Good evening. Thank you for joining Skillz's Fourth Quarter 2021 Earnings Call. My name is Selena, and I will be your moderator. 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 Skillz' Fourth 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 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 on the Investors 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 two 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 costs. So three of the measures that are probably the three 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 2022 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 focusing first-time 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. And 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.

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 two 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.

Thank you for the question, Michael. I'll pass it over to Casey, our Chief Revenue Officer, who will discuss marketing. Then Ian Lee, our CFO, will provide details on 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 our 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 this year to generate more returns in the back half of the year. And then to Andrew's other point, we would expect in Q4 of this year, 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 quite a lot 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 one-time 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.

Thanks, Andrew. Drew, the way to think about the optimization of 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, which aren’t, 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 Q4 with paying MAUs? And at least the past few years, you've seen a sequential uptick going from Q4 to Q1. Is that something that we should be anticipating this year with Q1?

Ian?

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 this year as we used 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 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 there exists from a free cash flow perspective.

Yes. Actually, I'm not sure if Andrew can hear us right now. Casey, do you want to take the first one on engagement marketing? I'll 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 maybe you say, structural changes.

Yes. I believe you have some common strategies to keep players engaged on the platform. You've mentioned reducing efforts to target lower-value users, and I think we can all understand what that entails. My questions are: what does that actually mean, and are you considering making any significant structural changes to implement that strategy?

Sure. The engagement marketing spend usually involves specific incentives we provide. Over time, we’ve observed that some of these incentives effectively boost engagement, retention, and monetization, while others may reduce existing player spending. As we approach 2022, starting from 2021, we realized we are still in the early stages. Our approach has been to broadly test which programs yield the best results and identify the less effective ones. I don't believe we need long-term structural changes, but I mentioned earlier that we could have eliminated some underperforming programs more quickly, which would have saved money and improved profit margins. Therefore, in 2022 and onward, we're focusing on applying the lessons learned from 2021 across the system. This doesn’t mean we won't continue testing programs that engage our users, but it does indicate that we'll be more cautious and likely discontinue the ineffective ones sooner.

Brad, it's Ian. On your second, 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.

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 technology 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. A little surprised that some of the trolls out there on the Internet. We will be announcing developer finance 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 timeline, 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 uploaded 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 since time immemorial; it is an important part of being human. When you think about what we can do in the digital environment is we can actually perfect competition in ways that you can't offline. We can create higher levels of trust and fairness than anything we've ever experienced in the offline 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?

In 2021, we began developing a team to establish our business in India. To be completely honest, we hired our own staff but are now scaling back. It's somewhat disappointing to discuss this further because India represents a significant opportunity for us. However, we do not plan to invest more heavily in our India product or content localization at least in the first half of 2022. We are currently communicating to everyone that our goal is to focus on fewer initiatives but execute them exceptionally well. Launching in India is still a crucial initial step in Skillz' longer-term strategy to capture the vast international gaming market. We truly believe that India and other international markets present significant long-term growth opportunities for us, but it cannot be our immediate focus.

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. I believe there are two parts to this question. The first part is about our efforts to grow content in our ecosystem. As Andrew mentioned earlier, our 2022 plan will focus on the supply side of the business, specifically the games and content available on our network. I see this similarly to the early phases of growth for other two-sided marketplaces like eBay, Airbnb, and Uber. Initially, these companies focused on developing the demand side of their platforms to establish consumer behavior in a previously non-existent market. Looking back, we have been quite successful in establishing that behavior, as indicated by the increase in transaction volume through our system. Now, we are shifting our investment toward enhancing content and products for our developer customers, as we view the supply side and the games on our platform as the long-term growth driver for our business. By investing in our developer customers and addressing their needs and challenges, we expect to see a greater frequency of new content on our platform, as well as improved quality in that content. The second part of the question relates to when we will have a game like Call of Duty, PUBG, or Fortnite. I interpret this to mean when Skillz will feature a massive game with a large built-in audience, similar to those titles. I genuinely believe that day will come, but I can't specify whether it will be an existing title or a new game for Skillz, nor can I provide an exact timeline for when a game of that scale will join our platform. However, building for that level of scale is certainly part of our strategy. To illustrate the potential revenue impact, we generated $384 million in revenue last year with approximately 3 million monthly active users. Just imagine the revenue implications of a single piece of content that could bring in 20 times our current scale. It's an exciting prospect, but we want to avoid committing to a specific date for its arrival.

Great. 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?

So, sorry, Andrew.

Sorry, I was just going to hand off. I'm glad you already jumped in, you're the right guy for this question.

So sorry for jumping in. Thanks for the question, Stephan. 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 it 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, growth, and profitability. And I can tell you that we are actively evaluating opportunities. But as you know, it’s 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.