Firy Inc. (SKLZ) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Sorry for the slight delay there. Thanks for joining our conference. It's been a great event. I'm Michael Graham, Internet analyst here at the firm, and excited to have Skillz here this year. Andrew Paradise, the Founder and CEO. Andrew, thank you for being here. Skillz is a really exciting company sort of pioneering how mobile video games get developed. And since you're a relatively new public company, having completed your entry earlier this year on the public markets, can you maybe just give us a high-level overview of Skillz and just talk about how this is a new way for game developers to monetize their efforts?

Sure, and thank you for having me, Michael. Skillz is a B2B2C platform that enables developers to monetize their games through competitive gameplay and for players to engage in fair, fun and meaningful competition. We're probably best known for running one of the biggest -- what was once referred to the skill-based gaming technology stacks but is now often being thought of as casual esports. We power everything from the analytics to the live operations of all the games on our platform. We handle payments. We run end-to-end user support, so all the consumer complaints and problems, whether it's allegations of cheating that we referee or something that's basic as my game crashed. But we do all of this so that the development can really focus on what they do best, which is making great games. And the concept behind that is we're going to democratize game development back to making it about building a great game not about who can build the best data value chain from an impression on the [ NAND ] network through end user LTV, and I think that's a great change for the world because it will bring more meaningful content to all the consumers out there that are looking for it. Last year, we hosted 2 billion tournaments total. And that involved, in terms of payment processing, we did $1.6 billion for GMV, or gross marketplace volume. That resulted in net revenue of $230 million. This year, analysts are expecting us to generate $390 million of revenue, which would represent a 70% year-over-year growth.

Awesome. Let's go one layer deeper on the developer front and sort of your relationship with game developers. You touched on this, but historically, sort of the freemium gaming market was -- has been, still is develop a game and monetize it with ads and in-app purchases. And the vast majority of people playing that game are doing so for free. You've got this value proposition built on competition. Maybe just to level set for the audience, just give us one example of how, a, competition works. But then more deeply a large portion of your revenue comes from a relatively small number of games still. Talk about how that impacts the developer value proposition.

Sure. So the value prop to the developers is quite simple, actually. We help them monetize their content better than they could on their own with either in-game advertising or in-app purchases. And that's -- a big piece of that is getting a much larger number of consumers per thousand to participate in paying. So if you look at Q2 for us, payer conversion from free to paid, we were converting 19% versus an industry average for in-app purchasing of 1.5% to 2%. It's not unusual to see a large portion of the revenue of the business coming from a small number of games and developers. In fact, we've seen this pretty much since we started the business. So if you rewind to the launch of the platform, the first hit on the platform was almost 100% of revenue before we started having more developers join and find success. So the way I think about it as a kind of future state of the business is that we'll always have concentration. Concentration, it's really a hallmark successful media because users in games, just like other media formats, they -- if there's a blockbuster movie out, they flock to watching that movie on Netflix. If there is the new most popular book out, everyone is going to read it. The top pop song, right, I mean the very nature of the top 50 is exactly this. And if we ranked it by minutes spent listening to a top 50, it's probably disproportionately the #1 song. So what's really important is on our platform to understand for investors is that these top games on our platform aren't actually declining. They're just getting supplanted by the next top hit. So if you rewind the clock to our 2014 #1 hit, it was a game called Strike! bowling, which has subsequently partnered with actually the largest bowling corporation in the world called Bowlero, and it's now bowling by Bowlero. But that game actually is significantly larger in revenue today than it was . But what happened over time is as new developers came on and the -- I'd say, the competition between developers to build the best content for the consumer continues to rise, you saw new companies like Tether find success on the platform. And that -- their first hit was, I, believe 2018. They're actually no longer our top developer -- top game on the platform. They are still the largest portion of revenue because they have several hits. But if you look at like the Q2 revenue of Tether, it was 42% of the total versus 61% in the prior year period. But the important thing to understand is Tether's revenue actually grew significantly over that same time period. So I would say the way to think about it is the quality of the developers and the number of games on the platform only continues to grow. Q2 games were actually greater when we think about a metric we care a lot about, which is games that do over $1 million of GMV. It was actually 42 games that did over $1 million in GMV for Q2 versus 36 as of the end of last year.

So I have decent skills in that Bowlero game. I wouldn't -- I'm not very good but decent. So seemingly...

You and me both, Michael.

Fortunately, there's a guy out there [ in the new slot ] machine.

You don't want to play slot machine.

We don't want to play him, okay. Well, we'll get to this later, but I live in Connecticut. So I can't play him for money anyway yet, but hopefully soon. So you've got all these developers. They build these games. They build them to be monetized via competition as opposed to being monetized via ads and in-app purchases. And as you mentioned, this competition-based monetization is much more reliable, much more lucrative. They give you that game, and then Skillz takes that game and, in most cases, Skillz manages the marketing of those games. Talk about how you allocate your marketing resources. Is it very top heavy to a few games? Is it democratized across a lot of games? And just how do you go about deciding which games you really want to get behind?

Yes. So there are now tens of thousands of developers signed up to the platform, and so a lot of content being built pretty consistently every week now and launching. When we think about engaging in promotion of a game, it's actually -- it's an addendum to our developer in terms of service. And we get the option but not the obligation to promote a game and to auto-renew our promotions. So we started that concept by approaching a developer using data. So when you think about the stages of game development, maybe to level set in case the audience isn't familiar with this, but there's typically -- there's 3 phases, so to speak. First is your concept and development phase. And so in the -- drawing a parallel to the NFL challenge, the first stage was creating a game concept and basically creating documentation on what kind of game you're going to build, and you think through and build out what's called a game design dock, which is sort of a parallel to a technical design dock in other types of software. You get to a place where you feel confident about that design dock and then you go into development. So that's kind of your first phase. Once you have that game developed, and this is where like in the NFL challenge that we're running, where the 14 semifinals are right now, they're building the game, and they'll arrive at soft launch. Soft launch is the hardest phase base. Now you've actually built a game and you have to face the cold reality of the data of whether or not this game is highly retaining and highly engaging. At end of the day, we can't make the games fun if they're not. What we do is we amplify fun as a business. So this is really your hardest phase, the soft launch phase. And candidly, a lot of games die here. They can't get past it because what they'll do is they launch. They gather data about user cohorts. They look at that data and then they try to hypothesize about the problems in the core, content and iterate. And I'll give you an example, Fortnite, which people think of as an overnight success, it was 7 years in soft launch. So it can be a long time in soft launch and before you arrive there. And then, of course, once you get to the end of soft launch, you're going to enter the phase, which I'm sure is the phase where most people understand games, which is this hard launch phase because that's when you're really blowing out marketing. But it doesn't really do a lot of good to pour marketing dollars into a product that doesn't retain. So when you think about Skillz business, we're actually capturing more data on user game play than any other platform in the history of gaming. And so we captured 300 data points in every 5 minutes of game play. And we're using all these data signals to actually predict which games will be successful. And as a result, we're able to be highly capital-efficient about deciding which teams to partner with to promote. As a platform, we really don't play favorites when it comes to who bills next hit because it's all up to the developers. But what I can tell you is we are always monitoring the data signals coming out of these games. And we're basically -- we've developed a level of pipeline of minimum need on things like day 1, day 28. So that's your first day retention, how likely is the person to come back the next day. Day 28, how likely is that person continuing to play 4 weeks in. But we look at those metrics and we very carefully monitor them to understand which games would warrant a promotional test. We then get that amendment in place. We then run a promotional test. If the test like a test audience in a movie studio model, if the numbers are compelling, we then start scaling up the marketing budget to where you see that what we're doing with someone like a Big Run or a Tether. And what I can tell you is since going public, one of the most exciting things is exposing our financials, going through the go public process. It's enabled us to attract many more high-quality developers than we've ever had. We have the highest quality developer base we've ever had in the history of the company now. And so it's really exciting when you think about the next 6 to 12 months as they build these games and launch into soft launch. It does take roughly 6 to 12 months from concept to launch, if you think about it, we've been public a little over 6 months. And so we're just starting to see some of these games in soft launch. One that we're really excited about but cautiously optimistic is the right way to message is Big Buck Hunter: Marksman. This is our first game in the first person shooter genre that appears viable. And it's -- obviously more genres equals more demographics. More demographics is only a good thing for a platform like ours.

That makes a lot of sense. And one other kind of dynamic -- we're going to dive into your business model in a second, and I want to just mention to the audience if there are questions you'd like me to ask you Andrew, just go ahead and put them in the system. I'll do my best to get to those. But one other thing on that, Andrew, is that there's this really good benefit to sort of your unit economics in a game if the amount of wager initially is higher, right? And I think that, that really comes from building player liquidity around the game. Can you maybe just talk about if you have an incremental marketing dollar, does it make more sense to spread that out to a game that's just getting started? Or does it make more sense to throw that after a game that has a lot of momentum, where the prize pools are bigger?

Yes, it's really complicated. It's not quite that simple. I think one of the things that's really amazing about what we've done as a platform and understanding the effect of liquidity on monetization better than really anyone in the history, and part of that is player management and player rating systems and how to rightsize the algorithms to ensure fair matching. When you think about -- I would say, generally, we are more interested in retention and engagement than monetization as a business. So we focus first on keeping users on platform than on getting them to that average of over an hour a day session and trying to -- again, a next metric, which isn't really one we report but one to think about is we also think about frequency of play over a week. So we want to get more users from 1 day a week to 2 days a week to ideally 7 days a week. And we actually have a double-digit percentage of users who play 7 days a week now and climbing. But that's the goal, is to get this to be -- really our daily entertainment and replace another product in your household like television. That's the way we think about it. So when we think about that engagement dollar broadening the pool to get to greater depth, less so. We don't really do that to deepen liquidity in the game and do you have people to play higher stakes. The higher stakes, the template mechanism, the way it works, is we know what level of speed of matching and what level of liquidity and player variety are optimal for creating the right level of retention curves for different games. And so we're able to calculate when we should launch a higher stakes tournament in a given game and not just whether it's head to head but also 3-player, 5-player, 20-player per tournament or -- and lots of -- what I think to the user probably looks like custom-written events but is actually driven by machines. So we run a large amount of what appear to be like live events for custom prizes, and they're actually segmented out by user group so that every user in the -- in those tournaments has an opportunity to potentially win one of these, what appear to be larger, format tournaments. But all of that is automated. So we're running like -- to give you an idea of scale, we're in thousands of live events a week with a team of under 10 people for all of live operations, for all games in our company.

Yes.