Firy Inc. (SKLZ) Earnings Call Transcript & Summary

Good afternoon, and welcome to Wells Fargo's TMT Summit. I'm Brian Fitzgerald from the Internet and Interactive Entertainment Research team. We're very happy to have with us skilled CEO, Andrew Paradise. Andrew, welcome. Thanks for having me, Brian. Good to be here.

Thanks for having me, Brian. Good to be here.

So I wanted to jump right into the questions and start -- maybe take a step back to a high level. And can you tell us a little bit about your motivations for founding Skillz, what you've kind of learned along the way what led you here to where you are today?

Sure. Well, by background, I'm a lifelong gamer. I actually learned how to program by hacking video games as a kid. At my last company, we invented mobile self-checkout. So after selling that business, I really want to work on an industry that I believed and something that is really passionate about. So I decided to pioneer in gaming, and there's this huge problem in mobile gaming. We were starting out in 2012. There's a growing disconnect between the art that people love to consume and the art that they'll pay for. So we invented skillz and skillz, it's a B2B2C technology platform. It powers more than 2 billion tournaments a year now. For the developer, we enable them to monetize their art better than through other methods like in-game advertising or in-app purchasing. For the gamer, we're providing them with fair, fun and meaningful competition. These competitive experiences, they really heightened the enjoyment and the art experience. We make money by connecting these different constituents through a transaction fee system. So we run money in, money out tournaments, Skillz-based game tournaments. We run millions of those now, and we take a fee that ranges between 16% and 20% from these tournaments. We leverage the platform in a -- I'd say, it's a highly scalable technology stack. We're enabling tens of thousands of game developers now to take advantage of the software through a self-service developer console and portal. It generates over 90% gross margin as a business. And I'd say more broadly, the way we look at the platform is we are gamifying games, we're heightening the competitive experience. We're really creating the competition layer of the Internet. And we believe the long term that can be a 100-year vision to really build the future of competition.

Yes. So that's great. It almost answers my next question probably succinctly did. And then that was just what effect do you want skillz to have on the mobile gaming ecosystem. It sounds like you're describing almost a democratization of tool sets. Any other finer points to put on what you think is the potential change if you see -- when you succeed as you're succeeding that you're going to have on the mobile gaming kind of market structure.

Look, this is a really different company for many out there. We're a company that's pioneering an industry. We believe that we can change the paradigm for how free-to-play mobile games monetize in a way that's better for everyone in the ecosystem. Before now, the developers really had 2 options on how we can monetize their art, and both of them are methods that weren't really designed for this type of art. So interactive entertainment, video games, it's in our form, right, just like other arts forms for it. And the options for the developer, it's run in truth of ads inside their games. It's interrupt the art, the experience more or less ruin the experience. And the problem you have with that for monetization is for every dollar you're making, you're attacking the retention against the art form. So monetization directly tax retention. Think of that of that as your war of ads versus money. On the other hand, you can do in-app purchasing and game purchasing and what you're doing there is you're basically locking users out of content. It's a lot like for people in the audience who remember share [ were ] -- it's sort of this world and this idea that we're going to give you a little bit free and then lock you out. And then actually, the stranger thing in app purchasing, is you typically create a monetization schema, where you're asking the user or the consumer of the art to pay more and more money, the deeper and the more they like the art. And it's a very strange ecosystem. You're seeing the effect of in-app purchasing or in-game purchasing. It's like a 2% payer ratio on average across the industry. Your average Skillz scheme is monetizing, we're getting 17% of the audience to pay as of this last quarter. So the simple math and the simple concept here is if we get 8x more people per thousand to pay for their art, we can both charge them less, and we can monetize more for the game developer. And that's what we're proving out. And I think it's really about building game-centric monetization and enabling video games to focus on the purest form of art that they can build rather than forcing the art to be twisted into these kind of strange formats just to monetize.

Right. Right. Got it. That's awesome. It's been a little over 12 months since you came public. How has the journey been as a public company? What are the puts and takes there? And within those kind of 12 months, plus, we've seen some wonderful changes. We've had COVID, we have lockdowns, you have iOS 14.5 ATT.

Back to COVID. Back to COVID, now, we were Omicroned.

Yes, back to COVID. Can you talk a little bit about a lot on back there, but all those kind of nuances of what has transpired since you became a public company?

Sure. Look, a lot's happened. We -- I'd say our entire team has learned a lot about being a newly public company. We've scaled our staff really massively in this last year, a lot of new people coming in. Certainly, over the 8.5 years to getting to public, we had folks who had built the journey as far as they could. And so there's been just a bit of a changing of regard, a lot of scaling in people. As we mentioned in our Q2 earnings, the impact of COVID and sheltering in place, it really only hit us and affected us in the kind of first 6 to 8 weeks of COVID. Mobile gaming, if you think about it, one of your top 4 places to play is actually on your commute and then we don't have for many people. So it hasn't -- I don't think mobile gaming is seeing necessarily the same level of like COVID, COVID up or COVID down. It's much more normalized than that in terms of mobile. And that's very much the case in a system like ours, where your retention, your engagement, they get -- it goes hand-in-hand through monetization because it's a transactional system that we're building. In this last 12 months beyond even COVID, we had a big change in how tracking happens in the Apple ecosystem, which is the majority of revenue for our business. The IDFA rollout and the changes that Apple made to application tracking, they were largest expected across the industry, but I'd say it's certainly something we've had to handle. It's it's been, I'd say, a lot of work to get to hear, but I feel really excited about where we are as a business and the team and the path forward into 2022. I'd call '21 for us. It was a huge setup year to get ready for the years ahead.

Yes. Great. Interesting. Any tangential comment on Epic versus iOS from your point of view? I think December 9 is when we hear from the circuit court whether or not they stay it. But from your point of view, any comment on how that transpires?

Well, look, I think the world before the Apple ecosystem, it was an open Internet, right? And the Internet is -- and that's a lot of what's going on here. I think in either path we're really confident about the future of our business. Apple has been a really great partner to us. I think there's a lot to unpack between Epic and Apple and more from either of those companies to comment than us.

Got it. Okay. I want to ask about what we kind of call your platform flywheel or flywheels and that's on the supply side and the demand side is one more important to you? Can you talk about that? And then can you walk us through your plans to scale both sides of that force over the next several years?

Yes. Look, I think as we keep growing the number of consumers in the network, the size of the games that are adopting the platform continue to grow, sort of a rule of thumb that I've always used is we've never signed a -- not a developer, but a gain that was multiples of the size of the network. It's always been like the biggest developer, biggest game joining is roughly equivalent to the size of the network at maximum. So when we think about where we are as a business, we are seeing more and more success with bigger and bigger games. Big Buck Hunter in Q3 really excited to see the performance out of the gates as quickly as that game came on platform. Actually, if you think about it, soft launched on the platform earlier in '21, hard launched in Q3, kind of immediately has become a top game in the sports category I think we're really excited about the potential for that game, and not just for the game specifically but also for the category more broadly. I mean, first versus shooters are just a massive part of the ecosystem. Beyond even Big Buck, we've talked about in Q3 about Trivia Crack. I can't say it enough. I'm shocked that people aren't more excited about this. Trivia Crack is the #1 Trivia franchise in the world. It's available in 180 countries. It's in 34 languages. It has 45 million MAU. It has 150 million annual players. I mean it's a massive game. And the team -- the team behind it, Etermax, that's a 450-person company. So it's a sophisticated, I would say, large-scale development company using their marquee IP with our platform. It's actually -- if you think about the history of skillz, that's the first time that's ever really happened. We had -- we signed Street Fighter back in, I believe, 20 -- it's like 2016, 2017. We tried to get Street Fighter up and running with Capcom. We neither company could get to a level of fidelity on the art where we felt comfortable launching it. But it's really different when you think about Trivia Crack and the fact that we're actually already in market with Trivia Crack payday and soft launch. Look, as typical and I'd say for anyone watching who's thinking about investing and thinking about revenue in the business, we don't forecast new games impacting our revenue forecast. We also can't predict which games are going to work. So just because Trivia Crack is an awesome game without Skillz. It doesn't mean Trivia Crack with Skillz is going to be a hit. They are iterating. We're going to work with them as hard as we can as much and they're going to work as hard as they can care to you to build the future of Trivia on the platform, but we'll see. And the reality of it is, art is one of these things where it's lightning, we can't predict where it's going to happen, but when it does, it's explosive. I do think whether it's Trivia Crack Payday and the real proof point there being that it's a large company using their marquee IP on a platform. And I would say that is a trend that we think will continue to happen with the flywheel, right? Bigger and bigger companies with not even -- not even just a bigger brand name. We partnered with some big brand name companies historically, but big IPs, right? Big IPs going live. And if all competition, we -- almost -- you asked that question about 12 months. It's like I have the siren of like, man, we announced the NFL competition. The investors out there got, I'd say, irrationally exuberant. The price skyrocketed to a level that we really didn't want. What we wanted is for people to understand that one of the top sports organizations in the world is partnering with Skillz to build the future of their mobile business, right, to build the future of mobile games. We announced that in the earlier this year, we've had hundreds of submissions against that. I know I've said it million times to people who are out there and trolling and stock twists or bets. But the reality of it is like the NFL competition is the first of its kind in the world. It's also the first of its kind on Skillz. And so getting hundreds of game development companies to submit proposals. And these are not like simple form filling kind of proposals. We're talking 50-, 60-, 100-page game design documents, which is basically it's like a technical design document describing what they're going to build. That's what a submission look like for each of the company that participated in the competition. We went from that down to 14 companies they're building full video teams, right? So 14 companies are building full football video games. Now will they win a deal with NFL? That's TBD. They have to build a game that hits the retention engagement metrics that fits the NFL judges and the Skillz judges ideas of what will be winners. But I can tell you, 14 is more semifinalists than we expected. So I think why would we have more semifinalists. Well, it's because there are candidly too many games that were too compelling, right? They're just like we are looking at these IPs. And by the way, just because someone doesn't win the NFL branding and the NFL marketing from the competition, that doesn't mean they can't launch a football game, right? That football -- I mean there are actually quite a number of football games on the app stores that have no branding, right? And that actually have been pretty successful. So I think when you think about that broadly, what that means, it doesn't -- it means the developer can build art where they can still be successful without winning the competition. It means that NFL can't put their marketing muscle behind IPs that are very novel in different vectors from just simulation games like Madden, they can look at stuff ranging from trivia to puzzle games with NFL IP. And the reason that's important is that, that allows the NFL to broaden the demographics that are interested in football, right, as an activity. And that's one of the issues with the historical usage of NFL IP. It's like, yes, Madden is great for that core demographic, but let's talk about what NFL IP is there in video games for Midwestern housewives. I mean there's not -- there's actually nothing built. And they've never even tried something. And let's face it, when you think about NFL's viewership, it's about broadening their viewership and engaging the existing viewership. So sorry, I'm going on and on about IP. But I can't say enough, when we think about something like NFL, the reason to announce it and to get out there is to entice other brands of meaningful scale to join our platform.

Yes. No, I appreciate it. I think it's an important topic, and I'm glad we're drilling down in it. The mobile video game market, it's incredibly large. There's hundreds of some genres. You talked a little bit about, hey, we were working with Street Fighter and we couldn't get to work. So maybe that's nice. Maybe I wanted to talk a little bit about as the technology improves, as your platform continues to innovate and improve. Are we reaching a point where it's opening up the genes of applicable IP to be on your platform is -- as it stands right now, is there one -- are there one or several kind of genres that it's most attractive for how is that expanding big buck hunter? Can you give us an update on that? And then I'll hurt there -- I'll stop there, and then I got some more, yes.

Okay. Well, look, competition is such an inherently human trait. So the company Skillz, we're focused on digitizing all the off-line competitive behaviors. And when you think about video games and we start with something like our early categories like card, board games. There are a lot of other casual categories that make a lot of sense for our platform, whether it's Trivia games word games. I can't tell you how many people have told me, why can't you get words in front, Don't worry, we're working on it, arcade games. The reality of it is video games, most of them. The art originally was focused on competitive interactions, either competing with other players or competing with yourself. So if you think about the earliest days of video games, it was in physical arcades. Literally, it was PVP or it was trying to put up that next highest score in something like Donkey Kong. Well, Skillz has been designed around this like very nature of the art and behavior. We made a lot of progress. As you mentioned, a big buck hunter is exciting. It is an asynchronous first-person shooter, meaning you're shooting virtual deer and maybe you're comparing scores with another -- I'm going to a quote for anyone here who's a real hunter, but a hunter, you're a digital hunter.You're comparing your scores, right? You're not actually engaging in first person shooter like a Call of Duty, A Halo shooting at each other. That's why we made the investment into exit games. Exit games Photon Engine. It's now actually fully integrated into our platform. It's a technology. It's really one of the -- one of, if not the best, multiplayer synchronous server technology in the world. And Yes, if we had that on system and integrated when we did Street Fighter back several years ago. Street Fighter might have been able to go, I would say, to expectations set correctly with people. We don't anticipate Battle Royale, team-based first-person shooter type games, Call of Duty style of games to really be a major part of the platform until 5G has rolled because we really need to see -- we need to see latency on mobile phones when they drop off of WiFi, get way below 100 milliseconds. We need to see throughput on -- in terms of bandwidth. We need to see that continue to go up because these more complex schemes, a Fortnite, PlayerUnknown's Battlegrounds, they use a lot of data. a lot of data with very low millisecond ping times. And by the way, I'd even message people, we should continue to think about what the future of this industry looks like there will be more innovation beyond even Battle Royale I mean if you think about Battle Royale, 100-player PVP, that wouldn't have really been possible 10 years ago with the existing computers and technology. It is now we should all be thinking about where computing is going and how that's going to drive innovations in this art form. And there's a lot left to be pioneered, right? We're -- in the next 10 years forward, we're going to see augmented reality and virtual reality becoming, I'd say, very meaningful parts of the computing world. And so too will video game art follow.

Got it. Got it. And so your -- to put a bow around with exit games, your tech stack is integration is progressing well, done maybe already or on its way and the tech stack is there. And synchronous competitive gaming is more a function of that 5G rollout. Is that a fair way to assess that?

Yes, I think that's a great summary. Sorry, I'm long-winded.

No, no, no. Absolutely. The value prop to developers, how would you characterize the parts of your platform that are most important to mobile developers, is it -- is it hosting? Is it platform tools? Is it the payments, the fairness algos? Can you talk -- it's all of that, I assume you're going to say can you talk -- maybe some of those value props resonate with different size or different genre developers as well.

Yes. And a lot of it comes down to who owns the data, who owns user registration. We started the business. We made this decision that we wanted to build a true network. And through network meeting, we needed to own that player edge. We needed to own that player data. As we've been scaling, we've gotten successfully larger games onto the platform. And the thing I'd say that's really important, it's not like we haven't had larger developers sign up but they didn't use their marquee IP. So like Zynga partnered with us in 2015, but they put their game -- then they put on a platform is a game called Back Breaker, which was a bit of a back breaker. It's a very buggy IP. We haven't seen games with lots of bugs really take off. One of the things that's important for the investor community to understand about our business. The fidelity of the game has to be really sacrosanct when you're thinking about like this environment, right? We're talking about people putting their own money into a game to potentially compete and win the prices. Now if they feel like the game glitch to the hardware glitch, any of the tech stack failed them, and it wasn't actually their own ability that failed them and why they lost, they're going to complain. And that complaint may result in a refund. We certainly have a refund line item in our P&L. That complaint may result in just never playing again, even worse. The reality of our business is that it takes actually hundreds of successful payment transactions to breakeven on each newly acquired paying user into the platform. So our business is a lot like running like a really high fidelity ATM. It's like running an ATM network inside a video game. We have to, every time, be perfect. You can't put your card in and punch withdraw $20 and have it fail a single time and ever trust that ATM again, right? And so 2 is the same with our business. And so I think when you think about how we've been building this company and building out the technology and how we think about the bigger developers, it's not the bigger developers, it's the bigger games. These large-scale IPs. I want to be in a world where we get Words with Friends from Zynga if we do another partnership there, not Back Breaker. So at the end of the day, I don't think anyone here watching me today. They're excited about Back Breaker. I think a lot of them -- well, I'm a fan of Words with Friends. I'm sure many of them might be. The tech and the platform that we've created has taken us literally almost 10 years to create all this technology. It is a very integrated set of interlocking technologies. If we lost our own platform, the data we've now captured and the data we use to optimize and build experience it would actually be impossible to replace the existing platform. So we don't think we could do it with our existing team that actually built the system. So we can kind of all think about whether or not that means an individual game company can do it on their own or would be a competitor.

Got it. Got it. A couple more points I want to hit. We've got about 5 minutes left. On the customer acquisition and user engagement front, you spent a decent amount to bring gamers on to the skillz platform to play and stick around. How are you thinking about marketing going forward, especially with some of the partnership -- publisher partnerships you've mentioned. How will engagement marking lever throughout '22?

So I'd say '21 was a year where we spent a lot of money on time, optimizing and thinking about engagement marketing experiments. We're running hundreds of experiments at any time any given time. So we're running pretty sophisticated multi-barrier testing. So split testing like you would on a website, but we're doing it on mobile. We are doing that to really understand that optimal blend between getting people to pay for the first time and to become long-term high-quality paying users. It's definitely too early to project specific changes on how we'll optimize engagement marketing into 2022. But it's definitely possible that there'll be a reduction in engagement marketing relative to revenue next year. user acquisition, look, CPIs across the industry, they're kind of record levels. We've actually seen it leveling off. They do historically go up in fourth quarter in North America as a result of e-commerce and consumer companies increasing their advertising around the holidays. And then we usually see a pretty steep drop off right as we hit the Christmas holiday. As a result, I'd say we in the industry, we typically see slower user growth into Q4 relative to Q3. But we plan to invest aggressively into acquiring new users with attractive paybacks. The way we think about user acquisition marketing is we make a decision every day, every week, every month. On whether or not we want to buy a new cohort of users. And it's all about that front-end layer that we now have with Aarki. We're participating in 5 trillion auctions a month, and we're thinking about those actions, hey, do we like the spot price of this specific type of user cohort? And by the way, we have a data signature when we're in that auction before we actually win the auction, where we can now tie that data signature out all the way through end user final payment. So we're only getting better at the data value chain of predicting, hey, if we win this auction, this is exactly what that user is worth in terms of their LTV, and this is exactly what we want to pay in terms of our payback.

Got it. I wanted to hit on Aarki really quickly. A really interesting acquisition, DSP integration has been progressing well so far.

Yes, yes. And I think -- I just want to -- I always try to strike a balance between people who see me speak about recently and people who or seen this for the first time, but I am going to repeat it. Aarki's integration process, we anticipate that to be several quarters. We don't want people to think it's going to be a single quarter. The actual integration of Aarki and Skillz is complete. The optimization of Aarki technology against Skillz is going to take several quarters. So think 4 to 8 quarters, not 1 to 2 quarters that will continue to reap benefits and slowly be moving towards a better and better reality. We're not trying to force it to go quickly. The reason being for people who are familiar with DSPs, DSPs, especially Aarki. Aarki is a sophisticated machine learning technology, machine learning technologies, they learn off of data sets. So the more data we gather, the more efficient Aarki becomes, but it's also -- it's a process, right? You're like layering data on. you don't want to try and go from 0 to 100 very quickly because, frankly, that's just not how machine learning tech works. It's iterative off of the data that you're capturing. So I'd say we continue to be really excited about the synergies between the 2 businesses. There's obviously the user acquisition piece, the data science piece. But also to remind everyone the developer piece, right, Aarki's top -- they have many of the top 100 game companies as customers. So we now have advertising partnerships with a lot of top being companies. So it's a shared developer base, right? It's the exact same companies that we want to have use Skillz for their next great IP or to modify an existing IP, they are now customers also via our advertising tech. And of course, when you think about the raw numbers on user acquisition, you have to remember that we're paying 20% to 30% to these DSPs that are not part of the Skillz family. So we will be recapturing that 20% to 30% fee as we move spend over to Aarki.

Got it. I want to quickly hit on international, I had some other Aarki questions, but I want to hit on international expansion. You've mentioned that. Can you give us an update on how you're viewing international expansion in India, in particular, how are those initiatives progressing?

India is on track to launch before end of year as planned. The learnings from that, as we've said, we plan to very much follow what's made us a great company to date, test, learn, deploy. So what we're going to learn from launching India will use to launch other countries. One thing at a time, and India is, frankly, it's a massive market. The -- while many people here are going to say, "Hey, not as much revenue as like as a Western country, there is a massive mobile population, and it's the fastest -- one of the fastest-growing mobile populations as well as household incomes, the growth there is really fast. So it's like 1/3 of the U.S. household income. It's like 300 million smartphones with a potential to go to over 1 billion smartphones. So I think it's a very smart move to go into India early. We like it a lot for multiple reasons. As a reminder for everyone watching our guidance does not include India or other international geographies.

Got it. Andrew, we are over time. So we'll have to end it there. As always, thank you so much, very thoughtful and insightful comments and we very enjoyed it.

All right. Thanks for having me, Brian.

Thank you.