Flying Eagle Acquisition Corp. (SKLZ) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by. The companies refer participants on this call to the press release issued by the company, the presentation and Flying Eagle Acquisition Corp.'s filings with the SEC for a discussion of the risks that can affect the business combination, our business and the business of the combined company after completion of the proposed business combination. The companies also specifically refer participants to the presentation filed with the SEC to remind listeners that some of the comments today may contain forward-looking statements, and as such, will be subject to risks and uncertainties which if they materialize, could materially affect results. Forward-looking statements include, but are not limited to, Skillz and Flying Eagle Acquisition Corp.'s expectations or predictions of financial and business performance and conditions, competitive and the industry outlook and the timing and completion of the transaction. Forward-looking statements are subject to risks, uncertainties and assumptions, and they are not guarantees of performance. Skillz and Flying Eagle Acquisition Corp. are under no obligation and expressly disclaim any obligation to update, alter or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. I will now turn the call over to Mr. Harry Sloan, Chief Executive Officer of Flying Eagle Acquisition Corp. Please go ahead, sir.

Good morning, everyone. On behalf of my partners at Flying Eagle, we're really excited to announce that Skillz is going public with our Flying Eagle Acquisition Corp. When I first met Andrew 3 years ago, we thought we were watching the creation of a mobile game company with some unique aspects of growth. We've since come to realize that what he has actually created is a platform unto its own. Skillz is utterly unique and is positioned at the intersection of several of the most powerful trends in the digital world. Gaming, video gaming is now larger than movies, music and books. It's driven by the proliferation of mobile devices and high speed bandwidth worldwide. Mobile gaming, in particular, is the fastest-growing segment of the gaming market. And according to third-party industry data, this segment is expected to grow from $68 billion last year to $150 billion in 2025. Now I've played a role in the evolution of video games for over 2 decades, first as a founding investor and Board Member of ZeniMax Bethesda Games to most recently DraftKings, which we took public successfully earlier this year with our Diamond Eagle Acquisition company. And I believe Andrew has positioned Skillz as the platform for the future of entertainment with mobile, gaming and enablement all converged. So with that, let me turn it over proudly to the CEO and founder of Skillz, Andrew Paradise.

Thank you, Harry, and good morning, everyone. I'm a, by background, an inventor turned entrepreneur turned business builder, but have been a lifelong gamer. I actually learned how to program from hacking video games when I was a small child. I actually hack [ sed ] the end sequence of a game to unlock it and show my friends. They were amazed. It made me fall in love with computer science. It's actually how I originally learned how to program. I've gone on from then to invent the technology for 5 companies in different industries. With the most recent company I created, I invented mobile self-checkout. We wrote the standard for the mobile payments in retail industry, which is published by the National Retail Federation or NRF, which is the governing trade group for retail. And with their help, and along with RBS WorldPay, we went to Visa and Mastercard, and we were able to change card-not-present to card-present transactions, which enabled the future of smartphone payments in stores. I'm an entrepreneur, who's been a CEO twice before with 2 successful exits. But fundamentally, when you think about Skillz, it's really the culmination of all my interests in one company. At Skillz, we're working to build a 100-year independent company. I invented the Tact for Skillz, but I didn't join until the end of the first year. I seeded it all with $1.3 million along with angels I've worked with in the past. I brought my co-founder, an early employee of my last company, this incredibly sharp, Harvard business school Guy, Casey Chafkin, who today is our Chief Revenue Officer. And when I decided to join Skillz full time, I walked away from a guaranteed paycheck as a director at Intuit. And I came in, it was Casey and 5 engineers, 10 prelaunch customers, whereas today, we have over thousands of customers. I talk to those 5 engineers about what it would mean to build a long-term independent company and that eventually, we take the company public. And I told them if everything went well, it would take us 8 to 12 years to do that. And I'm sure those early employees had their doubts. But here we are today, 7 years in, and we're on track to achieve that goal. And our mission is to enable developers to share their art with the world by connecting gamers through meaningful competition. Skillz is building the competition layer for the Internet. Skillz is the only mobile gaming platform that enables over $1.6 billion in GMV and more than 2 billion e-sports tournaments every year, and we're systematically scaling that. To give you an idea of what this all means in terms of payment transactions and uptime, the payment nerd in me wants to tell you this, we're running 70 financial transactions per second at 99.9875% uptime. So that's 4 9s in uptime. So we're down 20 minutes every 90 days. The most recent company I created, I pioneered and I scaled mobile self-checkout. So payments really is in my DNA. And what a lot of people don't understand about Skillz is, we're not so much building a video game system as much as we're building a financial payment system the video games are sitting on top of. And all of this is to build something so the gamers no longer just like their experience. They truly love it. And the way we measure that love is in fulfilling their desire for community and competition. When they pull their phone out of their pocket looking for entertainment, there are a lot of free options. So we aren't competing against just any other form of entertainment, but all of these different applications in your pocket. When you pull that phone out of your pocket, whether it's static entertainment or the interactive entertainment we're providing, you can see that we are providing higher engagement than many other leading applications and very much selling the time spent. So you should think about that 62 minutes that we're generating across the user base, that's our average consumer. The top 1% are at 4 hours a day, and they're not just passively consuming content, they're leaning in and they're interacting with the platform. And the way we've done that is we've redesigned the mobile game ecosystem to bring developers and gamers together instead of having to fight each other over monetization. We found a way to align their interests. At your typical game developer, there are 2 factions. On the one side, the ponytails, the other side the suits. The -- you can think of this as the creatives or the business people, but the creatives are motivated to bring their art to the world and it conflicts with the business people who want to extract money from the gamers. We're changing how games are monetized so that everyone is aligned and art no longer has to be compromised. And on our platform, more engagement drives more revenue, more revenue brings more developers and content, which in turn drives more players and more engagement. It's a virtuous cycle on a powerful network effect, and our business results demonstrate it. We're proud of the business we've built over these last 7 years. We've focused on systematic scale and profitable growth, and we've been able to double or triple the business every year. But honestly, we're much closer to the beginning than the end. We really view going public as a milestone, but not the end of the race for our company. Just to give you one example, less than 10% of our revenue comes from outside North America today, even though the international mobile gaming market is 4x larger outside of North America. It's pretty incredible to think about what these next few years can look like when we start expanding throughout the world. And what we're doing is we're making gaming better for everyone in the ecosystem through our proprietary and highly scalable software platform. Our platform is built on 4 pillars. On the one side is the gamer competition engine, which is the front end SDK that plugs in the games. The software development kit is lightweight, 12 megabytes, so you can download it over the air, and we can automatically update the games on the fly. On the other side of the platforms are developer console. It's sort of like a Shopify-type dashboard where our developer partners can rapidly integrate and monitor their game performance. People often like to ask us how easy is it to launch on the platform. Well, I actually have a pretty cool anecdote for you. In Q4 of 2019, we actually had a 7-year-old go live for the first time. And the way our developer relations team realized this is in the middle of our system is our live ops system and up on that system, our developer relations team saw the game pop up. They saw that the art in the game was hand on, almost like a Microsoft paint, like crayon drugs. And they contacted the developer, and they found out. It's pretty amazing to be able to say that a 7-year-old can bring a game live on the Skillz ecosystem. And speaking of that middle piece, the live ops system, this is how we manage the ecosystem where we run everything from multivariate testing on the acquisition of new cohorts to optimizing on-system engagement to maximize revenue retention. Underpinning these 3 different pillars of the platform is really the crown jewels of the system is our data science technologies that we've been investing in throughout the life of the business. And data science very much augments every side of our platform. So next, we're going to walk through each of these pillars in more detail, but let's begin with the gamer facing system. If you have one takeaway today, just one, it's that Skillz brand is about trust and fairness. Skillz is making fair competition accessible for everyone, everywhere. And we do that through 200 different features we've built to create a community, and it's a community that loves fair and meaningful competition. These features do everything, ranging from head-to-head tournaments to multi-hundred thousand player weeklong leagues and exciting live events. We have loyalty systems that enable virtual and physical rewards, you unlock achievements, you level up as you play. We run 24/7 customer support with a sub 30-minute response time at a greater than 90% CSAT, if you have any problems with your experience. We run proprietary data sciences around player rating and player matching, anti-cheat and anti-fraud. All these things are built so that we can protect the consumer against cheating and fraud. It's literally the most important facet of gaining their trust and retaining their trust. And trust is really an esoteric concept. It's not just a single feature. It took us a long time to get here, but every day, the data we're capturing makes it harder and harder to replicate what we've built. And what we're building is we're turning mobile gaming into the future of entertainment. Gaming is actually now larger than movies, music and books. Mobile gaming specifically has grown from an $8 billion market when we started to $68 billion today. That's literally half of the total gaming market today. Not only is mobile the largest segment in gaming, it's also the fastest growing. Current forecasts estimate that by 2025, the mobile gaming market will be $150 billion. And it's not hard to imagine this when you think about it. There were 800 million smartphones and tablets in 2012. Today, we have 4 billion. Tomorrow, we'll have 10 billion in 2025. Mobile gaming is interactive content that's built for interactive devices, and that's what makes it the future of entertainment. And in that future, anyone can embrace their inner champion. I want to share a little bit here about the existing demographic on the system because gaming isn't just the 24-year-old guy in their parent's basement anymore. It's really become everyone. There are 2.6 billion monthly active people playing mobile games. On Skillz ecosystem today, over half of our gamers are women. Our gamers are everything from students to professionals to factory workers to homemakers. And the reality is everyone loves to compete. They just needed the right content. Next, I want to run you through a quick example of our unit economics, so you can understand the flow of funds in to our P&L. And if you're following along on the slides that we provided, this is Slide 16. The simplest example of our business model is the head-to-head tournament. This is a competition where you and I would each pay $0.60 and entry fees to compete, and that would generate $1.20 in GMV. We then pay out $1.04 to our developer profit share, prizes and incentives, and we're left with $0.16 of revenue. We generate an effective 14% take rate. And on that 14%, we generated 95% gross margin, leaving $0.15 of gross profit. We spend $0.11 in OpEx, and that results in $0.04 of contribution or a 25% contribution margin. This contribution is based on our 2019 results, as I explained earlier on the slide, but today's contribution margin is actually now well over 30%. And beyond just making money, I want to talk to you about a couple of other things on the platform, some of the positive changes that our community is affecting. And one of those initiatives is called Gaming For Good or G4G. Gaming for Good is the future of the charity walkathon meets the future of the charity golf tournament. It's a mass participatory event from home that demonstrates the power of community through competition. The initiative started originally from our customer service team. We thought it would be meaningful to engage our players by running a charity tournament. And what we found from that is not only do we drive higher engagement from those players, both during the event and long thereafter. But those that participated were among the best retaining cohorts we've ever had. It really turns out that doing good is good for our business. We scaled from that first year in 2017 to the following year in 2018, which is what you're seeing on Slide 17 in our deck. And the headline partner in 2018 was a charity called Susan G. Komen. You may be familiar with Komen for the Cure if you're here in the United States. What you're seeing on Slide 17 is the demographic of the Skillz players who donated in 10 different tournaments throughout 2018 versus the demographic of Susan G. Komen's donors. Together with Komen, we actually raised 23% more than they expected, and we helped them generate 25,000 new first-time donors. A new first-time donor is very much the lifeblood of a charity, much like a new first-time payer is the lifeblood of the business. Since 2018, this effort scaled to many different nonprofits using our platform for their annual fundraising efforts, ranging from important causes, such as children's hospitals during COVID to Red Cross blood drives, to most recently, the NAACP with Black Lives Matter. For nonprofit, their brand is really the most valuable asset. We've been honored to be trusted by so many of the world's top nonprofits, such as the World Wildlife Fund, which is the top 10 nonprofit globally, or American Cancer Society, which is the top 3 nonprofit in the U.S. They run -- terming with us every quarter. At the same time, G4G or Gaming For Good, it's a very important proof point for brands that shows that we can optimize our price pools. I just want to remind you on that prior slide that I was discussing that our price pools actually represent more than half of all of our GMV today. So we touched a little bit on the gamer side and the -- throughout this talk. I wanted to talk a little bit about the developer side of our business next. In 2009, there were 30,000 developers making games. In 2019, you have 10 million developers making games. So what happened? While new tools like Unity and Unreal, they were created in the 2000s, and they gained mass popularity in the last 10 years, and enabled this whole new generation of content creators to engage in building interactive content. What happens in interactive content is a lot like the story of what drove YouTube. In the 2000s, Adobe created tools that enable content creation for the semi-professional to video edit and create content for the first time. All of a sudden, they could compete with Hollywood. And these creative tools drove these incredible changes in the content that humans were consuming. And of course, what came next was the need to distribute and monetize technologies, and that's where YouTube came in. We've seen that same evolution in gaming where Unity and similar technologies have enabled an explosion, interactive content making. And all of a sudden, these content creators, all these interactive content creators, they need tools for distribution and monetization, and that's where Skillz comes in because the old business models are no longer working. Up until now, the developers had 2 options for free-to-play games monetization. One, they can put intrusive ads in their games where monetization directly attacks retention. Or they, on the other hand, can do in-game purchasing or in-app purchasing and they put their -- the developer on this content treadmill of constantly making new content for ever smaller portions of paying users. You can think about a lot of top games where they sell you access to the next level or sell you skins in the game for your character. At the same time, as these 2 static business models have existed, there's been this explosion in game content that's making it harder and harder to get discovered. Over the past 5 years, the market's changed quite dramatically, and developers can no longer grow profitably. It's awesome there are now 10 million developers making games. The bad news is standing out is harder and harder every day. The cost per install for a game in the U.S. has actually gone on 20x in the last 5 years whereas the revenue per install has stayed relatively flat over the same period as the ways to make money are the same. And this means that the profit for the developer is getting squeezed more and more, and more and more games unit economics have become inverted. And the reality is there's a lot of great content entering the market, but it isn't being discovered or monetized well. And that's where Skillz really comes in. Skillz is redefining the entertainment paradigm. Let's talk about what they value. The gamer wants community and fun, the developer wants discovery and monetization. But the old models are delivering pay-to-win and interruption to gamers, and they're delivering broken economics and gimmicks to developers. Instead, Skillz is building meaningful connection through competition. And what we're building for developers is a network of exposure and continuous mutual financial success. Beyond our value prop, they get a self-service platform that enables our partners to integrate and monitor their game performance through sophisticated dashboards that's similar to what Shopify did for e-commerce. In this new world, the developer makes the content and Skillz runs the business for them. This enables them to do what they do best, which is make great games. I know it's a crazy idea. But they no longer need to focus on things like payments and analytics and customer service and live ops. And speaking of which, live ops is really the heart of the Skillz system. A typical game maker at scale will have 30 people running live ops for a single game. By using machine learning combined with artificial intelligence, Skillz is running the live ops for thousands of games on our platform today with only about 10 people. It's a disruptive threat to the largest developers because live ops is this competency and big advantage they have over the smaller developer. Our platform converts, engages and retains better than ads or in-game purchases by selling users something they actually want to buy: fair, fun and meaningful competition. And these live ops systems we built, they operate off the data science technologies we've designed to power the company's advanced marketing automation and user acquisition engine. In fact, data science is really the secret sauce and the deepest competitive motor on our business. We spent 7-plus years building data science, technologies and inventions. And I could talk a lot about the different areas we've built over these last 7 years. But let me give you one specific example. One really unique aspect of our business is we're ingesting 300 data points in every 5 minutes of gameplay, 300 data points in every 5 minutes of gameplay, and we're running 5 million tournaments every day. You can imagine the intensity of the level of data warehousing and data ingestion we run. We override all the randomness in every video game. We actually wrote and patented that technology. It's proprietary to Skillz. Even some of your most skill-based video games, you have random elements affecting an outcome. With Skillz, everything comes down to the players' input, to the players' decision. And with our data ingestion pipeline technology, we're actually reading in all the inputs and all the outputs of every game and allows us to create statistical maps of probabilistic next outcome. Simply put, we can map your next likely move in a game, and that enables us to distinguish between skill improvement, on the one hand, or cheating on other. We can detect how likely it is Andrew is playing or did I hand my phone across to someone on this call. And as we keep gathering more and more data across the ecosystem, we're basically creating the equivalent of antivirus software. McAfee showed the strength of network effect for first movers building that type of technology. When we launched in 2013, we were basically an immediate target for cheaters and fraudsters. We actually had about 10% of transactions per day coming in from these 2 factions. So massive levels of cheating and fraud in this type of business. With the money-in-and-money-out system, the complexity of stopping cheating and fraud is most comparable to businesses in the financial payments industry. Today, we're at 58 granted and pending patents covering these proprietary technologies. All of this is simply built so the developer can make a living doing what they love, and that love is translated into an incredible ecosystem. Our #1 title is rotated many times over the last 7 years, but gamers live on our platform, they move game to game. And if you do ask me how long have I been playing video games, it's 30-plus years. Our paying users today have 10 Skillz games installed. In 2015, this number was 3 games installed. And even though the top title continues to rotate over time, they're not shrinking or disappearing. In fact, they continue to grow, often quite substantially after being displaced from the #1 position. To give you an idea of this, our 2015 #1 title, it's grown 30% in revenue since 2015. Our 2016 #1 title has grown 268% in revenue since 2016. Our 2017 #1 title has grown 110%, and I can keep going on and on. Over the past 12 months, the number of games that are generating over $1 million in GMV in the ecosystem has more than doubled. In fact, if you look at the other side of the ecosystem at attrition, we've only ever had 3 developers or $19,000 a GMV ever leave system. That's less than 0.5 basis point of the $1.6 billion in GMV we expect to generate this year. This is a business that we've defined by building an incredible capital efficiency with compelling economics. And as such, we've been able to generate profitable growth. We built this business with a mentality that we build a great product first. We built strong economics around it, and then we'd systematically scale it year after year. One of our 7 values of our company is frugality. Frugality means we are all about the efficient and thoughtful use of capital. We treat every dollar of capitalized if it's our own. It's the #1 reason why we grant stock options to our employees. We want them to be owners. It's so ingrained in our operating ethos that with only $104 million of capital deployed, we built a business that will generate $225 million of revenue this year and $555 million of revenue by 2022, and that doesn't require any new games or geographies. Today, we're fully funded with well over $100 million of cash and undrawn debt, but the opportunity for smart deployment of capital is perhaps stronger now than ever for Skillz. And as I said earlier, we are much closer to the beginning than we are at the end. We have a long runway ahead of us. We have a lot of exciting vectors for growth, and this goes beyond just iOS and Android in the U.S. It goes beyond just casual e-sports to add in all other genres of video games in the world. It goes beyond other genres to international. International is massive for us as well as the deployment of new monetization models like brand-sponsored prize partnerships. Becoming a public company is a really important milestone for Skillz. We look forward to accelerating the growth of the business as we work with our developer partners to bring Skillz power competitions to the billions of gamers worldwide. Thank you, guys, for your time and attention today. If you have any questions regarding the presentation, please e-mail ir@skillz.com. Thank you again for joining today's call.