Skillz Inc (SKLZ) 2021 Q4 法說會逐字稿

Good evening. Thank you for attending today's Skillz Fourth Quarter 2021 Earnings Call. My name is Selena, and I will be your moderator. (Operator Instructions)

I would now like to pass the call over to our host, Stefan Gerhard, VP of Finance with Skillz.

Thank you. Good day, and welcome to the Skillz' Fourth Quarter 2021 Earnings Conference Call. I'll proceed shortly by reading our forward-looking statements and non-GAAP measures immediately followed by a 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 and 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 fourth quarter 2021 earnings release.

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

Thanks, Stefan. Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2021 results. Our Q4 stockholder letter was published at the investor site earlier this afternoon. And before taking your questions, I'd like to just start by sharing a few thoughts.

2021 was a key building year for the company. We set out these 2 goals: aggressively growing revenue while also building the critical organizational infrastructure we need for the future growth of the platform. We invested really heavily in marketing to grow and engage our user base and added key leaders and talent across the company. We acquired Aarki. It positioned us for our long-term vision of registering every person on earth into the competitive platform, Skillz.

Having said that, recently, we've spoken with a number of our shareholders, and we've been listening to your feedback. We've considered that as we're thinking through and building out our 2022 plan. In 2022, as such, we will transition from our strategy of revenue growth at all costs to increasing profitable growth and efficiency. We intend to use the balance sheet that we've built up to build a long-term, profitable, high-growth company.

Our company will have the following financial characteristics by the end of this year, so in Q4 2022. So revenue after engagement marketing, our year-over-year growth rate will be north of 30%. Our adjusted EBITDA margin will be better than negative 30%. And we expect adjusted EBITDA breakeven by the end of 2024 and well within the net cash we have on hand.

To accomplish this, there are a few things we need to do inside the company. So let me talk a little bit about the key initiatives to improve LTV and, separately, customer acquisition cost. So 3 of the measures that are probably the 3 most important that we'll be engaging in 2022 to drive LTV improvement: first, we're going to eliminate our low-return engagement marketing programs that are cannibalizing our profit generation; second, we're going to be rolling out more social features across the platform, such as chat, and providing greater personalization for all of our users who play in our games such as improved leagues and technology around how they socially engage and compete; and then third, it's been about 10 years now for the platform, and we haven't refreshed the user interface of our core game loop, we'll be refreshing the interfaces this year which we think will have a really nice impact on retention for our users.

In terms of customer acquisition cost efficiency, we're going to be optimizing our user acquisition spend across geographies, networks and really focusing on increasing organic traffic. Second, we're going to be investing in our developer community who we've heard the message loud and clear that we need to continue to increase the quality of the content on the platform, and this will enable us both to reach new audiences as well as to deepen our content in genres where we already have penetration. And then, finally, we'll be migrating more of our user acquisition spend to Aarki to capture margin that we're giving away right now to third-party DSPs.

We've shared more granular details on our Q4 stockholder letter. But net-net, we really believe that the results of these efforts will be a far stronger business. And perhaps, even more importantly, it will position us to continue to efficiently grow the company at an attractive pace at the end of '22 and into 2023 and beyond.

It's really important, I think, to pause and think for a moment about where we are in the world of mobile gaming and inside of mobile gaming, competitive mobile gaming. We're still very much in the early innings. When we started 10 years ago, we invented this industry. Mobile gaming as a part of the video game industry, it was really the runt of the industry. Today, it's grown from being the smallest part of gaming to being a $90 billion-plus industry inside of video games. It's actually the majority share of all video games. And we had the foresight then to build here for now.

We're going to continue to follow Gretzky's advice. We're going to keep skating where the puck is going, not where it's been, converting gamers and developers from ads and in-game purchases to monetizing through competition. It's a multibillion revenue opportunity. But it's not going to happen overnight. We're very much focused on this vision of building the competition layer for the Internet on focusing first on video games, on building game by game, developer by developer. And we remain very much convinced that the thoughtful and sustainable growth of this business is the best path for Skillz to define this new industry.

The path to pioneering the future of competition for the entire world is definitely a long one. It's a huge undertaking that we are contemplating, that we talk about with you. But it has the potential to create a $1 trillion opportunity in the long term. It's a 100-year journey that we've been on, and we continue to be on now at 10 years in. But that hasn't changed because of this last year, and we don't expect it to change this next year. So for those of you who want to be on this journey with us, my sincere thanks.

With that, let me open it up here for questions.

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

Thanks for the shareholder letter and for the opening thoughts there, Andrew. I just want to ask 2 questions, please. One is on your marketing strategy, just maybe a little more depth about kind of how you approach marketing in Q4 and how you think that might change in 2022. I know you mentioned eliminating some of the engagement marketing, but maybe just a little more depth on that.

And then secondly, your guidance is for sort of 11% growth, but you just mentioned you want to exit the year in Q4 at over 30% growth. So maybe just talk about sort of what that arc sort of looks like and why that's the shape of the year.

All right. Thank you for the question, Michael. Let me hand off first to Casey, our Chief Revenue Officer, who's on the call to talk about marketing. And then Ian Lee will, our CFO, follow up to talk about revenue guidance.

Thanks, Andrew. And thanks, Michael, for the question. Candidly, we spent more than we should have in both user acquisition and engagement marketing in Q4. And that's not to say that we didn't extract valuable learnings from the expenditures that we made. We did. And we're already leaning into those learnings and inclusive of the things that Andrew mentioned and you just alluded to, like getting rid of the programs that we've seen are not driving profitable growth for the business. But the reality is we spent more than we should have. And as we orient towards a more profitable 2022, we are already reducing both our engagement marketing and user acquisition budgets. And the result of that is going to be and already is improved customer acquisition costs, higher revenue after engagement marketing and, ultimately, a more profitable business.

Thanks, Casey. Ian, do you want to talk about revenue guidance?

Yes. Thanks, Andrew. And thanks, Michael, for the question. So on the topic there that Andrew is referring to, so that was regarding revenue after engagement marketing. So as we noted in the letter, we expect the full year growth to be 24% year-over-year. In terms of the kind of cadence through the year, we kind of expect broadly improvement in the growth rate truly, if not perfectly, linear as we expect some of the product initiatives that we're launching in this year kind of generate more returns in the back half of the year. And then to Andrew's earlier point, we would expect in Q4 of this year a revenue after engagement marketing growth rate above 30%. That also goes with an adjusted EBITDA margin of better than negative 30% coming out of the year. So just some kind of color again on the comments Andrew made on the revenue after engagement marketing curve.

The next question comes from Drew Crum with Stifel.

In terms of your commentary and plans to reduce engagement marketing as a percentage of revenue, is this something you intend to do over time? Or is the 10 percentage point reduction you're targeting for 2022 more onetime in nature? Just trying to understand how that impacts the guidance to be breakeven by 2024. And then I have a follow-up.

Sure. Thank you for the question, Drew. Let me hand off to Casey as he's responsible for managing engagement marketing.

Thank you, Andrew. Drew, the way to think about the optimization of the engagement spend is exactly, as I just mentioned, as an optimization. So it's something that we plan to continue doing over time as we look at which incentives are driving profitable growth for the ecosystem, and which are short term in orientation and which aren't. And so the 10 percentage drop that we expect this year are the optimizations that we are confident we can execute inside of the calendar year, so we expect to continue optimizing that expenditure over time just as we'll do with all of our other expenditures.

Got it. And then just my follow-up, any more detail you can share around the sequential growth you experienced in 4Q with paying MAUs? And at least the past few years, you've seen a sequential uptick going from 4Q to 1Q. Is that something that we should be anticipating this year with 1Q?

Ian, do you want to take that?

Yes, sure. Thanks, Andrew. Just before we finish that, just on the prior question, Drew, I'd say you will see, in terms of engagement marketing, certainly a sequential decrease in the engagement marketing from Q4 of last year into Q1. So just a note there because we are starting that engagement marketing right away.

I would say that we did see, obviously, a significant increase in the user base in Q4, so obviously as we do some of the user acquisition marketing. I would note that in prior years, we have seen a boost from Q4 to Q1 of the prior years. Again, I don't want to give specific guidance on the particular flow of the sequential growth into Q1. But I would say, again, we aren't going to be boosting this acquisition in the same way that we had in prior years, but we'd be focusing much more on the efficiency of that user acquisition starting again in Q1, which has already commenced.

The next question comes from Brad Erickson with RBC.

I guess, first, just on the lower engagement marketing you spoke to in '22. I guess do you think you need to make maybe any sort of structural changes as you look to sort of keep players engaged on the platform?

And the second question is just when you're talking about the breakeven in '24, I think that was for adjusted EBITDA, can you maybe just help us what sort of a bridge or lag that exists from a free cash flow perspective?

Yes. Actually, I'm not sure if Andrew is muted right now. Casey, do you want to take the first one on engagement marketing? I could take the second part.

Brad, I wasn't sure I understood the question. This is Casey. I wasn't sure I understood the question regarding the, you say, structural changes.

Yes. I think you guys have some pretty common methods to sort of how you look to keep players engaged on the platform today. And you've mentioned sort of cutting out -- kind of going after some of those lower-value users. And I think in concept, we all can generally understand what that is. I guess my question was really, a, what does sort of that mean; and b, and second, like are you looking to make any sort of bigger structural changes as you try and execute that strategy.

All right. Got it. Yes. And I think the way to think about it is the engagement marketing spend is typically manifested in terms of specific incentives that we're giving out. And what we've seen over time is that some of those incentives are effective in driving increased engagement, retention and resulting monetization. And in other cases, the incentives that we're giving are actually cannibalizing existing player spend on system. And so as we think about 2022 and the concept that -- or starting with 2021 and the concept that we're really in very early innings, the thinking for us was we wanted to test really broadly around which programs we're going to be most effective and, ultimately, which ones are going to be least effective.

I don't think that there are long-term structural changes that we need to make so much as when I mentioned that, previously, I think we could have cut some of those underperforming programs faster and saved the money and had a higher profit margin. So I think that what you're seeing us do in 2022 and beyond is harvesting the learnings from 2021 and applying them across the system. And it doesn't mean that we're not going to continue testing which programs move the needle for our user base, but it does mean that we're going to be judicious and probably cut off the losers sooner.

Brad, it's Ian. On your second part, so obviously I'm not guiding specifically to free cash flow. But certainly, on an unlevered free cash flow basis, there really shouldn't be too much of a lag to EBITDA given we're not a CapEx-intensive business.

(Operator Instructions) We have no additional waiting at this time. So I'll pass the conference back to the management team for closing remarks.

Yes. And thank you, operator. And before we hit the closing remarks, we do have some questions that we collected from our shareholders through our Say Technologies portal and wanted to go to those questions now.

So the first question that was upvoted was the following: when will we get more news on the NFL partnership?

Great question. Thanks, Stefan. This is Andrew. We're right on track with NFL competition. I was a little surprised with some of the trolls out there in the Internet. We will be announcing developer finalists this quarter. We're on plan exactly as we said when we announced the NFL partnership. So if you recall and go and look at when we announced it, about this time last year, we said that we would be prepared with NFL to have a game or games to launch by the 2022 NFL season. That's still the time line, with the finalists being announced this quarter, so basically unchanged from the initial plans and excited as ever for the partnership with NFL.

Great. Next upvoted question was, are there any plans to be involved in the metaverse?

That's a great question. When we started talking about building the competition layer of the Internet a couple of years ago, it's very much what the pundits are referring to now as the metaverse. Our first market is mobile gaming. And in the future of our platform, we see extending this beyond gaming to markets that range as far-flung as education and exercise. The concept of Skillz is abstracting competition out of software. And competition, it's a human activity that has existed, probably time immemorial, it's an important part of being human. When you think about what we can do in the digital environment, we can actually perfect competition in ways that you can't off-line. We can create higher levels of trust and fairness than anything we've ever experienced in the off-line world. And that's very much where we're headed.

Great. Thank you. Next question is, Skillz did a trial for a pilot launch in India, do we expect an official launch soon?

So in 2021, we started building out a team to establish our business in India. Just being very candid, we hired our own people and we're retrenching. It's certainly at least a little bit upsetting to say more about it because India is still a really large opportunity for us. But as a result, we're not planning to invest more heavily in our India product or content localization, at least for the first half of 2022. I think one of the things that we're messaging everyone right now is that we want to be really focused on doing fewer things in our business really well. But it's launching in India, it's still an important initial step in Skillz' longer-term journey to capture the massive international gaming market. And we absolutely continue to believe that India and other international markets are a big, long-term growth opportunity for us. But it can't be our near-term priority.

Thank you. Next question is, when will you start adding games like Call of Duty or PUBG or Fortnite?

Casey, would you like to answer that question?

Sure. And I suspect there are kind of 2 questions within this question. I imagine the first question that's being asked here is kind of what are we doing to grow the content on the ecosystem. And Andrew mentioned this earlier, but the 2022 plan is really to focus on the supply side of our business, which is to say the games and content that are on the network. And I think of this very similarly to what I've seen with other 2-sided marketplaces, the initial chapters of the growth story. And I think this is the case with eBay, Airbnb, Uber. But the initial chapters of that story were really focused on building the demand side of the platform as those companies, and we as well, sought to establish a new normative consumer behavior in an industry that previously didn't exist. And when I reflect on the years behind us, we've been largely successful in establishing that consumer behavior as evidenced by the transaction volume that's now flowing through the system.

But our investment is shifting towards building better content and better products for our developer customers as we see the supply side of our business and the games on the platform as the long-term growth engine of our business. And so as we invest in those developer customers, as we continue to do an increasingly better job of meeting their needs and solving their pain points, we expect to see an increased cadence of new content on the platform and likely a rising quality VaR in that content as well.

The second part of the question, when I hear that question of when will you have a game like Call of Duty or PUBG or Fortnite, I imagine the question is when is Skillz going to have just an absolutely massive game with a huge embedded audience, like a Call of Duty or a Fortnite. And I do believe that day is coming. But we can't tell you whether that's going to be an existing game. We can't tell you whether that's going to be a new game for the Skillz platform or exactly when that day is going to be, that a game like Fortnite or Call of Duty or of that size joins or grows in the platform. I mean that type of scale is what we're building for. And it's pretty easy to see the potential revenue impact from something like that. I mean we did $384 million of revenue last year on roughly 3 million playing MAU. And so you can do the math on a single piece of content that brings 20x that current scale onto the platform and what that would mean from a revenue perspective. So it's definitely exciting, but it's not something that we'd want to pick a date and set a promise for when it's coming.

Great. Thank you, Casey. And then our last question, you recently borrowed $300 million at 10.25% interest, can you clarify what this is for, considering you still have around $500 million of cash on hand?

Thanks for the question, Stefan. So we did complete a $300 million senior secured debt offering at the end of last year. So that financing really provides us with further flexibility and allows us to move quickly to take advantage of M&A and other strategic investment opportunities when they arise. And we're really focused on pursuing selective M&A opportunities that could accelerate our strategy, our growth and our profitability. And I can tell you that we are actively evaluating opportunities. But as you know, with the nature of M&A investment opportunities, that's very difficult to predict when and if the deals are going to close.

Great. Thank you. And that takes us to the end of our Q&A. I'll turn it back over to Andrew Paradise for closing comments.

Just wanted to thank everyone sincerely for taking the time to join us today. I know how busy everyone's lives are these days. We very much look forward to providing an update on our progress for 2022 when we report our first quarter results. Till then, thank you.

That concludes the Skillz Fourth Quarter 2021 Earnings Call. Thank you for your participation. You may now disconnect your lines.