Firy Inc. (SKLZ) Earnings Call Transcript & Summary

All right. So welcome back to afternoon #1 here at the RBC TIMT Conference. I'm Brad Erickson. I cover Internet here at RBC. Very pleased today to be joined by the management team and principally, the Founder and CEO of Skillz, Andrew Paradise. Andrew, nice to see you. Thanks for being here. How are you?

I'm doing well. Thanks for having me.

Yes. No, this is great. Yes. So we'll obviously run through some questions and get through the latest near-term and long-term items. But just to start, I think obviously, still somewhat newer to the public market. Maybe just catch us up over the last kind of 6 to 12 months. COVID, obviously, I think, was generally a nice tailwind for your business. How have things changed kind of over the last year and bring us up to present tense, if you could?

Yes. And it's interesting to say about COVID because we definitely saw a COVID bump, but it lasted really a short time period in mobile. It's really, at least from our data, more like 6 to 8 weeks. So we normalized a long time ago in terms of COVID. I think, probably, desktop and console games benefit a lot more from COVID than mobile. If you think about 1 of the top 4 places that people play mobile games is their commute, and we lost the commute. Now of course, it was balanced by probably more free time than anyone ever wanted, but we saw about like a -- about a 20% change in engagement from COVID in the first couple of months and then normalizing back to what it was before COVID. And as a transactional revenue model, our revenue changes commensurate with engagement. So similar in terms of revenue changes. Yes. So in terms of the last 12 months, I mean, gosh, a lot's happened, right? We went public actually 11 months ago today. So that was a pretty big COVID event for our business. We've had some pretty exciting partnerships come on board, whether it's Big Buck Hunter, the NFL. Probably, most recently, we signed Trivia Crack, which is -- they're the top trivia franchise in the world. 180 countries, 34 languages, 45 million MAU Trivia Game. So for our business, it's been a very eventful 12 months.

Yes, absolutely. And let's go there, let's talk about content. Obviously, you have things like Blackout Bingo and Solitaire Cube among others that are kind of your top current games. You mentioned Buck Hunter, which has obviously started already and then the Trivia Crack and things like the NFL partnerships. How should we think about the -- functionally, how those sort of add to the model as we move forward here in terms of the new games you're bringing to the platform?

So in terms of revenue forecasting, we don't actually model any new content working on the platform. When we were a smaller private company, we tried to forecast hits, and it is so difficult to predict which games will take off before they do. And what we found was that we were constantly disappointing our investors by forecasting new hits. So we stopped doing it many years ago. We've maintained that discipline til today. So when you think about Big Buck Hunter, when you think about Trivia Crack, those are purely accretive to existing forecast. When I look at something like Solitaire working in the Skillz platform, I think about it a lot like the early days of computer gaming. One of the most widely distributed games in the world is actually Microsoft Solitaire. They came bundled with the computer. I think we're just -- we're in the really early days of what's possible with Skillz technology stack. We're seeing content continuously improve and the size and magnitude of each hit continue to grow. So Solitaire Cube was a great early success on the platform. There's another game before them that you may not know called a Strike! by Bowlero, but it was a bowling game. The order of magnitude from bowling to Solitaire to then Blackout Bingo and successively, literally more than double the revenue of each. And I think we're going to continue to see that for some time to come because we're still so early in terms of content development for a platform. The bigger developers are just starting to uptake Skillz. If you think about a company like etermax. etermax the maker of Trivia Crack. They're a 450-person company out of Brazil. I think one of the things that's pretty interesting about that partnership is a pretty -- not just a pretty sizable studio as far as our industry goes. I mean 450-person gaming companies, it's coming up on the size of something like Glu Mobile. And so you have a sophisticated multi-tier management organization choosing Skillz to build out the future of Trivia, but also, I'd say, even more importantly, they're using their #1 IP. So if you rewind the clock to when we did an early partnership with Zynga, for example, back in 2015 that we announced, and that partnership was one where they were putting kind of the end game on the platform. It was -- it's actually as this football game that they had acquired that was very small, called, Backbreaker. The partnership was a bit of a back breaker for us. It was not the kind of marquee IP we're hoping for with something like, we're some friends, which I would love to see where is the friends on our platform. I think it would be incredible for all the fans of that IP as well as attract new audiences, but I think we're just still in these early days where bigger and bigger developers are trusting us with their #1 IP. And Trivia Crack is a great example of that.

Yes. No, that's a good example. I guess, to date, the business has been relatively concentrated amongst, call it, a few developers. So when you talk about some of those emerging partnerships, is that something you feel like we could see a diversification overtime? And maybe just as a quick reminder, what is -- what are the considerations for why a developer would develop a game with Skillz versus maybe some of the more, call it, traditional monetization method through the App Store and advertising, et cetera?

Yes. So maybe first let's talk about concentration. So you were right on the clock, too, when I was talking about Strike! Bowlero -- by Bowlero. When we first got that gaming platform, it was 100% of revenue basically. We have always seen concentration in the top game on platform. Having said that, if you think about 2018, our top studio is Tether. Tether was, I think, early to adopt a platform. husband-wife couple, ex Zynga employees who left and adopted the platform, early built a really nice business. They -- I think the developer concentration was probably more of a meaningful discussion in content concentration because just I would expect and I think we all expect as an intent team that content naturally has concentration. So if you think about -- let's take a platform like HBO. When HBO had Game of Thrones on, if we looked at like minutes watched on HBO's platform, I'm sure that it would highly concentrate inside of Game of Thrones. Now there's a subscription revenue model, so revenue doesn't concentrate hand-in-hand with engagement, but I think you get the point. Consumers and platforms always are trying to -- the platform, if we have a top piece of content, we want consumers to discover that because it is higher engaging, higher retaining than any of the other content on the platform at that moment in time. And therefore, it's your best way to build your business. So one of the things that's also very interesting, if you look at the history of these games on the platform is, these top games, they are rotating over time. So Solitaire Cube isn't their #1 title anymore. Blackout Bingo is, but they're not -- it hasn't actually shrunk in revenue. It's actually continued to grow, albeit not as fast as the platform as other games. So when you look at the revenue build and you think about the growth of the company, we've been doubling 2 to 4x in revenue over these past several years each year. And the -- what's actually happening is, new games are coming on to the platform, and they're growing faster than the existing top games. Now the top game isn't shrinking, it's just growing more slowly. So that's kind of part one talking about, I'd say, concentration and titles. Part two, why do developers work with Skillz? Well, higher monetization candidly, right? We're effectively monetizing a much larger percentage of audience than the next best alternative, which is in our purchasing by literally orders of magnitude, right? We're able to not just get a larger percentage of audience to pay for the content they're consuming, but we're also demonstrating these incredibly long-lived cohorts of paying users. And these are users that are -- we now have data at 7, going in 8 years. They're still on system and paying every month, and they're paying for an experience that they are opting into every time they play. One of the things that's really interesting about Skillz, it's almost like a virtual arcade machine where you're paying a quarter, so to speak, every time you play. So I think it's really the nature of the monetization and the potential for the content that's attracting these developers.

Got it. Got it. Okay. And then just quickly on Big Buck Hunter. Obviously, that's been the new nice shot in the arm from the content side of things. Maybe just a little bit more specifics on how that -- how we've seen that accretion lately in your numbers relative to Big Buck Hunter coming on the platform?

I don't believe we're actually -- we're breaking out Big Buck. We did share that they went into a hard launch in Q3. We achieved #1 in the sports category. So they're one of the top titles in sports and games. I think there are a few really interesting things about Big Buck Hunter: one is, not only do we have strong initial performance and spending growing very quickly and becoming one of the top games on our platform as well as on the App Store, but it also -- it's our first real proof point in the first-person shooter category, which is -- it's just a massive demographic that we haven't tapped yet. So I think it's early days in first-person shooter, but exciting to have our first proof point that we can make something really work well there.

Got it. Got it. And then moving from the first-person shooter to the synchronous games, obviously, that's where I think you guys have made some investments over the years as well as lately with Exit Games. Talk about what the challenges are there trying to achieve a really solid synchronous gaming platform? And then what sort of opportunity do you think that would unlock as we hopefully get there?

Well, so when you think about the fidelity of console or computer gaming experience you have right now in something like first-person shooter or racing or fighting like a Street Fighter, latency is really important, right? Like we shoot bullets in real time. We punch in real time. We're expecting from the interactive art that we're engaging with that the milliseconds for when you make a decision and the game to it, registering in the game. And for your opponent, all that to happen sub-100 milliseconds. So the latency is really important for the user experience in multiplayer synchronous schemes in order to get multiplayer on mobile to be comparable to PC console. One of the things that we're really excited about is the rollout of 5G is happening naturally from the carriers, and that's going to not just deliver the bandwidth for richer experiences on the go, but it will also deliver the latency. So the theoretical latency of 5G is going to be 1 to 3 milliseconds. In terms of Exit, I think that's an incredibly exciting partnership. We just had our first Board meeting actually in [ Hamburg ] and Exit, Photon Engine, it is the most advanced multiplayer synchronous servers in the world. They have a developer community of 500,000-plus developers that have adopted this platform basically with no marketing. So entirely word of mouth from developers to developers. It really is the best multiplayer servers out there. When we're thinking about the future with Exit and Skillz, we're really working to democratize the game development environment. We're providing developers with a monetization platform that enables them to compete with largest developers and the synchronous servers that can be accessed through the partnership with Exit and their Photon Engine. It's that same approach as we think about a synchronous multiplayer games.

Got it. Is latency kind of the core issue or hurdle that needs to be overcome? Or are there other developments that also need to be scaled there?

Probably, for the knowledgeable people in the audience who are saying, wait a second, I'm playing Fortnite on my phone or I'm playing PUBG Mobile, it is a higher fidelity experience that we offer as a service. So we're talking about running synchronous multiplayer. We're talking about a lossless transaction environment where you have an expectation that you're playing for real prizes that there's a certain level of quality that you may not have when you're just playing for free. So when we're thinking about this, latency is definitely a piece of it, but also concurrency. And then the third one, which is, I think, going to be more and more important over time as we move into the future of interactive gaming is the ability to operate servers at scale with very efficient cost structures.

Got it. Okay. So let's talk about new customer acquisition and user engagement. Obviously, you guys spent a fair amount of money to bring new customers to the platform as well as retain them. It's been high in terms of a percentage of revenue. I think the future vision is, obviously, intend to come down. How and sort of when should we start to see that evolve, would you say, on the engagement marketing side of things?

So we discussed this a bit in Q2, but we kicked off several experiments in engagement marketing to really learn how to best drive end user engagement and monetization. Those experiments they carried through into Q3, and we expect them to continue into Q4. We haven't communicated a target for engagement market as a percentage of revenue. However, as we're looking at 2022, our goal to engage our marketing is to really leverage the learnings from '21, and from all these experiments to focus our investment on programs that are most effectively increasing user engagement and monetization. I would say, it's too early right now to project specific changes, but it is possible this will lead to a reduction in engagement marketing relative to revenue next year. So yes, that means we may choose to forgo some short-term revenue by reducing engagement marketing programs that we believe have less attractive return profiles, but this will, in turn, increase the profitability of the business.

Got it. Okay. So -- and just so I hear you clearly, though, when you think about balancing growth versus profitability, would you say, we're sort of more balanced than we were? Because it feels like you guys were pursuing growth before, I think, head on, and now it feels like you're a little bit more measured in your commentary there. Is that a fair characterization?

I would just say that we're starting to look at it.

Got it. Okay. Okay. I guess -- and then as we think about '22, you're essentially saying, you're going to bring that metric down, but essentially, pursuing higher-quality users, if I'm hearing you correctly. Is that right?

Yes. I mean I think that's structurally correct. I think we're always trying to think about what is the best way to grow the platform efficiently. It's still early, but we'll start that process.

Got it. Okay. And then just on the churn comment. I know you guys don't comment on churn or you don't disclose that as a KPI. But just in general, what have you sort of observed churn wise historically on the platform? And now that we've come out of COVID, what should be sort of -- or what are your rough expectations around churn on the platform overall in terms of paying users?

So we don't specifically talk about churn, but as user growth and liquidity increases on the games and also on the platform overall is -- we have a very large percentage of users playing multiple games, playing and paying. It provides us with more and more data across our footprint on how to attract and retain more players. So one of the things that's really interesting about DSPs like Aarki as well as everyone else in the industry is, they function off of machine learning algorithms that only become more and more powerful as they increase their data sets. So I would expect us to be able to grow our platform more efficiently over time. And you can you actually see in our stockholder letter that our LTVs have been very consistent.

Yes. Yes. Absolutely. And then just on the sort of seasonal trends we just saw. I think you guys obviously beat users nicely last quarter. GMV came in a little bit late. What are we -- relative to some of the high-value targeting you just talked about, what are we sort of seeing at the moment seasonally as we move into next year?

Well, every year, right now, Skillz is over 90% North American revenue. So we are very much affected by the patterns in North American behavior. So one of those going into Q4 year as it gets started in cold. Cold weather is good for attracting players to video games. I would say, conversely, last year with COVID, we saw a pretty huge jump in online advertising as a lot of traditional retail was trying to replace revenue that they were losing in physical footprint. This year with the vaccine, I think things may be different. But you're kind of balancing what was kind of the watermark for online advertising against changes in behavior around onboarding. Now having said that, when we onboard a cohort, whether we onboard them in December or we onboard them in July in North America, we see very consistent behavior.

Yes. Yes. Got it. So let's talk about Aarki, very interesting DSP acquisition in the Ad-Tech space you made earlier this year. You've said, it's early days. It's going to take, I think, 2 to 4 quarters or something to sort of get that more fully integrated. What is the broader thesis there, though, just to reset for a moment?

I love being public. So I'll tell you, we said more like several quarters, not 2 quarters. To remind everyone.

I didn't mean to put words in your mouth. To set the record straight...

Yes. Well, you cut the timeframe down in half. It's like -- but we want to do it twice as fast with -- happens much. No, but jokes aside, Aarki is doing well. So give you a little bit of an update on the integration. Our efforts to reduce CPI through acquisition, optimization, leveraging Aarki, they're still early, but they're still in line with what we saw prior to the acquisition. The integration of Aarki is now complete. We're in the process of migrating more and more of our user acquisition investments to their platform. I don't think it would be correct to message people that we should expect all of our spend to ever be on Aarki, just a more and more meaningful portion of our overall user acquisition budget. I'd say, beyond that, we laid out several different synergies between Aarki and Skillz. One of the things that's really important about Aarki, Aarki is participating in 5 trillion auctions every month. And so we're actually capturing data now at the auction level and tying that all the way through to end-user LTV. And there are very few companies in the world that have the data to do that. That, over time, will become more and more meaningful because if you think about it, what that means is, you'll know before you win an auction exactly what you want to pay -- like more and more accurately. And so I think that's a really exciting thing in the future of the gaming world as well as Skillz. So whether it's these are acquisition synergies, the data science that I just mentioned, obviously, selling developers -- advertising or selling developers, skills, monetization, those go very hand-in-hand as well. We have some, I think, exciting updates coming soon about what we're doing over there. And when we think about when we're going to see the benefits, while you should see this showing up in terms of how efficiently we can scale UA investment and user growth. We're -- as I said at the beginning of this feel about Aarki, the right expectation is that this is going to be over the next several quarters, not 1 to 2 quarters.

Got it. Okay. And then...

Net-net, going well, but progress takes time.

Progress is ongoing. I won't leave the business anymore, I guess. Yes. And then on the -- it sounds like, obviously, on the cost per install, you'll start to get those benefits down the road. What about in terms of feeding your data over to Aarki and sort of their pre-existing business? Do we expect sort of any tailwinds to that piece of it, say, within the next 4 quarters or start to see it out beyond that?

So right now, I would say -- so Aarki's Q3 results, they're in line with expectations. We're not changing expectations for their revenue contribution for the rest of this year. I do think that an advertising network with our data footprint and our data lake will be advantaged over others over time. So I would expect that we will be able to grow that business nicely in the years to come. We're very excited about the future of the integration there.

Got it. Got it. And then talk about international markets as you look to expand. I think you've talked about India, in particular, has been a focus before the year ends here. Just any updates you can offer there? And sort of what we should expect from a user growth perspective going forward?

Yes. So we're on track to launch in India before the end of the year. As we've been messaging that we'll be live in Q4, it's now Q4. We are planning to take the learnings that we have from our India launch to inform our strategy before we roll out to other countries. Just as a reminder, we don't include any of the international countries in our forecasting.

Got it. Got it. So -- but you're -- safe to say that you're on the precipice of beginning to invest in that market. If I'm hearing it exactly.

Yes. Yes, that's right. That's right.

Got it. Got it. Got it. Okay. And then just lastly, just in terms of the types of games, and you touched on this earlier, but remind us where you see sort of the low-hanging fruit for categories of games that could drive growth more meaningfully? And obviously, we've gotten into Big Buck, would be curious to hear about what you think the NFL might offer? And then other categories.

Yes. Well, I think we've been really pleased with the early days of the NFL competition. So we had hundreds of game developers submit proposals for that competition. It's actually the first time we've had to developer competition for IP on the platform. And I'd say, probably, the first of many to come in the future. The -- so both -- and those proposals both came from our existing community as well as the NFL's community. So we had about -- it's about half new developers joining the platform for the first time. So I'd say, great from attracting new developers to build content on the platform, but also to engage our existing developers with, I think, a meaningful competition for not just the trademarks and the industrial property from NFL, but also the opportunity to be part of the NFL's marketing muscle. This is an organization that has a 200 million fan reach and getting bundled into their ongoing digital marketing, things like nfl.com. It can be incredibly meaningful to one of our developer partners and also to our platform. So we went from hundreds. We narrowed the pack down to a little over a dozen developers. We plan to get from semi finals to final so the competition to about 5. We originally were planning with NFL to have one winner. There may be more than one winner. So we do have the right in the competition to have more than one winning piece of IP. I can tell you that there are multiple concepts in games that are being built that have a lot of promise, but with a message everyone watching is that it's a driven business. And so we see the data on the games. I certainly wouldn't want them to kind of opt for weight on what all this means. I think what it definitely means is a marquee sports brand in the world choosing Skillz and trusting Skillz definitely means that hundreds of developers are engaging in building content for our brand. And it really upends the entire traditional licensing model to the gaming industry. I think it proves all of those things at this point. And I'm hopeful, and I think so is the NFL, so obviously, the company is competing that they'll build a hit, and that hit will be a meaningful long-term value for the NFL for Skillz into that development company. But you have to remember, I mean, all this is -- we're just scratching the surface, right? It's we're a 3 million MAU system in a 2.8 billion MAU worldwide gaming market. Yes, I mean NFL's a piece of it. Look, I would say, we definitely plan to go and get other sports organizations involved. They're not the only one that we plan to partner with. So you can probably expect progress from us on other sports partnerships in the nondistant future.

Got it. Got it. That's great. And then lastly, just you remind us just on your target model. Obviously, you're pursuing growth at this point, so we recognize it's not going to be profitable for a bit. But what is kind of the long-term target model here factoring in things like the engagement marketing we mentioned over time seeing leverage, et cetera?

Yes. So when we're thinking about the long-term optimization of profitability of the business, we're making this decision every month on whether or not to invest in user acquisition. And I think a lot of people don't understand that about our business. So we buy a cohort in a given month, and that cohort has a return profile and a profitability profile. And actually, we -- right now, we use historical LTV data to model future performance. And what we've seen over time is that the cohorts continue to outperform forecast as we continue to improve the skills ecosystem, both not just the content on the platform, which we've obviously hit quite a bit, but also the feature sets built on the platform. So it's exciting to think about what that looks like over time for each new cohort because they are actually doing better than we anticipate. As a business, we have a 30% EBITDA margin as our long-term target. The choice to invest our profitability into user acquisition each month is one that we don't take lightly. I think we -- we think a lot about that process. I mean, the Aarki deal is just one example of why we want to optimize these acquisition and our investments. But user acquisition and the current model also is not the only -- kind of the only pieces that we're changing and optimizing the business. Another piece that we've talked about, I think, quite a bit over this past year is optimizing the take rate. So many of the marketplace models, they operate more like a 25% take rate. Our marketplace model today, we're on like a 15% take rate. We plan to optimize our take rate, not by increasing pricing to consumers, but by actually engaging brands and brand-sponsored competition on the platform by optimizing the engaging marketing and by scaling our infrastructure. All of those things will improve the per unit profitability of the business over time, but I say, broadly -- sorry, go ahead.

No, no, you're good.

I was just saying, as a philosophy, 1 of our 7 values is frugality and frugality for us means high ROI investing. It doesn't mean being cheap, so to speak. Some people see that and they say, oh, these guys, they're pinching pennies. It's not about pinching pennies, it's about making sure that every penny we deploy we treat the capital as if it's our own. We think very carefully about the return profile, and we really think about maintain that discipline across all areas of our business. It's a long road from 3 million MAU to 2.8 billion MAU in terms of where the platform can go. And I think we want to get there as efficiently as we can.

Yes. Yes. Got it. Great. Well, Andrew, it's a pleasure talking with you. Unfortunately, we're out of time, but thank you. And I hope you have a great rest of your day.

Thank you. Thanks for having me.

Yes. Have a good day.