Firy Inc. (SKLZ) Earnings Call Transcript & Summary

All right. Good afternoon everyone, Thank you for being a part of our Digital Gaming Summit really pumped to have skills here this afternoon. We're joined by Andrew Paradise. Who's the Founder and CEO. Andrew, thank you so much for taking the time to join us.

And I'll just start off with a high-level question. You did your IPO or you entered the public markets earlier this year and skills has really pioneered the way I think about it as pioneered a new way for game developers to sort of profit from their efforts. And you've also created a super engaging experience for gamers. And we'll get into all that, but maybe for investors who might not be familiar with your company because you still are relatively new. Just give us an overview of skills and what you're trying to accomplish.

Sure. So skills is a B2B2C technology platform that's powering more than 2 billion tournaments as of last year. For developers, we're enabling the developer to monetize their art through a new and better method than they could through other methods such as ads or in-app purchasing. For the gamer, we're providing them with fair, fun and meaningful competition. And we're making money by taking a percentage of all the entry fees on these tournaments. So we charge basically a transaction fee. That fee is typically ranging between 16% and 20%. That's our take rate. And we're leveraging a highly scalable technology stack, which enables us to generate really strong gross margins against those entry fees. So we're capturing a gross margin in the mid-90 percentile, so 90-plus percent. More broadly, our company's long-term vision, we talked a lot about our 100-year vision. It's to go beyond mobile gaming, it's to really create the competition layer for the Internet. We think there's this future that's happening with the digitization of all things as we move from analog to digital worlds. There's this ability to take all of your competitive data to create this competition layer of the Internet and to connect people through competition.

Okay. Fascinating. And definitely, there certainly is several decades of kind of opportunity there with that kind of vision. Let's go a layer deeper regarding your relationships with game developers, in particular. And maybe just talk through the value proposition for your developer partners. And then currently, I think still a somewhat large portion of your revenue comes from a fairly small number of games, which is great for the developers that have those games, but not as great for the other divestitures. So just maybe talk about how you think about sort of optimizing the value prop for all the developers that you're partnering with?

Sure. So the value prop with the developers, we have this really sticky relationship with the developer, because we're so closely aligned with them for success. Our business is a revenue share model with the developers. When they use our software, they sign up to our developer portal, they download our software development kit and actually build their games using our software development kit. So it's a really strong value prop for the developer through higher monetization, and that's primarily a function of -- we actually get more users per thousand to pay for the experiences. So people prefer to pay for competitive interaction. We are getting a much higher payer conversion rate per thousand than other methods. So to kind of put that numbers, our Q3 2021 number, our payer conversion rate was 17%. That's more than 8x higher than the industry average for a next best method like in-app purchasing, which is 2%. So again, 17% versus 2%. So that's really why the system works, so to speak, why there is this really amazing partnership and opportunity for the developer. In terms of concentration, as you pointed out, our business, it naturally tends to have revenue concentration around the top games. Revenue concentration is really the hallmark of success of successful media. For example, when you look at other industries like movies, songs, what's popular and Netflix any one time, it's typically one show or a handful of shows. We also create concentration as a result of our approach to investing in our user acquisition, our marketing against the most performing games. We always want to push the most performing games as they are the best ROI for the platform. Lastly, there are direct benefits, the user experience for concentration. So for instance, the higher the player liquidity in a single game, the faster we can match make players with fairer matches. The top titles in the system, they've continued to rotate over time, but they're not really shrinking or disappearing. That's actually not what's happened over these last 8 years. What we've seen actually is that they grow often quite substantially over time, but they're just not growing as fast as the overall ecosystem. And there are new hits that are coming on to the platform that are supplanting the top title. So today, 2 of our developers, Big Run and tether, they've reached pretty significant scale on the platform. But we're working with many more high-quality developers than ever before. We're actually -- we expect to be in a position to help scale this next class of developers on our platform over the years ahead. Just to note, if you think about our top 3 games, they've actually decreased a couple of percentage points in terms of revenue concentration in Q3. Same with our top 2 developers.

Yes. Okay. That's helpful and insightful. You mentioned marketing the games. And I think I recall you talking in the past about when you get a lot of player liquidity in a game, the entry fees can get higher and sort of the overall economic impact of a game, of an iteration of a game can be larger. And that obviously, I think, impacts how you think about marketing, right, because it does pay the kind of channel more marketing behind fewer games, at least to get them to some level of scale. And I guess you have to balance that with trying to have a robust sort of platform, in general, like I don't know really what the question is there. Like how do you think about that balance, I guess?

No, totally, totally right. So we choose every day which titles to invest in, which sells to promote. So we choose at a daily level, a weekly level, a monthly level. The way we choose which tails to promote, we're capturing this pretty massive amount of data in our business. So on system, our existing system, we capture about 1.8 billion data points every day. When we acquired Aarki, the DSP, or demand-side platform, that actually -- Aarki is participating in 5 trillion advertising auctions every month. And so we're capturing just a really, really large amount of data, but from the -- now the ad impression level to on system to end user purchase behavior. And that allows us to identify promising games through data and it allows us to promote based on the data signals that we're seeing across the network. And as a result, we're able to be much more efficient through our game launch process by supporting the most performant games and having early visibility on how iterations during soft launch can improve user engagement as well as retention.

Okay. Excellent. So moving into sort of player behavior and how that they interact with some of your sort of marketing spend, in some cases, you provide incentives to players in the form of subsidized entry fees, and they spend those incentives several times on your platform, which is pretty cool. Can you maybe just walk us through an example of how a paid entry game works for players? And is there sort of like an average time they tend to recycle wallet balances into new games or just talk about that whole dynamic?

Sure. So maybe I'll start with an example, and I'll talk more broadly about how end user incentives work. So one example, a user will deposit $10 of money using a credit card typically or other payment method into the system. When they do that, they may get a promotion to do that. We call this bonus cash. So they get let's say, $5 of bonus cash, so they'd have a $15 balance total. When the user is then entering into competitions with that bonus cash and when they win in those competitions, they get that bonus cash back as a portion of their price. So in their account, it remains bonus cash, it can't be withdrawn. And then when the user enters into a contest that runs cash and they lose the opponent wins that bonus cash, and it's converted into real tax cash because the other player is unaware that their entry fee was comprised of bonus cash and real cash. So in their opponent's account, it is now real cash, and it can be withdrawn. So whether a user wins or loses, they really do tend to reenter power winnings multiple times until their wallet is basically depleted at which point the deposit and the cycle continues. We've seen a very consistent rate of depositing versus withdrawing in the system over time. When you think about incentives we provide, we provide bonus cash alongside real cash to end users through these various incentive programs, whether you're depositing, you can earn certain bonus cash from promotional incentives like achieving a deep level of gameplay. The most popular center programs that we run are deposit incentives, We have a loyalty program. It's not dissimilar from like an airline miles program where you earn some points every time you play if you spend more, you earn points faster. We call it tickets with the Z, that's practically on system, but the Ticketz loyalty program. And then finally, we have time-based leagues where you're competing in a league, something like the Sprinter cup and would be an example in off-line sports but these kind of time-based leagues where based on your standing on that lead, you're winning a price.

Can you just -- yes, go ahead.

Those programs I just mentioned, they represent over 80% of all the total and eastern centers on systems. So that's -- we can get into the nuance of all the other little bits, but that covers most of it.

Yes. Perfect. No, that's great. And just talk to us a little bit, if you can, about how you think about generating an acceptable ROI on your marketing spend, in general?

Yes. So we're running -- we actually -- one of the really cool things that we did when we created this system is we enabled the ability to run really sophisticated split testing on mobile. I think this has been pretty challenging for a lot of companies. We're running multivariate testing on our engagement marketing programs, basically at all times to determine the ROI of this program. So I think hundreds of experiments running concurrently on different portions of the user population. And as you may guess, when we say the word experiment, not all of these experiments pan out. They're not a good ROI. We shut them down. We continuously learn from them. And then we take the programs that are working and we expand them to population over time. So this is a process we're doing literally constantly. We learned a lot over this past year and the past several years from all these experiments. We plan to use those learnings to continue to optimize all of our marketing programs in the years ahead, including 2022. Certainly, one of the reasons we have to run experiments. We can't predict which ones will specifically work. We go into them, believing they'll work. It is possible that the experiments from 2021 will lead to a production engagement marketing as a percentage of revenue in 2022.

Okay. Cool. That's helpful. So I want to shift into what I think is one of the key sort of investor debates around your stock, which is just the growth framework, I guess. And you just reported Q3 results a few weeks ago. 70% revenue growth. So that was awesome. Congrats on that. And that growth was primarily driven by the conversion of MAUs to paying MAUs. That was like, as you mentioned, 17% and it's been as high as 19% recently. And maybe a year ago, it was 10% or 12%. So we've really seen a big kind of step-up in that conversion. And also from our ARPU expansion, in general, just engagement, right? So -- and I think that sometimes investors want to see like -- MAU growth in addition to all this other stuff. So, Just maybe talk to us, remind us your philosophy there and maybe talk to us a little bit about how high you think that conversion rate from MUA to Pre-MUA can go over time?

So if I could, I would only have paying MAU. The reality of it is, when we're thinking about things at the ad auction level. We're trying to predict which users will pay and then trying to only buy paying users. And so saying in one way, while we should be proud that we're now at 17% to 19% of population paying, there's a lot of room to grow to getting to 100%. I don't believe we'll get to 100%. We've conducted a number of studies over the years, probably one of the most notable ones was with the primary research firm, called Frank N. Magid Associates, a very well-known video game, primary research firm. One of their studies showed that 40% of gamers would like to pay to play for prices in their favorite video games. So kind of let's break that apart. Pay to play in their favorite video against surprises. So that means we have to get their favorite video games on system. I think we're continuing to do that. We're building the content library pretty and methodically. And then we need to -- it needs to, of course, be a price or a competition that is meaningful to them. Interesting. So that might be playing for a cash price like we often have in the system and might be playing someday Candy Crush to win a Chanel bag. It could be -- actually, one of the more exciting competitions we've had for physical prices. Some very high emerging series of events for [indiscernible] playing to win Tiffany's necklaces and a game that was primarily actually women gamers. And it was around Mother's Day weekend, and the competition series was called win-it for you or win it for her. And so I think we have a lot of distance to go to getting to that 40%, that would be more than doubling, paying conversion. We don't yet have all the games, as you know. We are making progress. I was really excited in this past quarter. We got Trivia Crack to sign up to the platform. Trivia Crack for the people who are not familiar with it, it's the #1 Trivia game in the world. 40 million MAU. We definitely want to get to having all 2.8 billion MAU participating in the Skillz ecosystem. But I would say we historically have always focused on getting users to pay as that is our primary value proposition to the developer community.

I think the Tiffany example also is an example of one thing that you've talked about in the past, sponsor prize pools, which I imagine there are a lot of companies who would want to showcase their products in a format like that, so that's interesting, too. Let's shift into talking about sort of player acquisition and, in particular, Aarki, which as you mentioned, is the ad tech platform and the gaming space that you purchased. Just maybe describe what it can do for you and sort of how is it going so far?

Yes. So Aarki is a leading technology-driven DSP, or demand-side platform, as I mentioned a minute ago. Really deep domain expertise in mobile gaming. So a great fit for us because most of the customers were of mobile games. They have a differentiated platform that's built on machine learning algorithms. And over 100 top-tier game developer customers when we partnered with them and acquired the company. They have a network that is -- it's reaching 465 million users every month. And I think I mentioned already, they're actually participating in 5 trillion auctions every month. What our key is doing for Skillz, we're really excited about the synergies between these 2 businesses, because in terms of user acquisition, data science and developer relations, you can see why there's so much natural overlap. The integration of Aarki is now complete. We expect the efficiencies from Aarki in terms of the data value chain to continue to take several more quarters. So we see that things will continue to get better for several more quarters to come, and it will allow us to acquire users both more effectively, so higher paying users, but also more efficiently. In terms of some of the deal synergies, first, we're going to gradually increase our spend on the Aarki platform. We're doing that now. That's going to take several quarters. The financial impact of that will be to capture that 20% to 30% fee that the DSPs that are not owned by Skillz are currently charging us. So that's going to -- you're going to see a reduction in CPI or cost per install. Second, we expect that we're going to further improve the industry-leading performance of Aarki's algorithms by being able to integrate our rich first-party data with their ecosystem. And that's going to enable us to target audiences more effectively for all the developers on our platform, not only when we're using Aarki to win an auction for our developers, but also in all of the other auctions that we participate in with all the other DSPs that we partner with. So pretty exciting when you think about the path ahead and what it means for our business.

Yes, for sure. That was a smart acquisition there. On -- just I wanted to slip in one on your balance sheet and sort of you finished Q3 with about $540 million in cash. And at least in our forecast, we have you burning through a little less than half of that, I guess, before we have turned EBITDA positive in 2023. That's our model. Just talk a little bit about how you're thinking about the balance sheet and how you're thinking about balancing growth and profitability over the next couple of years?

So Skillz can be profitable today if we want to dial back our investments for growth. I think we're -- we see a huge market opportunity ahead for the business. We're a few million MAU business in a multibillion MAU market. So we're attacking pretty aggressively on market capture. And as we think about the path ahead, we want to continue to maintain sound financial discipline while aggressively moving to capture the market opportunity. And if we're able to continue to do that, it's very, very much because we can monitor the performance of our cohorts on the system very closely. We can -- we have so much data in this business. It's really an amazing thing of how digital our business really is. It's probably one of the most digital businesses possible, because not only is all of the commerce and activity in terms of the payments happening online like an e-commerce site, but your also -- all of the fulfillment is fully digital, right? We deliver a video game tournament to every customer. That is the delivery of what we do. So -- MAU really, it enables us to very tightly understand what's happening in every consumer cohort in the system. And it lets us think very carefully about our user acquisition marketing into the system. I think what gives us a lot of confidence on our investment is that our LTVs have continued to be consistent as we've scaled multiples in marketing. I would say somewhat cautiously, right, year-to-year doubling -- or doubling to tripling marketing, not never taxing our marketing budget any given year. And we've seen these LTVs continue to be very consistent over time and to track against all of our prior observed data. These cohorts, they tend to be very long lived, and so they're generating really substantial positive returns over extended numbers of years. We've actually never had a paying cohort of users stop paying. So every cohort on system continues to pay at 8-plus years now in counting. And so when you think about that and you see the data, you can match up new acquired cohorts against all this existing data, you can see that there's a breakeven point on every investment we make in user acquisition marketing and then are these incredible long-lived proper tails. And that's very much how we think about the investment into user acquisition marketing in the system.

Okay. Awesome. In a second, I want to get into some questions about your game expansion strategy, but we're getting tons of questions coming in from the audience. And one of the major theme, there are 2 kind of major themes, I guess, one is India and the other one is the NFL challenge. So maybe you could touch on those 2 topics for us.

Both on track. So India, in Q4. We're in Q4. So we're on track on that. The NFL challenge, I really feel like I'm a bit wistful on this announcement because we wanted to get the fact that we're partnered with one of the greatest sports organizations in the world to build the future of mobile competitive video games. I wanted to get that out there earlier this year. I think people were a little bit irrationally exuberant about it. My wishful piece is, I wish we had messaged, look, we're putting this out here, not for stock price, but we're putting it out because we want more sports organizations to partner with us. We want more world-class brands to trust this platform and to be a part of the ecosystem, whether it's brand-sponsored prizes with things like Tiffany's in the future or it's your next great sports organizations using our platform to build the future of mobile competitive gaming for their industry, the NFL competition has been going really, really well. But I think the reality of it is like the time line from when we announced to when the games will be in market is about 18 months. It's -- it was -- we were never intending to say, hey, the NFL is immediately going to generate revenue in the next quarter. We had hundreds of game development companies participate in the first round of the competition to win NFL branding. We have more companies in the semi finals than we had anticipated. We kind of expanded the semifinals a little bit with NFL because there are too many great games being built. I think we're cautiously optimistic about these games going from where they are now into hard launch and potentially multiple winners of NFL IP and NFL promotion with the 2022 NFL season. Just want to make sure everyone understands he's listening, that is not part of our financial forecast. We don't forecast new games working on system. We only really think about existing games, scaling further as how we think about the future revenue growth of the business.

Okay. Excellent. We have a couple of minutes left. Thank you for clarifying that. We have a couple of minutes left. I wanted to just ask a couple on sort of game expansion. Maybe start with Big Buck Hunter, which was your debut, first person shooter, which launched late in Q3. And you mentioned Trivia Crack payday. Just how are early results with some of these games? And just more broadly, how are you thinking about genre expansion?

Well, I'll start with like -- for anyone here, if you try Big Buck Hunter in a bar arcade, I challenge you to go and try the video game experience and Skillz. It is really similar and only getting better. And one of the really awesome things about mobile gaming is the continuous improvement loop. So we're capturing a lot of user feedback along with the developer partner. The game is iterating. It's already one of the top games in the sports category. I think we're really excited about the potential Big Buck Hunter as well as the first person shooter category going forward. But we can't really provide more specific color on the revenue contribution of Big Buck. It's early, right? It's still early. I mean, yes, it is one of the top sports games. It's a lot of distance for being one of the top sports games to being the next fortnight or whatever people here are thinking about. Trivia Crack, look, amazing franchise, killer developer, etermax has 450 people working there, and they want to build the future of all Trivia. They want to build the next -- they want to build interactive jeopardy. We want them to build that. I think the team at etermax has been incredible in the art they've created to date before partner with Skillz. Trivia Crack Payday launched already into soft launch in Q3. So I can say that because I know you can find it and download it, try it out, see what you think. The -- we certainly appreciate free installs. So if you want to help us lend down our CPI, or cost per install, please help. But it's typical for games that are yet to scale, we can't make predictions about potential revenue contribution. I think generally, the way to think about the system is we've really only scratched the surface of the content opportunity ahead of us. The most popular content on our platform today falls into card and board game categories. These are not the biggest game categories. Even in those categories, there are just an incredible number of people who haven't tried Skillz. Give you an idea of reference point in the United States, our games Solitaire Cube with our partner, Tether, that game to kind of talk about the category, there are 110 million smartphones that installed Solitaire last year. We have not had 110 million people try for that game. There is a lot of opportunity to market that game in that category. But surely, as we look at that, there's a lot of other categories, right? There's things like Trivia, there's word games, there's arcade games. There's, as we noted, just a moment ago, Big Buck Hunter was with first person shooter, right? That's a -- first person shooter, I mean, very near and dear to my heart as a category. There's -- there are opportunities that we haven't even yet landed with things like racing and fighting games. And so we're really excited about the path ahead. One of the reasons we made the exit games investment was to get exclusivity over the most sophisticated multi-player server technology for our business. That partnership is really important, and it will accelerate our expansion beyond just casual card and board games into these mid-core and hard-core games.

Okay. Awesome. We're bumping up on the time here. So that's a great place to leave it. Andrew, thank you so much. Really appreciate all the insights, and we'll look forward to hearing more, I guess, on your Q4 results. But thank you so much for joining us.

All right. Thanks, everyone. Thanks for listening.

Bye.