Skillz Inc (SKLZ) 2021 Q3 法說會逐字稿

Good afternoon. Thank you for attending today's Skillz Third Quarter 2021 Earnings Conference Call. My name is Nai, and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to your host, Stefan Gerhard with Skillz. Thank you. You may proceed, Mr. Gerhard.

Thank you, Nai. Good day, and welcome to the Skillz Third Quarter 2021 Earnings Conference Call. I'll proceed shortly by reading our forward-looking statements and non-GAAP measures immediately followed by brief introductory remarks, and then a question-and-answer session. Hosting the question-and-answer session today, we have Andrew Paradise, Chief Executive Officer; Casey Chafkin, Chief Revenue Officer; and Ian Lee, Chief Financial Officer of the company.

We hope you've had a chance to read our press release and stockholder letter, which we published earlier today, both of which are also available on our Investor Relations website. We have also posted to our website a short video of our CEO discussing our business highlights this quarter.

Some of management's comments today will include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by the use of words such as will, expect, should or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to the company's SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition.

During the call, management will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2021 earnings release.

With that, I'll turn the call over to Andrew for some brief opening remarks.

Thank you, Stefan. Good afternoon, everyone, and thank you all for joining us today to discuss our third quarter 2021 results. In case you haven't had a chance to review our Q3 stockholder letter, which we just published to our Investors site this afternoon, I want to share a few key highlights from the quarter before we get started with your questions.

We're definitely very proud that we share the news with you that we generated 70% revenue growth year-over-year, led in large part by 47% year-over-year growth in paying monthly active users. The company was able to increase user acquisition marketing investment to acquire new users while maintaining high efficiency as several initiatives during this quarter drove cost per install, or CPI, lower from prior quarter.

This quarter, we also officially launched Big Buck Hunter: Marksman, the first mobile version of the iconic arcade shooting game that we all know and love. It was celebrated at the 14th Annual Big Buck Hunter World Championships in Chicago and the convergence of the online and off-line world for the first time.

Throughout our investment with Exit Games, we were able to integrate advanced synchronous technology onto the Skillz platform through Exit Games' Photon Engine. Its market-leading multiplayer synchronous game engine has accelerated our ability to support popular first-person shooter and racing games by several years. We also announced a deal with our game developer, etermax, to bring the most popular trivia franchise in the world, Trivia Crack, to the Skillz platform.

And finally, we grew our executive team with the addition of Vatsal Bhardwaj, who joins us as Chief Product Officer from Amazon, where he led the team responsible for game development services, including transforming how large-scale multiplayer games are developed, operated, scaled and distributed using the cloud. At Skillz, Vatsal will be responsible for leading our product development teams.

Before taking everyone's questions, I just want to take a moment to thank everyone on our team that makes it all possible, the Skillz teams who work tirelessly every day to create the future of competition, to build out the competition layer of the Internet, and of course, for our developer partners who through their teams and their creativity, they bring us imagination and fun.

With that, let me open up for questions.

(Operator Instructions) The first question is from Michael Graham with Canaccord.

Thanks so much for all the information in the shareholder letter. I wanted to dig into Aarki a little bit. You mentioned that you were -- your guidance for the year doesn't really kind of incorporate any benefit, I guess, on the marketing side from Aarki yet, but you do have plans to kind of shift your spend there and get that integrated. So I wonder if you could just give us some commentary around the expected pace of that integration.

And then you did have a comment at the end of the letter talking about the possibility of seeing some leverage on UA spend next year. And so I just wanted to kind of maybe get -- now that you've had a chance to kind of get more deeper into Aarki, get a little bit of a sense of your updated thinking on UA versus engagement spend and just how you're thinking about that whole equation going forward.

Michael, it's Ian Lee. Hope you're doing well. So yes, we are very pleased with the integration of Aarki. As we've noted that -- in the letter, the CPI improvement we saw in the quarter didn't yet include the -- any benefits yet from the synergies from Aarki. We're continuing to integrate Aarki and have noted again that, that process is going to take several more quarters from here. But again, we're very excited about that as we head into next year.

In the other 2 points you noted there, on the UA spend, this is more of a Q3 thing I'll talk about going forward. So we did see some improvements there in the CPI and allowing us to be more aggressive with user acquisition investment in Q3. Some of those reasons were again some of the media buying tools, which we're able to scale several networks, which enabled us to increase our bidding precision. There were also some traffic initiatives that we're able to use, such as search engine and app store optimization, which allowed us to grow our organic traffic. So going forward into Q4 next year, we look forward to continue to be aggressive but also disciplined.

On the engagement marketing side, so just a little recap for you, talk about next year, we introduced a number of different testing and experiments on engagement marketing initiatives to drive end-user engagement and monetization in Q2, continue that in Q3 and expect to continue doing that into Q4. Specifically to your question about 2022, we noted in the letter, particularly around engagement marketing, that we've done a lot of these testing experiments over the last several quarters. So we'll be looking to leverage the learnings from all those as we go into next year and really focus on the investment on programs, which we believe over time will better most effectively increase the engagement of users and sort of monetization. So again, as we noted, it's still too early to predict specific changes around engagement marketing, but it is possible that some of those changes may lead to a reduction in certain engagement marketing initiatives relative to revenue in 2022.

The next question is from Clark Lampen with BTIG.

I'll make this easy and I'll follow up on Mike's question, maybe on the SSP side with Aarki. Now that you guys have had that under the umbrella for a little while, I'm curious how you're thinking about the ad opportunity. Is that something, particularly as we've seen the MAU base, increasing this quarter? How do you think about that sort of an integration? How difficult is it? Is that something that we could think about maybe starting to contribute next year?

Andrew, do you like to take that one?

Yes, I'd love to take that. So generally, I think we've been messaging that the Aarki integration will take somewhere between 4 and 8 quarters, and I think that still should be the expectation. The integration is on track. We're really excited about the synergies between the 2 businesses in terms of user acquisition, data science as well as developer relations.

If I could, maybe just with a quick follow-up sort of on the guidance. You guys talked about $200 million or so in UA investment for the year. Is that still the right target as we think about you guys tapering spend?

Clark, it's Ian Lee again. We haven't given a specific target for the overall run rate for the full year of 2021. Again, we'll look in Q4 to be aggressive but also to spend, but we haven't given a specific target for the full UA budget for 2021.

(Operator Instructions) The next question is from Brad Erickson with RBC Capital Markets.

It's Dan Parr on for Brad Erickson. I was hoping you might be able to provide the user incentive contra revenue and the user incentive spend in sales and marketing for this quarter as well as the third quarter of '20? And then I have 2 questions on Big Buck Hunter after.

Sure. It's Ian Lee here. So the reduction in revenue amount for Q3 was just under $19 million for Q3. If you're looking at the engagement marketing that was in sales and marketing, that number was around $50 million in Q3 of this year. If you're looking back at Q3 of last year, it was about just under $27 million.

Got it. And then on Big Buck Hunter, have you guys seen any cannibalization of engagement with the launch for other properties on the platform? And has there been any shift in developer concentration mix with the launch?

I'll pass that to Casey to take that one.

Dan, thank you for the question. I think as you've probably seen, performance on Big Buck Hunter was strong out of the gate. The game quickly became a top game in the sports category and we're particularly excited about both the game and the category for Skillz. One of the highlights of our business is that the demographics between genres tend to be substantially different. And so we view the launch of new games and new experiences as accretive to the business rather than cannibalistic, as you might see in other gaming mixes.

From a revenue concentration perspective, I think we've shared this, but we always expect to see a degree of concentration in our business as consumers move towards the best competitive experiences. And so we always expect to see concentration in our top titles. We have seen a small decrease in the concentration among the top 2 developers on the system though as more experiences have come online.

We have a follow-up question from Clark Lampen with BTIG.

I just wanted to follow up on the genre commentary in the release. You guys talked about racers, FPS and fighting. My guess is that this is sort of just the start in terms of genre coverage and expansion. But was there a reason that you guys decided to sort of pursue those as the first one so there may be sort of pent-up demand that you guys were seeing amongst the developer community?

I'll pass it to Andrew.

Yes. Look, we've only really scratched the surface of the market opportunity ahead of Skillz. The most popular content on the platform today, it falls into the card and board categories of gaming. But candidly, even in casual asynchronous game categories, there are many other possible hits to build on the platform. So think about trivia, about word games, about arcade games, so many types of classic arcade games that haven't yet even pioneered onto the platform.

We made a lot of progress this last quarter. We announced an agreement with Trivia Crack in the trivia category. I think the reason we keep highlighting that particular deal is Trivia Crack is the #1 trivia game in the world. It has about 40 million MAU and pretty wide geographic availability as well. it's a truly international game.

The partnership also with Big Buck Hunter: Marksman, it is the first first-person shooter game on the platform, but the primary game mode today is asynchronous shooting. It's not asynchronous first-person shooter like what you might see in a game like a Call of Duty or Counter Strike. I think we're really excited about in the kind of the midterm ahead of the rollout of 5G. It's leveraging our partnership with Exit Games to accelerate the expansion of the platform beyond casual asynchronous into mid-core and core genres. And we think fighting and racing are 2 genres that are possible today with the level of fidelity that users expect on the Skillz platform when they're playing for real prizes.

The next question is from Brian Fitzgerald with Wells Fargo.

I had problems queuing up there, by the way. I don't know if that was an issue but I ended up dialing back in and the queue worked. So glad to be in. From a tools perspective, AppLovin bought Machine Zone and Zynga bought Chartboost and you bought Aarki. How do you think about the need to own other critical parts of the value chain, tool sets, game engines, DSPs, distribution channels? Are there other pieces you would like to have inside your toolkit?

I'll pass it to Andrew.

So I think we're being very thoughtful in terms of our inorganic growth as well as our acquisition and across the value chain. Buying a DSP was a very logical thing for Skillz, particularly our relationship with so many DSPs in terms of our user acquisition budget. As we're thinking ahead and looking at the next inorganic opportunities, there are definitely multiple pieces of the value chain that we're evaluating, but we aren't sharing anything publicly at this time.

(Operator Instructions) The next question is from [McAlister Henry] with [Contentful].

On September 20, the company put out a press release regarding a multiyear performance stock unit grant to Mr. Paradise. The press release mentioned that the grant which related to the company achieving certain milestones about the stock price, and the press release noted that vesting was based entirely on Mr. Paradise's achievement of performance objectives rather than his continued service. And then a few lines later, it said, under the term, Mr. Paradise must remain in service as either CEO or Executive Chairman and Chief Product Officer at Skillz. And the Form 4 really didn't shed any light on this. Could you clarify, is this based on Mr. Paradise's continued service? Or will he receive these shares if Skillz stock achieve those milestones even if he's not associated with the company in the future?

It's Ian Lee again. So that's all included in the public documentation, but no, he would be included as the ongoing service with the company to qualify that. But again, that's all in the public documentation.

There are no additional questions at this time. I will now pass it back to Andrew for closing remarks.

Well, thank you all for -- again, for taking the time to join us today. We're very excited to continue to build the company forward, and we look forward to providing an update on our continued progress when we report our fourth quarter and full year results in early 2022. Until then. Game on.

Great. Thanks, everybody.

That concludes the Skillz Third Quarter 2021 Earnings Conference Call. Enjoy the rest of your day.