Firy Inc. (SKLZ) Earnings Call Transcript & Summary

Welcome. We are thrilled to have Andrew Paradise, Co-Founder and CEO of Skillz, at the conference today. Andrew is always, always entertaining in his interview. He's promised he's going to be entertaining today.

I'll try my best.

So maybe I'll start with a really simple question. You're a Co-Founder of the company. What was the -- what's the founding story of Skillz?

So Skillz is the same business that I first created 10 years ago. So my background, I'm a serial entrepreneur and inventor. My last company invented mobile self-checkout. So first company to do smartphone payments in stores. I started that business. I sold it to Intuit as a Director of Intuit. And I created the tech for Skillz and funded Skillz out of the Gates. I didn't join for about a year. And Skillz, since inception, has been a B2B2C technology platform focused around helping game developers better monetize their art. And specifically, we are known as a competition monetization engine by many. We build a tech that can go into games that runs all of their multiplayer competition securely, and it enables the human developers to actually run real price competition inside their games. Today, from -- so in 10 years, we've gone from a fledgling idea. When I joined 1 year in, we were 5 people, 10 prelaunch customers. Today, we are thousands of game development studios. We ran kind of trailing 12 months over 2 billion tournaments. So a lot of volume. It's a micro payments business. We make money literally $0.60 at the time. It's our -- it's not a lot big money turns as people kind of -- if you've ever played like Skins golf, putting $1 on playing a game of golf, and the winner taking the prize money. It's about adding a sense of meaning to the competition beyond just a virtual reward. And my last plug on what we are is -- play to earn is becoming a really interesting topic now. And Skillz is really the original play to-earn platform. We didn't do it with crypto, of course. So it's not quite as in vogue as the NFT world right now, but it's been the same business since inception.

We'll get there. We'll get there.

Yes. Yes.

Let's talk about the mobile gaming market. It's obviously one of the most exciting TAMs out there. how have you seen mobile gaming evolve over time? And also the monetization models, you obviously have a differentiated monetization model. But have you seen the monetization models evolve over time?

So when I came in 9 years ago as our first CEO, and I've been CEO since, I told our investors that we were going to focus on mobile gaming and on mobile esports. And the first thing they said is, what is esports. And I explained what esports is, and they said, oh, I don't think you should use that word. I don't think anyone will know what that is. And I said, no, the term is going to become very popular in the future, like trust me. And kind of fast forward, and the reason I tell this story in context of the TAM, the overall TAM for us is a subset of mobile gaming today. Mobile gaming when we started, was -- it was really -- it was the runt of overall video games. It was a $8 billion industry going to $12 billion between 2011 and 2012. This past year, just under $100 billion, projected by 2025 to be over $150 billion. So mobile gaming has become the majority of all video games now. And competition is a subset of the behavior in games. We have run a number of surveys throughout the history of the business that showed that about 40% of users would be willing to pay to compete in their favorite video game. So it's about finding -- getting competition with prices into the right game for each user. And we've seen very much that -- we actually -- we have games on system right now that are monetizing at around that level. Now the blended across all of our games on the platform, it's about 15% payer. But if even 15% payer, if you look at where mobile game has gone, it's a 2.9 billion monthly active user market. And we're pretty far from capture, right? There's 2.9 billion monthly active users, 15% of that, 450 million MAU are paying MAU right now, $600,000 approximately. So we have a long way to go to capture all the market opportunity.

That's awesome. One of the key topics around the conference has been the state of the consumer and questions about risk of recession, et cetera. Are you noticing anything with your players around cutting back on spending? Or how are you -- how is your view of the consumer?

So we're over 90% U.S. payer, so very much a North American business today. Post public part of our plan has been to expand internationally. We started going into India last year. We had some setbacks. We're rethinking it before we go international again. So very much a U.S. business today. And the demographic in terms of income base is pretty broad -- pretty broadly spread across all the different buckets of income. So I'd say we have a good view on what's happening. It's a micro luxury business, right? This is people paying us. I mean, to give you an idea of like the monetization, it's not big dollars. It's a user spending 100-plus dollars a year across -- to give you an idea, to spend that as an average user, they're spending an hour per session of entertainment, and they're doing it 10 times a month. So 10 hours a month of entertainment. It's way cheaper than moving. It's way cheaper than -- for us.

For $100 a year.

Yes. It's your lowest -- it's still your lowest-priced entertainment out there. So I actually -- I think we'll see how the recession, if it happens, plays out. But I would expect that we'll be a lot more durable than other forms of entertainment and leisure travel, for example.

That's awesome. You recently signed partnerships with both UFC and the NFL. Can you talk a little bit about those partnerships? And then my follow-up question is around your pipeline of games and developers, et cetera, and how they'll play into the pipeline because they're obviously extremely exciting, both of them.

Yes. Well, I wish the NFL deal was quick. It was 3 years in the making. It started in 2018 with -- I pitched the NFL on partnering with us instead of going directly to game development studios, partner the platform, be able to run a developer competition to find the best developers for their IP. They actually -- they invested in our company as a private company at the time. We didn't put together the commercial deal for 3 years. And you can guess a fair amount of that was going back and forth with a very difficult to license from organization.

The legal team there is formidable.

Very good negotiators. And I think we're pioneering a new type of IP partnership for gaming. And it's important to put together a deal that would actually enable a future for that kind of partnership. We end up putting that together. We announced the competition February last year. We've been on track. So where we are now, we have 4 games or finalists. I think we will be kind of living against the expectations we've set, which are launching a game with the 2022 season. I think more broadly, going from NFL to UFC very much in line with the same kind of deal. We're going -- moving on. We did that deal much faster. It was much easier to put together the second sports league partnership and a similar sort of thing, right, trying to develop great content on mobile against UFC IP. I think you'll see more brand partnerships with Skillz but don't think just about sports. I think you can think about other large IP owners. I'll give you an example of a couple of categories, I think, are really interesting, 20 makers that have iconic brands. You can also think about media companies that have large troves of IP, right? We've just seen Netflix start to develop in-house their own games against their IP. I would argue maybe a better way of doing this to make sure you actually have a compelling game against your award-winning IP is to run competitions, engage the developer communities around the world and find the best developer for your IP. But we'll see, we'll see. That's the -- that's kind of the next steps there. For content more broadly, we continue to be able to source from the long tail. So if you think about the history of Skillz, we started with the first 10 customers. It was really about finding development shops that are literally 1 person up to 20 people, and I wouldn't actually do a deal with a 20-person-plus company, because I learned some painful lessons in mobile payments. My last company's biggest competitor was Square and I learned very painfully from Square and Jack Dorsey that you can sign a 1,000 merchants. And if they're -- even if they're crafts people at fairs, there's a lot to be said for building out powerful businesses in the long tail and aggregating the data. We, at my last company, went top-down. We started with companies like Walmart. And the hang-ups there were pretty significant around trying to get data sharing between customers like Walmart and Target and Safeway. So learning from that, when we started this business, we really focused on kind of a 1- to 20-person company. And then the barrier was we wanted at least a person who is full-time income from their game. First guy was this guy Jo. He had a fishing game. And he said, you know what? Skillz make so much sense because in the future, there will be no work, robots lobotomy and everything. And so how are we going to decide on resource allocation? Well, it's going to be video games. So Skillz must be the future. And he bet his livelihood on partnering with us. And well, the reason I'm telling you this is guys like Jo are the industry. They're just not known. So you look at the last 10 years of mobile games, 7 of the last 10 years, the #1 game was from long tail. One year, it was Flappy Bird. 1 year, it was -- I mean, we think of games now like Battle Royale, the genre, and we think here in the U.S., we think about Fortnite. But the reality is that game was popularized in that format was popularized by PUBG or PlayerUnknown's Battlegrounds. And the studio behind that was a 35-person company. They built the IP. The IP took off. Most video games go viral if they're really like the next hit. And they became status quo. And so Skillz strategy as a business has been how do we partner with the long tail, how do we enable that long tail to have the next great hit? How do we already be embedded as their monetization engine through competition when they take off? That continues to work. So like we have a nice number of games that are at the incubation stage from the long tail but we're not really talking about yet. But we are cautious about forecasting new games in their revenue. One of the things about the way Skillz forecast, we don't forecast any new games working. So the NFL IPs, they're not forecast. UFC, not forecast. Big Buck Hunter is a game on our platform, not in our forecast. We don't add them into the forecast until we have a level of stability around the game and their unit economics. And the reason being another painful lesson when we were a private company, we used to forecast hits. And one of the problems with forecasting hits is sometimes, they don't hit. And then you have very sad shareholders. So we've learned to really avoid forecasting what we can't control, which is I would say, as the game developers call it, finding the fun. But when they do, we see metrics at a very early state in their development cycle, and we can understand how that's going to build into our platform.

Awesome. Maybe I'll switch gears. Last year, you acquired a company called Aarki, which is a DSP on the ad tech side. I guess, number one, why did you acquire a company on the ad tech side? And number two, how is the integration going? And then three, ads, are you going to introduce ads on the platform? Or kind of what's the kind of the thought there going forward?

Maybe I'll start with a little bit of education about the marketing spend in our business, because it ties right into the DSPs and Aarki. So we get the platform going, and we see that these long-tail developers, some of them have very promising content. But unfortunately, their content is potentially small in terms of audience. But we see that they have a functional arbitrage. And what I mean by that in mobile gaming, it's about can you acquire a customer? Is your CAC sufficiently lower than your LTV that you can, or then generate value by running typically digital advertising for mobile games? We saw that we had a bunch of games like that on the platform, but they're not exciting scale. They're games from the long tail, they're going to do 1 million a year. And in order to really scale up the business, we realized we had to establish a publishing arm. And so we build publishing arm into the business, and we start doing deals with our development community where we see the data on small promising titles. We can go to them and say, hey, we'd like a larger rev share. We'll do a 70 to Skillz, 30 to you, but we're going to promote your title. And we basically signed these unilateral agreements with these developers that we have the right, but not the -- we have the option to promote their game. We're not forced. And that we can basically in perpetuity promote these titles. So we started that out in -- actually in 2015. And every year, the returns were amazing. And so what did we do? Well, we doubled our investment. And we did that actually systemically up until our IPO. At the IPO, we went from 100 million of user acquisition dollars to 200-plus million in the last year. And I think we started to see some softness in user acquisition at that scale in terms of just you start to have a pretty healthy level of saturation in the U.S. market. And so there are a couple of things we thought about. One is, well, okay, we're giving up a lot of our margin to the DSPs that we advertise on. In fact, they're capturing 30%, 40% EBITDA margins. So that's one part. And then the other part was we don't have end-to-end data. We're not actually participating in the advertising auction itself. We're reliant on these DSPs, and we're feeding them our LTV data. And so when you really think about like the future of this industry, it will be the companies that control the data chain from advertising impression level through end-user LTV that prosper. And so it's about controlling that data chain. And so we acquired Aarki last year with the plans to move a substantial amount of all of our DSP spend over to Aarki. I think from a kind of timing standpoint, we said to the market, this would take a while. It's not going to be overnight. And I think a while you should think from when we did the deal to really being at where we want to be with the data value chain and a lot of our spend moved over, somewhere between, call it, 8 and 12 quarters, I think we are tracking nicely on that. So we are migrating that spend over to where, in the near future, a majority of our DSP spend will be on our own DSP, thereby capturing both margin and reinforcing the data value chain. And what I mean by that is a company like Aarki, they participate in 5 trillion auctions a month.

That's incredible.

Yes. It's basically everyone on the planet seeing ads. And by participating in those auctions and having that data identifier, we actually tie those 5 trillion auction events all the way through who is spending what and what video game. And now it takes time to get that put together and then to actually optimize that. But there are very few companies that actually have that level of capability. There are a couple of other companies in the world that actually -- like I can think of 2 that have that. Now both of the other companies, their disadvantage versus us is they actually own the games. Skillz doesn't own games. It's a really important thing to understand. We do not develop games. We don't own games. People sometimes get confused as they say, wait a second. I see 1 game signed by Skillz called Diamond Strike. That's our test project that we bought for $5,000 and returned many, many times over capital. But beyond that, we are not a game developer. And that means we have -- we're playing a different game -- well, playing with words there, than everyone else that's in that value chain of data.

Awesome. At your recent Investor Day, you talked about 6 growth drivers. Can you talk about some of these growth drivers? And do you want to highlight any in particular?

Yes. So we hit one, which is marketing efficiency. I don't know about anybody else here, but I do not want to keep spending our dollars to build data for other companies. I want to spend it on our own, DSP. We're doing that. Also just trimming back our user acquisition downwards from kind of a peak level of spend. The first thing you often do in digital user acquisition is you scale and then you cut to efficiency. So we're pulling in payback periods. We're improving the LTV-to-CAC ratio on all of our spend. We're trimming our most inefficient spend first, as you might imagine. That's one piece of driver. We are also -- we're rolling out a significant amount of new product features. We haven't refreshed what we call, for lack of a better term, the core loop, but the core user experience of the platform. So how you -- when you play in the game, how does it feel? What's the drama around entering into a tournament, all of the kind of the beginning and ending around the core content that the game developers make. We're overhauling that and rolling that out this year. We are rolling out a lot more social. So we believe in the future, social is a very important part of competition. Competitive rivalry can be a really amazing experience. And generally, we think of our platform as building the future of competition on the Internet. And when you think about it that way, I think we want to purify competition and bring out the best of competitive behavior through digitizing it. So social is a big piece of that. That's becoming...

What do you mean by social end?

Well, I'll take a really basic example. We play indirectly in a tennis tournament. And you and I get matched up and we're on the court. We can talk to each other. Now I may say something offensive to you, and you may not like it. Now that would be a bad social interaction. We won't probably want to moderate that out. But let's talk about a positive one, like we actually become friends because I respect that you almost beat me.

Yes. Right. Almost.

No, you almost beat me. But my point being that interaction, we may end up becoming friends. Turning that into an online interaction and building that into our platform is something that we think a lot about. And I think it's a really important part of competition, like call it, competitive rivalry building friendships. And we actually -- believe it or not, we even have like monikers for if you go and look up like certain games on our platform, they are, in urban dictionary, as like a place to meet people indeed.

That's interesting.

So we are encouraging social interaction. We are not yet focusing around competition. And I think that's the next step of product development in terms of improving the platform. And then I won't comment on the rest of the 6 piece on going on a long time, but I will talk about cloud gaming, which we announced at our Investor Day. Cloud gaming is just -- it's a critical new development for the company. It's something we've been investing in and had, as a negative drag in our P&L for over 3 years, finally at a level where we can announce it and talk about it. What cloud gaming is, it's running every game that gets deployed. So the deployment process on Skillz, a game developer actually uploads their video game onto our platform before it goes to app source. All those games, when they're getting uploaded onto our platform, we have the signed binary. We actually are the digital rights management system for every game on our platform. So now all of a sudden, when they upload it to our platform, they'll get a link. And that link will literally be a cloud-based instance of the game. And that link, they can put it on a website. They can text it. They can -- you can think of every form of sharing. And instead of the person going to the apps to download, when they tap that link, it will instantly load the game onto any web-based device. So now you have -- yes, you have outside the App Store smartphones. That gives us Android access in a way we've never had. You get computer access. There are 1 billion personal computers. I mean I'm not like particularly bullish on smart TVs, but do you get smart TV access. You get browser-based console access. I mean, literally, anywhere you can think of a web browser, we're now able to play Skillz content and for people to compete. And by the way, not just compete, to fully play and never download the game, right? They can register. They can pay. They can do everything they do in a fully downloaded version of the game, really changes things for us on what it means to discover. And then the second piece of that, that goes hand-in-hand is I think one of the things I said a few minutes ago is really good games go viral. We have not been able to achieve a good of a viral coefficient as I think our platform could because of our lack of Google Play access. And by fixing this, I'll be able to challenge you to play me in, let's say, a very basic game. A game of trivia, like Trivia Crack. We have the #1 trivia maker in the world on our platform. I can challenge you to play in the JPMorgan trivia competition by sending you a text link. And you'll never download. You'll go straight in. And that level of frictionless engagement, I would think would massively clean up our ability to acquire.

So do you then own the data once these developers upload into your...

That's correct. That's correct. And so it's -- we're building out this data store of non Skillz owned games that is getting more and more powerful every day. And it also has real network value for the developers. If you think about it, the early developers part of the strategy of doing small devs was we said to these really small guys, hey, we're going to own the user account and the data. And yes, the 1 to 20 developer studio was like, well, why would you own that? And they actually pushed back a lot. We had to start from the long tail to be able to build an aggregate data and become this almost Switzerland of all the world's data on competition video games. And now we're getting bigger and bigger companies to come to our business at our standard terms of service. And like Trivia Crack, which may or may not be known by the audience, it's actually the #1 trivia game in the world. And etermax, it's a big company. They're 450 people. So sophisticated game development company. I mean the contact said Glu Mobile, before they were acquired by EA, they're about 600 people as a public company here in the U.S.

is Jo still on the platform? Has he published more games on the platform?

Jo had a rough experience with Skillz. We had some tough times early on. When we launched the platform, we were immediately questioned and sort of in the diecast with Google, PayPal and Facebook. And we survived all of that. It was why was that? They thought of price-based competition. Now this is the great irony of NFTs and play to earn. They thought of it as gambling. Playing a video game where you can earn a real-world value must be gambling. And the great irony of that, I'd say, is if you look at everything going on in the anti space and crypto around play to earn, which was by far the biggest new theme at GDC that's passed Game Developers Conference, it's all what we've been talking about for almost 10 years. It's like how do you enable someone to earn a living through playing video games, i.e., be a professional esports player if they can't get real-world value. And so it's been a long journey of being first. We actually wrote the white-label policy with Facebook and got reenabled. But writing that took 15 months. We built the policy with PayPal. We have not yet been successful with kind of changing status quo with Google Play. It's been a very long journey of -- it's funny. People are like, you'll be back up and running with Google in 4 years. And it's like 8 years later, no. But it will happen. It will happen. I think they'll come around. It's -- esports is bigger than ever in terms of the behavior. I think the market by investors is thought of as really small because of the way we attribute value between spending money in games versus spending money on or in competition. So esports just thought of it as $1 billion sector. Meanwhile, video games is a $300 billion sector. And it's really about like, well, which part of the pyramid of competition is influencing spend? And there's a reason game developer after game developer is either building in-house or partnering with Skillz to have price-based competition or games, everything from a Clash Royale having -- I mean, they have a huge effort with Supercell or I don't know if the audience here knows Riot Games, their entire business is built around this competition pyramid, so.

Early on, did you ever have any sort of -- or did you have a regulator come to you and say, well, no, this is not esports. This is gambling.

We actually tried to -- so I'm Boston-based originally. I grew up here, moved away quite a while ago. But we tried -- the business started here in Boston before we moved out West. We tried to get the Massachusetts to trade general to like for review what we're going to do before we started. We hired basically almost every skill-based gaming lawyer we could find. I can talk about another time the recursor process of finding the best skill-based gaming lawyers in the world. We did that. We did the kinds of things. If you already were successful in tech, you would invest in to try to understand this exact problem before...

You wanted like a no review letter basically.

Yes, absolutely. And they were like, well, we're not going to give you a white list letter, but if we don't like it, we'll write you -- we'll let you know. And that was the early relationship. Where we are now, some jurisdictions have given us explicit letters of approval. We don't have them everywhere. Skill-based gaming is an area of law that is very age old. And what we did was we really looked at skill-based gaming law, and we only operated where it was explicitly clear than what we are doing is legal. And so that was actually a much smaller footprint than many companies in skill-based schemes. It's 35 states. 35 states, we actually expanded another 6 states over the -- kind of the last 10 years. Multiple states have clarified favorably on skill-based games for video games without us even engaging. And now we're a level scale now where we -- actually, we hired in pretty amazing person for compliance from -- Nick Green joined us, gosh, about a year ago because now we have, I'd say, a very proactive dialogue with particularly the states where it's not clear because we'd like to see it be uniform clear across every state.

Makes sense. Maybe I'll take a quick pause with a few minutes left to see if there are any questions from the audience. There's a mic back there.

Yes, I had 2 questions. First was on just changes in the iOS ecosystem. Curious how that's impacted your ability to kind of acquire and retain users. And then second is, my understanding of the flow of Skillz is you have to link out to games in the App Store. And is there a path to putting the games inside the Skillz marketplace?

Yes. So the first -- well, maybe we'll go backwards. The cloud-based gaming, another piece of it, is it will allow us to have every game embedded inside one Skillz app or also skillz.com. So we'll be able to run for the first time, effective probably -- I don't want to promise, but probably effective television advertising. So you'll be able to actually run a TV ad for Skillz. The user can go to that -- to skillz.com on any device and actually play instantly without downloading. Of course, what we'll be doing, just because of cloud compute cost, we'll be influencing users to download after they've tried a sufficient number of times in the cloud and because there's a lot of value in kind of distributing that competing back to their own platform. When we -- trying to think about how to -- yes. Could you reframe your first question?

Just the changes in the iOS ecosystem?

Yes. So Yes. So the piece on IDFA, I can comment on, that's public. IDFA disrupted a lot of businesses just because of the value chain from app tracking all the way through to end-user LTV. It's all machine learning. So when you change a piece of it, it actually can cause like a ripple effect across a quarter or a set of acquisitions, right, over months. I think what happened and what we've seen by the time you're in 2022 is you see normalization again to where kind of the industry is all acquiring at a similar rate. Probably the best way to put it.

Any other questions? I'm going to ask one more. You mentioned NFTs. You mentioned play to earn. It seems like a natural fit for you at some point to potentially bring NFTs on the platform as another currency for competition. Can you talk a little bit about kind of the thought long term on it?

Yes. Well, we did our first like crypto project in 2012, 2013. And which was actually using our servers at night to mine Bitcoin. The reason we did that is we were prelaunched,and we're spending a lot of money on both a development cluster and a test cluster, and they're just sitting there every night when we go home until we launch the business formally. And so we decided to start mining bitcoin. And so we mined like side hustle, yes, a little side hustle. Put those servers to work on doing something productive at night and rather than just paying Amazon Web Services, tons of money. So we mined actually over half a dozen bitcoin, may not sound impressive, but it's actually pretty hard I don't know how much you guys know about mining bitcoin. But that was like sort of a hobby. And then our Bitcoin -- the company's Bitcoin got taken in the Mt. Gox scandal, which is in 2014, I don't know if you remember that. But basically, 85% of the world's bitcoin was hacked and stolen. 2015, we started an ICO project. that we never launched. We spent 2 years with the team really like running at that and analyzing and thinking about whether or not we want to do it. We shut it down because in 2017, it's the same year we won the Inc. 5000 as the fastest revenue growth business in the U.S. We just didn't want to co-mingle an ICO project with our real business. And we viewed it as -- we arrived at, this is probably unlicensed securities, don't want to be involved. Today, so 2019, you have NFTs really starting. And I think NFTs are a behavior that has existing games since before even games were digital. I think Riaz is telling you about Magic: The Gathering Cards. And people trade -- collecting and treating Magic: The Gathering Cards, that is an off-line NFT. Another NFT example, if you know about Skins and Counter Strike. If you know about -- I was mining WOW Gold in the early 2000s. And you'd like go and get -- try and get like people in China to do the mining for you at night and then trade it on our website. The reason I say this is like the idea of real-world value in video games has existed forever. And I think it will be real the NFT space right now is so much speculation. Have you met Beeple, I met Beeple recently, and this is the guy who sold a NFT like a work of art for -- I think it was $69 million. And the question I asked in the audience was how much of your ether is cash, and he would not answer. It seemed like he might have cashed in all of his ether into USD. And so I just -- if one of the leading NFT artists is doing that. I think there's just an incredible level of speculation still. And so what we're thinking about is when is the right time to introduce this to our community. So it can be a long-term sustainable business. Because one thing we really believe in is the core business of Skillz, and we don't want to co-mingle it with these fly-by-night endeavors.

I mean you currently have a play-to-earn model.

Correct. And so we don't -- without the speculative of the people betting on the long-term value of NFT, yes.

Yes. Yes. That's awesome. I think time has run out. But Andrew, thank you again for attending, and we will all keep our eyes on a lot of excitement in the future of Skillz.

Thanks. Thanks, everyone.