze. The fun of conferences in COVID, my friends. But look, the -- working with brands, it gives us this opportunity to increase the take rate of the business. We studied our P&L. We saw that 75% plus of all of the GMV in our business was going to prize pools. So if you think about this year, we'll do $1.6 billion in GMV. We're going to spend $1.2 billion in prize pools. So having brand sponsor just 10% of prize pools would generate $120 million of incremental revenue, nearly all of which could drop straight to the bottom line. One of the reasons our company continues to win is not only do we -- are we careful to think about the flow of money in our business. But we think a lot about how we can design interesting experiments to optimize our business over time. We're currently running literally hundreds of experiments on the ecosystem, and we don't know which ones of these experiments will work, but we have a threshold of -- you have to be able to move a core metric in the business by more than 15%. In a believable hypothesis on whether or not we'll run one of these experiments. So those core metrics, retention, engagement, monetization and virality. And to say you have hundreds of experiments running at a believable 15% plus yield. It's why we continue to win because we find things that work from that. It's an experiment and, I would say, a case key process that we think very carefully, and we very carefully manage the data in this process. So one of these particular experiments was could we run brand-sponsored competitions, where -- and actually, we start with nonprofits, where a nonprofit could put up branded swag and people pay to enter into the competition. And it turned out not only would they do that, but that we could generate a higher take rate than our standard 14%. So our nonprofit brand-sponsored competitions, they average a 22% take rate. The nonprofit e-mail markets and social media markets, the competition within the games on the platform. And to give you an idea of the scale of this, it started in 2017 as a very small test of a no name, very small nonprofit. In 2018, we [indiscernible] out with Susan G. Komen. So Susan G. Komen, the Pink Ribbon, if you're familiar with that brand. They ran 10 different 3-hour video game tournaments over the course of 10 months up to the end of their fiscal year. And they generated over 25,000 new first-time donors. There is 23% more than they expected, but very interestingly, the demographic that donated in this tournaments was a lot younger. It is literally almost 20 years younger on average than the typical donating audience. And what's amazing about that is they're accessing these new younger donors to engage in their brand for the first time. It's very, very powerful for any brand, right? And we actually went from common -- actually, the American Cancer Society inbounded us, saying we should be this. Their CEO actually during COVID, said, we should be doing more video game tournaments. They run a fundraiser every quarter on the platform for the last couple of years. We've had causes so far this year, they range from the World Wildlife Fund, they raised -- that's a top 10 nonprofit globally. There raised for Australian wildfires before COVID. During COVID, children's hospitals, Red Cross blood drives, more recently, the NAACP with Black Lives Matter movement. What we have seen from that is the proof points that led to brand-sponsored competition with 4 profit brands. Now these 4 profit brands, they're running on average at a 35% take rate. So you can think about how meaningful that is for a 14% take rate business to be blending in more and more 35% take rate tournaments, which is the -- kind of the core monetization unit of our business.

Yes. Really terrific. I mean doing well by doing good has obviously been a big part of Skillz and the impact you've had, it's been significant and really fantastic. So with that, I think we come to kind of the last question. And as you're just about to become a public company, you can count the days, you're going to get a lot of investor attention from analysts, investors, and you'll be working hard to talk to them all the time and keep them updated. But what would you like people to have in mind? You made it clear once you're public, you've got 100-year vision, which is what every fundamental investor wants to see, long-term orientation. And sticking to discipline and control of grow, all the things you've talked about. But the real-world is we live in a kind of quarter-by-quarter, yearly basis. So what would you like to have is in investors' minds as a critical way to think about the company, distinguish it from a lot of other companies in related spaces, but not quite like Skillz as they think about this as an investment going forward?

Yes. Well, I think a few things. One is, when you look at what we're using the proceeds for of the IPO, a lot of it is liquidity for our early-stage venture investors. The founders, myself, my co-founder, we're not planning on selling shares into the transaction. So we look at going public very much as a milestone. We think of it as an important one because it will give us greater access to capital to build the future of this industry. We've been able to historically double or triple the business every year in revenue. We expect to generate $555 million in revenue in 2022. That's pure organic growth. That doesn't include any new content. So I'll give you an example. In that forecast, we don't have Tetris forecasts. Even though Tetris is actually soft launched on the platform. We're not allowed to do the press release about that just yet. We are allowed to disclose it according to all of the lawyers involved in the IPO, but it's really exciting. If you think about Tetris and what that could do for moving this business for beyond the $555 million we plan to build off of existing content on existing geographies with existing distribution. That's really how we forecast. We're a company where we have always been very conservative and very thoughtful about what we want to forecast and what we won't want. We don't forecast India. We forecast all of the India's costs. We don't forecast any of its revenue. And so the growth opportunity we see in front of us is just so massive. That's the -- both exciting and daunting task ahead. It's a thrilling one at this moment, right, at this precipice of going public because we're going to have the capital to really go in and capture and really build this out as really a new industry. And we're expanding into new genres, into new geographies, we're adding in new monetization alternatives such as brand-sponsored prizes, which we just talked about. Today, it's a $15 billion market. We're expanding to more than $125 billion market over the next 5 years. The -- these new monetization models, such as brand partnerships and advertising, they're going to offer additional revenue growth and margin expansion beyond what we've even thought about so far. Our tagline today, it's e-sports for everyone. That means for every gamer, for every developer, for every employee of every walk of life to work here. And of course, for every shareholder to have an opportunity to be a partner of this. We really believe that everyone should be able to share in the future of competition.

And I couldn't think of a better way to end than with that tagline because it really does speak to what the company represents, and you've been true to it. Congratulations with all you've achieved. Thank you very much for speaking at our conference. I know you're very busy with your transaction going public, and we appreciate your time and look forward to more discussion.

Thanks for having me, Brian. Thank you, Wells Fargo. Thanks, everyone. Bye-bye.