Earnings Call Transcript - SKLZ Q3 2021

Operator, Operator

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. All lines will be muted during the presentation portion of the call, with an opportunity for question-and-answer at the end. I would now like to pass the conference over to your host, Stefan Gerhard with Skillz. Thank you. You may proceed, Mr. Gerhard.

Stefan Gerhard, Host

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.

Andrew Paradise, CEO

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 the 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 offline 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, Operator

The first question is from Michael Graham with Canaccord. Please proceed.

Michael Graham, Analyst

Hi, thank you for the information in the shareholder letter. I wanted to discuss Aarki a bit. You mentioned that your guidance for the year doesn't yet include any benefits from Aarki on the marketing side, but you do plan to adjust your spending there and integrate it. Could you provide some insight into the expected pace of that integration? Additionally, you mentioned the potential for leveraging user acquisition spending next year. Now that you've explored Aarki more deeply, I would like to hear your updated thoughts on user acquisition versus engagement spending and how you view that overall relationship moving forward.

Ian Lee, CFO

Yeah. Hi, 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, in the letter the CPI improvement we saw in the quarter didn't yet include the benefits 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 two 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 across 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 to 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.

Michael Graham, Analyst

All right. That’s helpful. Thanks a lot, Ian.

Operator, Operator

Thank you, Mr. Graham. The next question is from Clark Lampen with BTIG. Please proceed.

Clark Lampen, Analyst

Thanks a lot. Good evening. 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?

Ian Lee, CFO

Andrew, do you want to take that one?

Andrew Paradise, CEO

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

Clark Lampen, Analyst

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?

Ian Lee, CFO

Hey, 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.

Clark Lampen, Analyst

Got it. Thanks guys.

Operator, Operator

Thank you, Mr. Lampen. The next question is from Brad Erickson with RBC Capital Markets. Please proceed.

Dan Parr, Analyst

Thanks, guys. 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 2020? And then I have two questions on Big Buck Hunter after.

Ian Lee, CFO

Sure. Hi. 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.

Dan Parr, Analyst

Got it. Thanks. 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? Thanks.

Ian Lee, CFO

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

Casey Chafkin, CRO

Hi 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 two developers on the system though as more experiences have come online.

Dan Parr, Analyst

Thanks.

Casey Chafkin, CRO

Thank you.

Operator, Operator

Thank you, Mr. Erickson. We have a follow-up question from Clark Lampen with BTIG. Please proceed.

Clark Lampen, Analyst

Thanks for letting me back in. 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?

Ian Lee, CFO

I'll pass it to Andrew.

Andrew Paradise, CEO

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 number one 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 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 two genres that are possible today with the level of fidelity that users expect on the Skillz platform, when they're playing for real prizes.

Clark Lampen, Analyst

Understood. Thanks for the color.

Andrew Paradise, CEO

Thank you.

Operator, Operator

Thank you, Mr. Lampen. The next question is from Brian Fitzgerald with Wells Fargo. Please proceed.

Brian Fitzgerald, Analyst

Thanks, guys. 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?

Ian Lee, CFO

I'll pass it to Andrew.

Andrew Paradise, CEO

So I think we're being very thoughtful in terms of our inorganic growth as well as our acquisition 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.

Brian Fitzgerald, Analyst

Got it. Appreciate Andrew.

Andrew Paradise, CEO

Thanks, Brian.

Operator, Operator

Thank you, Mr. Fitzgerald. The next question is from McAllister Henry with Contentful. Please proceed.

Unidentified Analyst, Analyst

Hi, there. 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 four 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 achieves those milestones even if he's not associated with the company in the future?

Ian Lee, CFO

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. Operator, can we move to the next question if there is any please.

Operator, Operator

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

Andrew Paradise, CEO

Thank you all for joining 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.

Ian Lee, CFO

Great. Thanks everybody.

Operator, Operator

That concludes the Skillz third quarter 2021 earnings conference call. Enjoy the rest of your day.