Firy Inc. (SKLZ) Earnings Call Transcript & Summary

Good morning, everyone. I'd like to welcome you to the Firy Inc. Second Quarter 2026 Results Call. [Operator Instructions] At this time, I would like to turn the conference over to your host, Richard Land from Alliance Advisors to begin.

Good morning, everyone. Firy issued its 2026 second quarter earnings release yesterday after the market close, which is available on the company's Investor Relations website. Let me read the safe harbor language, and then we'll get right into the call. All statements and comments made by management during this conference call other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Firy cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during the call. For additional details on these risks and uncertainties, please see Firy's annual report on Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange Commission and Firy's subsequent public filings with the SEC. Firy undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, we will reference various non-GAAP financial measures and KPIs during this call. Please refer to our earnings release for an explanation of these measures and how we use them and in the case of the non-GAAP financial measures, reconciliations to their nearest GAAP equivalents. With that, it's now my pleasure to turn the call over to Firy's CEO, Andrew Paradise. Andrew, please go ahead.

Thank you, Richard, and good morning, everyone. Q2 was, without question, the most consequential period in the company's recent history. Our Firy rebrand is now fully in the market. The Papaya verdict and judgment are in, and we're executing against our strategies to unlock value for our shareholders. Let me start with a review of our second quarter results. I'll then highlight 3 significant developments since our last call in May before moving into our operating businesses. For the second quarter, GAAP revenue was $31 million, up 6% quarter-over-quarter and up 23% year-over-year. Adjusted EBITDA loss, excluding litigation-related expenses, was $2.7 million, a $4.5 million improvement quarter-over-quarter on a normalized basis. Including litigation-related expenses, the adjusted EBITDA loss was $13.6 million compared to a loss of $12.8 million in the first quarter and $11.4 million in Q2 2025. We also have an update regarding our balance sheet. As announced on August 4, we are redeeming $80 million in debt, saving the company approximately $2.8 million in interest expense before those notes' maturity date. This leaves $50 million in debt outstanding. We're evaluating options to further strengthen our capital structure and liquidity position. As part of our June rebrand to Firy and establishment of a holding company structure, we refined how we present our results. Beginning with the second quarter, corporate operating expenses are reported separately. This gives investors a cleaner view of our businesses. This is a change in presentation only. It has no effect on our consolidated financial results, and we have recast prior periods on the same basis. Looking at our 2 operating segments, RZR exceeded $10 million in quarterly revenue for the first time, growing 6% quarter-over-quarter and 75% year-over-year. The second quarter was RZR's fourth consecutive quarter of profitability with each quarter growing from the prior period. We expect RZR's profitability will continue to build through the back half of the year behind strong revenue momentum and operating leverage. For Skillz, revenue increased modestly quarter-over-quarter. This included a net $1.5 million benefit from 2 onetime items. Excluding these adjustments, Skillz revenue was down approximately 3% sequentially, consistent with the 8% decline in paying monthly active users. Moving on to recent key developments. First, I'd like to introduce our new CFO, Alex Walsh, who joins us on the call today. Alex officially joined the team on July 13, and he hit the ground running. He brings an extensive track record of helping consumer-focused businesses accelerate top line growth while driving profitability. I'm confident he'll replicate the success and contributions he delivered at his prior companies, Aristocrat Gaming, The LEGO Group and Procter & Gamble. Several of you have already had the chance to connect with him directly. As we transition from the turnaround into our growth phase, Alex will be front and center as we engage with Wall Street in this next chapter. I also want to thank Gaetano Franceschi, our former CFO, for the steady hand he provided throughout our turnaround and for the support he's shown in bringing Alex up to speed. The second significant update is our rebrand in June to Firy. Firy is the parent company together with its 2 reportable operating segments, RZR and Skillz. RZR is our high-growth, AI-powered performance advertising business, helping brands acquire and retain high-value users. Skillz is our real money skill-based gaming operation with more than 90 million registered users. And Beamable, which we acquired in the first quarter of this year is reported within our Skillz business, is our developer back-end and live ops infrastructure business. Beamable is building infrastructure technologies for the gaming industry with Skillz as a first customer and making progress on its objectives. The rebrand reflects the structure that's already existed for some time, interconnected businesses supported by shared corporate resources. Each of our businesses shares a customer, the game developer and serves this customer at different points in their monetization journey. And more importantly, our 3 businesses share something rare, a compounding flywheel that operates in a way a few other businesses can replicate. The third update concerns the recent court ruling in our litigation against the Papaya Gaming. As you'll recall, in April, the unanimous jury in the U.S. District Court for the Southern District of New York found Papaya liable for false advertising. A few weeks ago, the presiding judge rejected all Papaya's post-trial challenges and awarded us approximately $730 million. This is more than 70% above the original jury award and more than double the previous largest false advertising award in U.S. history. The natural question for shareholders is what happens next, and specifically, how we collect. Papaya is a private company, but public trial exhibits give the public access to their 2023 audited financials. Papaya earned $461 million in revenue and $73 million in net income and had $135 million in cash at the end of 2023. In Papaya's more recent filings with the Delaware court, Papaya's CEO represented to the court that the company has achieved annual revenue of approximately $500 million per year, demonstrating the top line is on par with their 2023 financials. An appeal would go to the Second Circuit. Federal appellate courts affirm the majority of the civil judgments they review on the merits. We remain confident in the record and the judgment while recognizing that no appellate outcome is guaranteed. We're pursuing every avenue available to us to return value to our shareholders. As Papaya's largest creditor, we intend to assert our rights in both the Israeli and U.S. proceedings. Looking back over the past few years to today at trial, the evidence showed that Papaya advertised billions of dollars in prize pools while using bots and over 60% of prizes were never paid out. The jury found Papaya liable and the court upheld those findings in full. Our team invented a category. Litigation is not our business. Building great products and services is. We took on these cases to defend our business and the category we created. Papaya's now stated that it's no longer running bots. As our core U.S. market returns to fair competition, we expect to benefit. A reminder on where the rest of our fair play litigation stands and where it goes from here. In our litigation with AviaGames, the 2024 jury verdict translated into an $80 million settlement, of which $15 million remains outstanding in 2 equal payments of $7.5 million over the next 2 years. Our case against Voodoo continues to move forward in the legal process. And on a separate note, the trial date in our litigation with Tether Studios has been moved to 2027. Let's turn to our operating strategy. RZR is demonstrating strong performance through product-led growth. Today, the platform processes more than 6 million queries per second across more than 10 billion devices. RZR's growth is coming from 2 areas, increasing existing clients' share of wallet and winning new logos outright. RZR's customers are performance-based. If RZR provides an efficient return for its customers, it will capture a higher share of wallet. Additionally, we're offering our customers new high-performing products. We offer 5 distinct products: Android retargeting and user acquisition, iOS retargeting and user acquisition and connected television. We built global operations, product and sales teams with significant experience in this category. We see an opportunity to deepen existing customer relationships and to continue expanding beyond the core gaming market customer. Gaming remains RZR's largest advertiser category at approximately 70% of Q2 revenue. This is down from roughly 80% in the prior quarter, which we believe is a clear sign that diversifying into consumer apps, retail and entertainment is working. We expect RZR's revenue growth to nearly double year-over-year. The business has a significant structural advantage worth highlighting. We own and operate our own data servers. This enables RZR to run both retargeting and user acquisition at real scale. Our iOS products are still newer to the market and CTV just launched. So there's still a lot of untapped potential. As all of our products scale, the incremental cost to serve stays low, which is exactly the kind of operating leverage you want to see. Shifting to Skillz. The business experienced operational headwinds during the quarter. I stepped in on an interim basis to lead the Skillz business while we actively recruit a dedicated Skillz platform CEO to support our growth efforts. We have line of sight to return the business to sequential growth in Q4. Our priorities for Skillz are aligned with long-term value creation, and we're committed to staying disciplined on costs and improving unit economics and customer lifetime value. Skillz content is now a balance of owned and operated, second-party and third-party titles. Games now operated and owned by Skillz account for 40% of Q2 GMV. Before I hand things over to Alex, I want to point you to the new investor presentation we posted to our IR website as part of the June rebrand. It lays out in more detail how Firy is positioned to benefit from combining AI-driven performance marketing with gaming. That combination underpins our expectation for revenue to more than double from 2025 to 2028, alongside a steady build in cash generation. We expect to generate modest positive operating cash flow in 2027 and accelerate from there into 2028 and beyond. We see 4 clear drivers for this business and by extension, shareholder value. First, RZR continues to scale with expanding margins and increasingly stands out. RZR is already EBITDA positive and scaling across iOS user acquisition, retargeting, CTV and a broadening advertiser base. Second, we're confident that we have the right playbook to drive a return to growth at Skillz. That path runs through our product, our content and disciplined unit economics. Third, our operating structure gives us the ability to scale the overall business without a proportional increase in fixed costs. And fourth, we expect litigation expenses to decrease. While litigation has been a real expense burn to date, we believe we will deliver a strong return on investment. And as it decreases, it will drive EBITDA and cash flow growth. I started the call by saying Q2 was the most consequential period in the company's recent history. What makes it pivotal is what comes next. The Papaya judgment is in hand. The economics of the business are improving. We're entering a new phase for this portfolio. Firy gives us a structure designed to compound value across the businesses we own today while creating optionality for where we go next. Over time, as we generate capital, we will allocate it to where we believe it can earn the highest returns. I founded this company in 2012 with a 100-year vision. The last few years slowed that work, but they didn't change the thesis. The business is improving, the structure is in place, and I believe this company's most interesting chapters are still ahead. With that, I'll turn the call over to our CFO, Alex Walsh, for a closer look at our second quarter results.

Thank you, Andrew, and good morning, everyone. I'm happy to be speaking with you, and I'm looking forward to working with you closely going forward. I just completed my first month at Firy, and with each day, my level of confidence increases in our ability to execute on our strategic initiatives that unlock shareholder value. Our second quarter results demonstrate the improvements we are making across the business. Q2 '26 GAAP revenue was $31 million, up from $29.1 million in Q1 of '26 and up from $25.2 million in Q2 of '25, representing a 6% increase quarter-over-quarter and a 23% increase year-over-year. Q2 '26 research and development expenses of $6.9 million increased 42% year-over-year, reflecting the ongoing investment in our Skillz and RZR businesses. Q2 2026 general and administrative expenses of $28.2 million increased 69% year-over-year. Q2 2026 net loss of $24.5 million compared to $17.9 million in Q2 of 2025. And finally, Q2 adjusted EBITDA loss was $13.6 million compared to a loss of $12.8 million in Q1 of '26 and a loss of $11.4 million in Q2 of '25. Excluding litigation-related expenses, adjusted EBITDA in Q2 '26 improved to a loss of $2.7 million. Q2 litigation costs were elevated due to the Papaya trial, and we expect them to decrease in future periods. Litigation costs are expensed when incurred, with Q2 expenses alone nearing $11 million. Litigation proceeds are not realized in our financial statements until we collect them. We believe in our balance sheet and continue to manage capital prudently. We ended Q2 '26 with approximately $164 million in cash and cash equivalents, and we ended Q2 with $130 million in debt that matures in December of this year. As Andrew highlighted, we have already announced a notice of redemption for $80 million of our debt, which will leave approximately $50 million outstanding. We are in active dialogue on a range of alternatives to further strengthen our capital structure and liquidity position. Importantly, we see significant, still unrecognized value on our balance sheet that I want to highlight. As disclosed in our most recent Form 10-K, we have federal net operating loss carryforwards of approximately $702 million and state net operating loss carryforwards of approximately $280 million. There remains $15 million to collect from the AviaGames settlement, of which $7.5 million is expected to be collected in the spring of '27, followed by the final payment of $7.5 million in spring of '28. We own our building in Las Vegas, and we have a 10% interest in a private company, Exit Games, for which we paid approximately $50 million in 2021. In closing, we continue to move this business forward, fueled by meaningful revenue growth on RZR, strong operating leverage and disciplined execution. Operator, we're now ready to open the line for questions.

[Operator Instructions] Your first question comes from the line of Ed Alter with Jefferies.

Would love to just dive into the strategic shift and kind of the rebrand and get into why now? What in the market are you seeing that gives you confidence in kind of changing the branding now?

Thanks for the question. So the rebrand is really to help investors better understand that Skillz has transitioned into several businesses over the last 5 years. We acquired Aarki in 2021. It's now been rebranded as RZR. RZR is a very meaningful portion of the total revenue and profitability of the business now, having crossed over $10 million in net revenue in the quarter. So the concept of -- it's more than just a rebrand, it's really to help all of the investors listening and those who can't be here today to understand that we've moved from one business line, skill-based gaming platform with Skillz to actually having multiple business lines, with RZR being a significant portion of our revenue currently. We do see in the future that Beamable will also become a meaningful portion of the consolidated revenue of the businesses. The thematic way that these businesses tie together is they all share the same customer today, which is the game developer, and they all service the game developer in different portions of their monetization journey, whether with RZR, 90 of the top 100 customers being game companies. So helping game companies acquire users into their games. Skillz providing unique skill-based gaming monetization or Beamable, which is a live ops platform, which is an industry term for an engagement marketing platform for game companies.

Great. And maybe if I can dig in on RZR a little more. Of those 90 customers that are gaming, can you just describe who those are a little more, if they're Skillz customers or broader gaming? And then separately, what is your view on the overall mobile game ads market, given there's been some pretty choppy prints across the industry in both directions this quarter? I'd love to hear where you stand on that.

Sure. That's a great question. So first part of the question, the customer base, those 90 of the top 100 customers being game companies, these are independent from Skillz for the vast majority, if not all. And they range from studios such as King, Niantic, which is now a part of Scopely and on from there. So major game businesses that engage in user acquisition and retargeting marketing. When we look beyond this quarter and we think about advertising in the games industry, without a doubt, we've seen new devices slow down over the last 5 years. We -- when you have new device slowdown, I think you can expect the market to seek equilibrium. I think we are going to see that though, over the next few years forward, where other products are moving into the advertising ecosystem on mobile, whether it's e-commerce, health care, AI is a major type of customer. But the -- that equilibrium that's being achieved, it's not like mobile is going away as an advertising form. It's very much here to stay. It is a very important type of advertising when marketers think about the omnichannel world their consumer or business target is living in and think about different ways to reach that target.

And then if I could squeeze one in on Skillz. Just can you talk about the paying MAU and MAU trends in the quarter, and kind of the latest update there on the declines?

Sure. Paying MAU trends, I think, Alex, perhaps that would be a great question for you if you'd like to jump in.

Sure. Yes. So just on the spend itself, for sales and marketing, it was $13.6 million, which was down from $17.3 million in quarter 1. About $1.5 million of that decline is lower end user incentives, which fell to $19 per paying monthly active from $21 and the balance is in paid acquisition. So the reason we did not expand is a returns reason, not a cash reason. We are working through an operational issue during the quarter. Acquiring users into a funnel you are actively repairing is how you buy a cohort that doesn't pay you back. So we chose to fix the funnel first. Note also that we did not cut spending across the board. We moved it. R&D rose to $6.9 million from $5.1 million sequentially and it's up 42% year-over-year. That's funding the retention and engagement product work that will improve the payback on every dollar of UA that we spend later. As it relates to the second half, our line of sight is to sequential growth in Q4, but that assumes product and content improvements, and we may accelerate acquisition as contribution profit supports it. We're not going to recommit to a spend number on this call. And I think the sequencing matters here, so product first, then content, then spend.

Your next question comes from the line of Bharath Nagaraj with Cantor Fitzgerald.

Just a few for me, please. With $50 million remaining in terms of debt, what are the active alternatives that you're considering, full paydown, refinancing, partial financing? And what's the approximate time line? And then just a follow-up on the same one. With $164 million of cash and $50 million now of debt remaining, what's the minimum cash balance you need to run the business comfortably taking into consideration all the investments in the product you plan to do in the coming quarters?

Thank you. That's a great question and something we are thinking very carefully about. Given the nature of the questions, I'll turn it over to Alex to talk more about how we're thinking about capital allocation.

Absolutely. Look, we have $50 million in debt maturing December 15. We will pay this debt off. And right now, we're in active analysis, evaluating a range of alternatives that will strengthen our capital structure and our liquidity position. That may be refinancing. There are other options we are also considering at this point in time. And when we have something to share, we will certainly share it. And as the question about minimum cash to run the business, we would always like to have $30 million in cash as a buffer to weather operating dynamics, et cetera.