Earnings Call: Q2 2021

Aug 3, 2021

Good day, and welcome to the Skillz' 2nd quarter 2021 earnings conference call. I will proceed shortly by reading our forward looking statements and non GAAP measures immediately followed by a question and answer session. Hosting the question and answer session today, we have Andrew Paradise, Chief Executive Officer Casey Chaskin, Chief Revenue Officer and Ian Lee, Chief Financial Officer of the company. We hope you had a chance to read our press release and stockholder letter that 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 for 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 and other such 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 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 measures is available in our Q2 2021 earnings release. With that, I'll turn the call over to Andrew. Thank you, Stepan. Good afternoon, everyone, and thank you all for joining us today to discuss our Q2 2021 results. This quarter we made important investments that will accelerate key initiatives to grow our users, increase our content and advance our platform With that, let me open it up for questions. Our first question comes from Michael Graham of Canaccord Genuity. Your line is open. Please go ahead. Thank you. Thanks for taking the question. I wanted to ask 2. The first is on your conversion to paying players Was up again this quarter, which is great. Just maybe comment on how much higher you think that can trend over time. And then I wanted to ask about the exit games investment and the synchronous Player capability. You had talked about some developers testing synchronous on the platform before this investment. So I'm just wondering if you can update us on sort of timing of when we might see more activity there on the platform and is That development pipeline now going to be sort of gated by exit or just maybe talk about that whole vector for us? Yes. So let's take that in 2 parts. Thank you for the question. Probably the first part talking about conversion to paying users, I'd prefer to ask Casey Jeff Skinner, Chief Revenue Officer to comment as his team is responsible for optimizing this We actually think we have a lot of upside in continuing to increase our conversion rate from playing to paying. We've actually this is something we've been studying since the business' inception. We've looked at market surveys and This number a number of different ways, and we believe that we should be able to increase conversion over the long term to 40% or higher. Let me comment on the second part of your question, Michael, which is about our key and the leverage against our user acquisition spend. We expect ARQI this year to contribute 13,000,000 of revenue for the remainder of 2021 before synergies. It's going to take I'm sorry, did I DSO I think Michael was asking about Exit. Exit, yes, sorry. Two deals both closing Recently. You've got a lot going on, I know. I know, I know. And that you we start talking about paying users and conversion, I thinking about Arke. Okay, let me tell you a little bit about exit. So the reason for the exit investment, it's an alliance That really accelerates our expansion into genres such as racing, fighting and first person shooter games. Candidly, these are the genres that I love most as a gamer And I've been incredibly excited about this development. Exit has actually been working on building the most advanced multiplayer server technology for about 15 years now. So the alliance with exit, it gives us platform exclusivity for exit's technology. It positions us to be the preferred partner for Exit. In terms of the integration, our SDK will be integrated with Exit's Photon engine. This will make it easier for developers to rapidly enable their games for Our next question comes from Brian Fitzgerald of Wells Fargo. Your line is open. Please go ahead. Thanks. I will pick up on the ARKII question from where Michael left off. He went to The trade scope of West Point with me by the way. So 2 part question. One is on The average LTV for CAC, what's that been trending like as we've kind of progressed through the first half of the year? What do you see it during the second half of the year? And how do you see that going forward with some of these tools and assets that you brought and you're bringing to bear, specifically around if you could quantify how ARQ is helping in costs in the quarter and what you see that doing for you from a CAC perspective in the second half of the year? Sure. So in terms of LTV over CAC, I'll actually ask Casey to answer that one first This is very near and dear to his activities as CRO. Brian, good to talk to you again and thanks for the question. What we've seen for the first half of the year is that our LTVs remain strong and steady. And we've previously Shared some of those LTV curves, but we continue to see our LTVs remain quite strong. CPIs are up across the industry, and this is something we've talked about over the last couple of quarterly earnings calls, and it's something that we think there's an opportunity to improve upon. ARKI is one piece of that. There are also other initiatives that we're working on in terms of lowering our customer acquisition costs. A few of them that come to mind and ones that we've talked about in terms of staffing the team and letting our marketing investment Catch up in terms of the infrastructure, catch up with our revenue build, but there's also opportunities in creative development, organic user acquisition and in other areas as And then let me jump in on the second part, Brian, which is talking a little bit about the ARK deal. I think it's a really important one for the future of our company. I started mentioning a minute ago that we expect $13,000,000 of revenue for the back half of 'twenty one. Honestly, that's not the most important part of the transaction. When we think about the ARKU deal, I know we shared color on several of the reasons on why we made this acquisition. It will take several quarters for us to realize the full impact of the transaction synergies in terms of migrating our DSP marketing spend to ARKII. In terms of our plan, 1st, we're going to gradually migrate a substantial portion of our DSP marketing spend to the ARK platform And that's going to take a few quarters. 2nd, we expect to further improve the industry leading performance of Archie's algorithms by integrating our rich first data, first party data. And that's going to enable us to more efficiently target audiences from the impression level all the way down to end user LTV. It will really be the only data chain like that in the industry. So we're really excited about the Arke deal and the potential for the future. Our next question comes from Brad Erickson of RBC Capital Markets. Your line is open. Please go ahead. Hi. Thanks for taking the question. I just have 2. First, When you think about potential, call it, incremental drivers in the second half for growth, and I guess maybe set Arke aside for a moment since we've kind of covered that. We look at things like new games, you got international opportunities, who knows, maybe something good happens with the Google Play Store. What are you guys kind of pointing to as sort of the biggest drivers As you target the second half of the year? And then I have a follow-up. Well, maybe to start with, I think Q2 revenue growth was very much in line with our expectations. When you think about Q2 'twenty one, it was a tough comp against Q2 2020 because of the COVID bump we saw last year. As we've mentioned on other calls, we're definitely seeing elevated CPIs In Q2. And so we've been making quite a number of mid and long term investments to mitigate the high CPIs that we've been seeing. And Obviously, you've seen one of those this quarter with announcement of ARKII. All of our investments so far against mitigating CPI are progressing well and we do expect to see benefits from them later this year. In terms of growth drivers in the near term kind of the 1 year period, We're looking at optimizing the value chain from impression level down to end user LTV, which will give us, I would say, better predictive LTV than Potentially anyone in the industry. In the mid term in the 1 to 3 year period, really focusing on more content being successful on the platform and more geographies. And what that really translates to is new demographics joining the platform. And you can think of things and developments there like India, Like Big Buck Hunter Marksman, which we've talked a little bit about. When you think about the longer term, which certainly is how we think at the We think very much even beyond the 3 year period. We think that the future of competition will be centralized in one place on the Internet. And that means going beyond mobile, that means non gaming applications like fitness, which we've talked about. Got it. That's great. And then maybe just a follow-up housekeeping item from the shareholder letter. In terms of the user acquisition marketing, I think You mentioned that you upped the engagement spend, doing it sounded like doing some testing in the quarter, which I guess implies that we may see Reversion there in terms of leverage, so talking like the amount of spend versus net revenue. Is that kind of the right way to be thinking about it as we head into the second half of the year? Just any clarity there would be great. Yes. And you know what, I actually would love to have Casey comment a little bit on how CPI is Given in July and what the expectation is for how CPI will trend for the rest of Q3 and Q4? Sure. Brad, good to connect. In terms of what we're seeing in July For CPI, we're starting to see the pace of industry pricing increases begin to stabilize. And we expect that pricing to flatten before decreasing later this year. We think that decrease is going to be driven by market dynamics, brand distribution partnerships, things like that. In terms of user acquisition versus Engagement marketing. What we saw in Q2 was rising CPIs. And in the face of that, We maintained the financial discipline and we reduced our UA investment. And this is something that we typically plan for in Q2 as a result of seasonal pressures, But it's also something that we can allocate dynamically based on what we're seeing inside the market. And with that with the bandwidth that came back to the team as a result of reducing that spend, we were able to increase our We were able to increase our experimentation with engagement marketing. And you hit it quite right. We're looking for the most effective Ways to drive dollars that bring our users back that increase their customer lifetime value. And so as we look at the path ahead, if CPI stay up, to we're going to chart a very similar course and we'll eliminate the experiments that don't work, we'll keep the ones that do, but we'll continue testing as we Our next question comes from Jason Bazinet of Citi. Your line is open. Please go ahead. Thanks. Can I just ask one more question on that toggling between user acquisition costs And engagement marketing? If you end up spending more on engagement marketing, is it right that both directionally users and paying users Would sort of be worse than they otherwise would be, but you'd see the benefit on the revenue per paying user. Is that the right way to think about it? I think what you're asking is whether engagement marketing is driving user growth Or is driving user monetization. We see the experiments that we're running in engagement marketing moving 2 pieces Of the financial model, one is conversion, and we run experiments to test incentives that help drive conversion from nonpaying Paying users, but also and perhaps your second point, which is the larger area of focus for us, which is extending retention and monetization of the existing user base. And so maybe to hit it more directly, engagement marketing does not drive MAU or MAU of the business. And I think more broadly, when we think about toggling between engagement marketing and user acquisition, We really have finite resources in terms of time, dollars and labor to use each quarter. So when we think about how we want to Want to optimize these activities, we're really thinking about the most effective ways to deploy marketing resources against our long term plans. As we noted in the letter, in Q2, we reduced the user acquisition investment spend following our increased investments in UA in the Q1. And really given when you think about the longer term plan of our business, given the massive market ahead of us, we would prefer to invest more in user acquisition than engagement marketing, But we'll continue to exercise discipline in the high UAC environment. And then you I guess when this ARK E is sort of fully integrated and your spend is sort of moved over to ARK E, then that's maybe when we could see the UA spend tick back up. Is that the right way to think about it? I think it's entirely driven by market dynamics, but that wouldn't be that certainly wouldn't be a crazy idea. Our next question comes from Drew Crum of Stifel. Your line is open. Please go ahead. Okay, thanks. Hey, guys. Good afternoon. So you guys have demonstrated some good progress on the take rate over the last several consecutive quarters. How are you thinking about that in the second half? What are the drivers to improve it? Separately, Andrew, you've noted that IDFA was not a concern For you with the business and your early observations in terms of impact that you've seen quarter to date or year to date rather? And then lastly, what are the next Milestones for the NFL Competitors Challenge along with Big Buck Hunter and when would we expect to see any meaningful Contributions from either one of those? Thanks. Okay. Let me try and tackle those. So let's start with unpack that. I think have three questions. So one is asking about take rate for the second half, 2 IDFA impact and 3 Big Buck Hunter Marksman impact. And if okay, why don't we start with Big Buck Hunter Marksman and NFL or let's call it new content becoming On the platform, I think when we think about content, we really want to take a view of sharing the progress of new content launching, But balance that with the expectation that we do not know which any one piece of content will become successful, Whether it's a game like Tetris that we're talking about earlier this year, Tetris being in soft launch and the metrics for the current version of the game, Not really warranting significant scale into hard launch. And I think that's very much why we call it soft launch and hard launch in the industry. When you think about Big Buck Hunter Marksman, we're continuing to work closely with the team of Play Mechanics to optimize the performance of BBH In preparation for scaling out, we certainly aren't making any predictions today on potential revenue contribution from BBH. So that isn't baked into our forecast. As it's typical for games that we have yet to scale, we're not yet including any revenue from BBH in our guidance. So that'd be the kind of, I think, the content piece on terms of DBH. And then similarly, we can talk about the NFL challenge if helpful. But with the NFL challenge, In Q2, we officially launched our multi phase partnership with NFL. We kicked off a competition to search for the next great NFL mobile game or games. The developer community is really energized and respond with significant interest and excitement. I'd say we are really excited by the overwhelming response both from existing developers As we saw a large influx of new developers to Skillz. In the end, we actually end up with hundreds of game proposals that were submitted. And we collaborated with the NFL. We actually reviewed all of these proposals. We give you an idea of how steep the competition was. We cut it down To 14 semifinalists that have moved into the development phase of the challenge. So we have 14 companies that are building NFL games. I would say some color there. We've been delighted by both the ingenuity and the originality of the proposals That were submitted, both the NFL and Skills were really excited by what we saw out of the proposals. And we from a timing standpoint, we expect to launch the winning game or games ahead of the 2022 NFL season. To kind of refresh everyone who's not familiar with game development, the timeline we typically see for a mobile game can be about 18 months to 24 months From when the game is first started as a project on the platform to when it actually is impacting meaningful revenue. Why don't I kick it over to Casey for a minute to talk about IDFA? Absolutely. So IDFA is still relatively early in terms of the rollout of iOS, 14.5 has been relatively slow. And so it's pretty early to read the impact of it. So I would say we continue to expect that the impact of IDFA will be neutral. On the one hand, cost per likely decreases as advertisers lower their bids in response to less efficient targeting and attribution. On the other hand, this potentially decreases Conversion rates as well. And then I think the third part was asking about take rate. Ian, why don't We'll give you a turn to talk a little bit about take rate. Thank you, Andrew. So, there's a couple of things on the take rate. So, there are multiple drivers that we could You used to work with to look at take rate over time. Just some examples, brand sponsored prizes, there are different Mix of tournament formats that you use, for example, head to head versus brackets. And I think just overall, there are a number of things we can look In terms of how we work with our users to ensure that we have avenues to increase take rate over time while minimizing additional friction for our users. So again, no specific Take rate, Guy will give you for this latter part of the year. Other than that, we'll look at that all the time. There are many avenues we can do that at the time. I think we're through if we're good there. We'll move on to the next question. Yes. I appreciate the color guys. Thank you. Thanks. Thanks. Our next question comes from Andrew Uerkwitz of Jefferies. Your line is open. Please go ahead. Thanks for let me ask a couple of questions here. First one is on EXA Games. You kind of talked about the high level benefits. Any way to Quantify what those benefits could look like, where they would show up and kind of a timing on that? And then my second question As you talked about CPI costs related to the Arky acquisition, is there a way to simplify that and you just kind of talk about the Broader impact it will have on SG and A. You kind of broke it out on the top line for guidance. Any way to think about that from a modeling perspective For this year? Thanks. Sure. Thank you for the question, Andrew. Let me start with talking a little bit about exit And we can comment on RK as much as we can for now. So with Exit Games, I think one thing that's publicly available information, I believe there are community of developers, it's about 500,000 developers that are already using the Photon engine for synchronous multiplayer So you can imagine we'd be pretty excited about the opportunity to cross market to that developer population over the In terms of specific guidance, it would be almost crossing over that line over into talking about new content influencing revenue. But I will say we haven't yet seen a successful game in 1st person shooter synchronous Modes. We do have promising early results in terms of 1st person shooter with asynchronous with Big Buck Hunter Marksman. But obviously games like Call of Duty, games like Halo: Hope, they're a massive part of the video game industry and Very near and dear to my heart certainly in terms of getting them running successfully on the platform. So with exit And that partnership, we can build a integrated solution to deliver potentially the 1st synchronous first person shooter on skills, which It's hard to quantify the level of impact. It certainly will bring a new demographic to the platform. They'll probably quite steeply increase the amount of hardcore gamers and a more male dominant audience that you often see in PC and console. So that's just thinking about FPS not even fighting, it's publicly available that some years ago we partnered with Capcom around Street Fighter 2. I would love to see a Street Fighter or a fighting game on the platform. I think it would be incredible for that audience And also for Skillz platform and our shareholders. So this is the important building block To making that real, the next thing will be inspiring developers to take risks and build in these genres. And then From that, hopefully we can talk about yielding amazing content that's successful in the platform. So that's the exit piece. In terms of Casey, do you want to talk a little bit about I know this is CPI is so near and dear to your heart. Yes, absolutely. And I wasn't sure if the Question was about ARKi and the potential impact to CPI or about the ARKi revenue and the flow through to the P and L. Well, I guess you broke out you updated the guidance, you kind of broke out the revenue side of ARK. Just curious if there's a break On the SG and A side, without getting too deep into the impact on CPI. Yes, sure. Thanks, Andrew. Just a couple of points out there. So just to recap, I think what Andrew had mentioned earlier. So we Assumed roughly $13,000,000 of revenue contribution from Aki for the remainder of the year following their close. In terms of their Impact on the OpEx. I won't give specific. Hopefully, I'll give you a little color that's hopefully helpful when you walk down the P and L for them. So their gross Profit margin, it's a little lower than the skills parent, so we call it in the 70s percent range. And then when you look at across the OpEx kind of categories, let's say the largest is sales and marketing, followed by R and D and G and A. And then at the adjusted EBITDA line, so, Aki's historically been profitable at the adjusted EBITDA line. We're obviously helping scale as a public part of a public company. So we would assume that the contribution would be they'd be slightly better than breakeven On a standalone basis. So you can use some of those assumptions when you are kind of combining them with skills as a whole. Got it. That's super helpful. Thank you. Thank you. We have an additional question from Brad Erickson. Your line is open. Please go ahead. Hi. Again, just had one more follow-up. I was just a little confused on some of the language here in terms of the user acquisition Spend, you call out the engagement spend and then the UA spend, and it sounds like all of that is comprised within sales and marketing. I guess first question is A, is that right? And B, is there an additional component within that is recorded as contra Brad, it's Ian here. Hope you're well. So yes, you will see that there is a specific breakdown in the financials between user acquisition and engagement marketing. So those are broken out. If you look into our filings, you'll see that there is a differentiation. It's Based on the fact that our end user is a developer. And so based on that, if they have a valid expectation of some of that expense, so there can be a break Between what is considered in contra revenue or in sales and marketing depending on that valid expectation. So, happy to go into that with you in a bit more But that's all broken out in our filings, which is how we break out that delineation. And just for context, it was roughly about $20,000,000 of end use incentives in contra revenue in the quarter, Q2. Got it. That's great. Yeah, I don't think the filing is quite hit yet. We have no further questions on the lines. Okay. Well, thank you very much everyone for your time today. We look forward to providing an update on our continued progress when we report our Q3 results. And until then, thank you, everyone. Great. Thank you.