Q2 2021 Skillz Inc Earnings Call
For <unk>.
[music].
We are now live Stephan please go ahead.
Good day and welcome to the scale second 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, Chad can 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 of discussing our business highlights for this quarter.
Some of the 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 SEC's 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 for the most directly comparable GAAP measures is available in our second quarter 2021 earnings release.
With that I'll turn the call over to Andrew.
Thank you Stefan.
Good afternoon, everyone and thank you all for joining us today to discuss our second quarter of 2021 results. This quarter, we made important investments, though accelerated key initiatives for our users increase our content and advance our platform technologies really setting the stage for long term growth hopefully you've all had an opportunity to read our stockholder letter, which contains details of our true.
<unk> performance with that let me open up for questions.
If you would like to ask a question. Please press star followed by 1 on your telephone keypad now if you change your mind at the Star followed by day.
Okay.
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.
<unk> 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.
On the exit games.
<unk> and the synchronous player capability.
<unk> talked about some developers testing synchronous on the platform before the investments so.
I'm just wondering if.
You can update us on sort of the timing of when we might see more activity. There on the platform and is that the development pipeline now going to be sort of gated by exit or just maybe talk about that whole.
There for us.
Yeah, Yeah, so, let's let's take that on the 2 parks. Thank you for the question.
Probably the first part of talking about conversion to.
To paying users.
I'd referred to as <unk>, and our Chief revenue officer to comment on this team is responsible for optimizing this metric.
Michael This is Casey thanks for thanks for the questions and continued interest from the business.
We actually think we have a lot of upside and continuing to increase our conversion rate from playing to pay.
We've actually this is something we've been studying since of the businesses inception.
We've done we've looked at market surveys and cut the number a number of different ways.
And we believe that we should be able to incur.
The increase conversion over the long term to 40% or higher.
And let me let me comment on the second part of your question, Michael which is about <unk> and the leverage against our user acquisition spend.
We expect our key this year to contribute $13 million of revenue for the remainder of 2021 before synergies.
Going to take.
I'm sorry to day DSO.
So I think Michael was asking about exit.
Yes, Sir.
2 deals both closing recently.
Yeah.
The next kind of locking in on.
No I know.
We started talking about paying users and conversion I sort of thinking about arguing.
Okay, Let me tell you a little bit about exit.
The.
The reason for the exit investment, it's an alliance that really accelerates our expansion into the genre such as racing fighting in first person shooter games candidly. These are the genres that I love most of the Gamer and I've been incredibly excited about this development.
<unk> actually been working on building the most advanced multiplayer server technology for about 15 years now so the the alliance with exit it gives us platform exclusivity for exits technology positions us to be the preferred partner for publishers and developers worldwide. If theyre interested in end user.
<unk> skill based gaming is the way to monetize and multiplayer synchronous technology from exit.
In terms of the integration our SDK will be integrated with exits photon engine. This will make it easier for developers to rapidly enable their games for competition.
Okay. Okay. Thanks, a lot for the color.
Of course, thanks, Michael.
Our next question comes from Brian Fitzgerald of Wells Fargo. Your line is open. Please go ahead.
Thanks.
I'll pick up on the <unk> question from.
Where Michael left of our peak.
To.
The trade scope of West point with me by the way.
So 2 part question 1 is on the.
The average LTV for cash what said what's had been trending like.
We've kind of progress through the first half of the year, where do you see it during the second half of the year.
How do you see that going forward with some of these tools on assets that youre, the broaden youre, bringing the bare specifically around.
You could quantify how <unk> is helping and costs.
In the quarter on what you see that doing for you from a cash perspective in the second half of the year.
Sure.
So in terms of the LTV over CAC.
I'll actually ask Casey the answer that 1 first of this is very near and Dear to his activities. This euro.
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 buy we previously shared shared some of those LTV curve, but we continue to see our Ltvs remain remained quite strong CPI 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 we think theres an opportunity to improve upon Archie is 1 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 well.
And then let me jump in on the second part, Brian which is talking a little bit about the Archie deal I think it's sort of really important 1 for the future of our company.
I mentioned a minute ago that debt, we expect $13 million of revenue for the back half of 'twenty 1.
Honestly, that's not the most important part of the transaction when we think about the the Arqiva deal I know we shared color on the 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 GSP marketing spend to Archie.
In terms of our plan first we're going to gradually migrate the substantial portion of our DSP marketing expense the RQ platform and that's going to take a few quarters second we expect to further improve the industry leading performance of argues algorithms by integrating our rich for Cedar.
The first party data.
And that's going to enable us to more efficiently targeted audiences for.
From the impression level, all the way down to end user of LTV. It will really be the only data like that in the industry. So we're really excited about the Archie deal and the potential for the future.
Thanks, Andrew Thanks Casey.
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 for.
When you think about potential call it incremental drivers in the second half for growth and I guess, maybe argue aside for a moment since we've kind of covered that.
We look at things like New games, you got to international opportunities, who knows maybe something good happens with the Google play store. What are you guys kind of pointing to is sort of the biggest drivers as you target for the second half of the year and then I have a follow up.
Well, maybe maybe at the start with I think Q2 revenue growth was very much in line with our expectations. When you think about Q2 'twenty..1 there was the tough comp against Q2 'twenty because of the Covid bump we saw last year.
As we've mentioned on other calls where debt.
You're seeing elevated Cps in in Q2, and so we've been making quite a number of mid and long term investments to mitigate the high <unk> that we've been seeing and obviously you've seen 1 of those this quarter with the announcement of Archie.
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 midterm in the 1 to 3 year period are really focusing on more content being success.
On the platform and more geographies and what that really translates to is new demographics, joining the platform.
And you can think of.
<unk> of things and developments, there like India like Big Buck Hunter, marksman, which you've talked a little bit about.
When you think about the longer term, which certainly is how we think of the company. We think very much even beyond the 3 year period, we think that the future of competition will be centralized on 1 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 sounds like doing some testing in the quarter, which I guess implies that we may see some 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 on.
Any clarity there would be great.
Yes.
Actually I'd love to have Casey comment a little bit on how CPI is trending given in July on what the extra.
Expectation is for how CPI will trend for the rest of the Q3 and Q4.
Sure Brad good to connect.
In terms of in terms of what we're seeing in July.
For 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 pushing down the industry pricing as a whole, but also as a result of the investments that we're actively making at our distribution costs Archie other traffic initiatives.
Brand distribution partnerships things like that.
Hi.
In terms of user acquisition versus engagement marketing.
What we saw in Q2 was rising CPI and in the face of that.
We maintained the financial discipline.
And we reduced our UA investment and this is something that we typically planned for in Q2 as a result of seasonal pressures but.
It is also something that we can allocate dynamically based on what we're seeing inside of the market.
And with that with the bandwidth that came back to the team as a result of reducing net spend we were able to increase our experimentation with engagement marketing and you hit it quite right.
We're looking at for the most effective ways to drive dollars.
Of that that bring our users back that increase their customer lifetime value.
So for as.
As we look at as we look at the path ahead.
If CPI stay up we're going to we're going to chart of very similar of course, and we will eliminate the experiments that don't work, we'll keep the ones that do but we will continue testing as we build for the long term future of the business.
Got it that's great. Thank you.
Our next question comes from Jason Bazinet of Citi. Your line is open. Please go ahead.
Okay can I just ask 1 more question on that on the toggling between.
User acquisition costs.
On engagement marketing.
If you end up spending more on engagement marketing is it right the both directionally users and paying users.
What's sort of the worst than they otherwise would be but you would 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 is.
Is weather engagement marketing and.
Is driving user growth.
Or is driving user monetization.
We see we see the experiments that we're running and engagement marketing move.
Moving to pieces of the.
Of the financial model, 1 is conversion and we run experiments to test incentives that helped drive conversion from non paying the paying users.
But also and perhaps the second point.
Which is which is the larger area of focus for us, which is extending retention and monetization of the existing user base and so.
And maybe the hit it more directly engagement marketing.
It does not drive does not drive Mou our model of the business.
I think we're <unk>.
When we think about toggling between engagement marketing and user acquisition.
Really a finite resources in terms of time and labor to use each quarter. So when we think about.
How we want to 1 alpha.
<unk> activities for really thinking about the most effective ways to deploy marketing resources against our long term plans.
As we noted in the in the letter in Q2 of reduced the user acquisition investment spend following our increased investments in <unk> in the first quarter.
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 on user acquisition and engagement marketing, but we'll continue to exercise discipline in the high UAC environment.
Yes.
I guess when the Archie as sort of a fully integrated in your spend of sort of moved over to Archie.
Maybe when we could see the UA spend ticked back up the right way to think about it.
I think it's entirely driven by market dynamics, but that wouldn't be.
Okay alright, thank you.
Yes.
Our next question comes from drew Crum with Stifel. Your line is open. Please go ahead.
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 half of it are the drivers to improve it you've noted the idea of <unk> was.
It was not of concern for you.
The business end of your early observation quarter to date or year to date.
Other and then lastly.
What are the next milestones for the NFL competitors challenge, along with Big Buck Hunter and see any meaningful contributions from either 1 of those.
Okay.
Yes, let me try and tackle those.
I think we have 3 questions. So 1 is.
The take rate for the second half <unk> impact on 3 big Buck Hunter marksman impact.
And if okay, why don't we and NFL or let's call it new content.
On becoming success on the platform content, we really want to take a view of sharing the progress.
But balance that with the with the expectation that we do not we do not know which.
And the 1 piece of content will become successful whether it's the game like Tetris that we're talking about early launch and the metrics for the current version of the game not really.
For into hard launch and I think that's that's.
That's very much for why we call it soft lunch in hard launch in the industry.
When you think about big Buck on remarks men working on.
Thanks Art.
<unk> of the performance.
Moving out we certainly arent Mckinney.
Any predictions today on potential revenue.
That isn't baked into our forecast.
As its typical for <unk>.
And including any revenue from deviation.
Guidance, so that would be the kind of of I think the content piece on.
Currently we can talk about the NFL.
I'll challenge.
In Q2.
So we officially launched our multiphase partnership with the NFL, we kicked off a competition to search for the next great NFL mobile game of games.
On the developer community is really energized and respond with the significant interest income statement I'd say, we're really excited by the overwhelming response, both from existing large influx of new developers.
The skills.
And we actually ended up with hundreds of game proposals that were submitted and we collaborated with the NFL. We actually reviewed all of these proposals.
Give you an idea of how steep the competition was we cut it down to.
That of moved into the development phase of the challenge. So we have 14 companies that are.
Building NFL games.
I would say some of them some color there we've been delayed by the both the ingenuity and the original reality of the proposals that were submitted.
Both the NFL and skills, we're really excited by what we saw out of the the proposals and we from a timing standpoint, we expect to launch the winning game of games ahead of the 2022 NFL season.
So the kind of refresh everyone who's not familiar with game development. The timeline, we would typically see for our mobile game can be about 18% to 24 months from when the game is first started started as a project on the platform to when it actually is 1 of kick it over to Keith.
The C for a minute to talk about <unk>.
Absolutely.
The idea is still relatively early in terms of the.
The rollout of iOS for.
<unk> 5 has been has been relatively slow and so the.
It's pretty early to read the impact of it though I would say we continue.
Ebay will be neutral on the 1 hand cost per install 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 the third part was asking about take rate.
I will give you a turn to talk a little bit of a take rate. Thank you Andrew.
Couple of things on the take rates so the multiple drivers that we should.
Used to work with too.
Look at take rate over time, just some examples.
And sponsored prizes.
Mix of format <unk> used for example hits of hit this Brexit and I think just of rule. The number of things. We can look to experiment with in terms of of how we work with the use of to ensure that we have avenues to increase take rate over time, while minimizing additional friction for users.
Again no specific.
Take rate guide would give you for the latter part of the other net we're looking at that all the time there are many avenues, we can do that at the time.
I think that we covered all 3 questions.
I think we are true FERC their rollout we'll move on to the next question, Yes, Yes, and I appreciate the color guys. Thank you.
Thanks.
As a reminder, if you would like to ask a question. Please press star followed by 1 on your telephone keypad now.
Our next question comes from Andrew <unk> of Jefferies. Your line is open. Please go ahead.
Thanks for the.
Let me ask a couple of questions here.
The first 1.
<unk> of games, you're kind of talking about the high level benefit any way to kind of quantify what those benefits could look like where they would show up.
And kind of of timing on that and then and then my second question.
As you talked about CPI costs related to the Archie acquisition.
Is there a way to simplify that and you just kind of talk about the broader impact they'll have on SG&A you kind of broke it out on the top line for guidance in any way to think about that for.
From a modeling perspective for this year. Thanks.
Sure. Thank you for the question Andrew Let me, let me start with talking a little bit about exit or we cannot comment on arc as much as we can for now.
So with exit games I think 1 thing Thats publicly available information I believe their community of developers of about 500000 developers that are already using the photon engine for of synchronous multiplayer games. So you can imagine we'd be pretty excited about the opportunity to cross market to that developer population over the coming years.
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 the first person shooter synchronous.
On loads.
We do we do of promising early results in terms of first person shooter with asynchronous with Big Buck Hunter marksman.
But but obviously games like call of duty games like Halo, there a massive part of the video game industry and <unk>.
Very near and Dear to my heart certainly on in terms of the getting them running of successfully on the platform.
So with with exit.
On that partnership we can we can build the integrated solution to deliver.
The potentially the first synchronous first person shooter on skills, which.
It's hard to quantify the level of impact of certainly wearing.
The demographic to the platform.
It will probably.
Quite steeply increase the amount of of.
The quote unquote hardcore gamers.
And in 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 public for the available that some years ago, we partnered with <unk> com for on Streetfighter too I would love to see the streetfighter or ace or of fighting game on the platform I think it would be incredible for that audience and also for of skills 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 a niche genres and and then from that hopefully we can talk about yielding amazing content that the.
The successful on the platform. So that's the the exit piece in terms of Archie.
Keeps you do on talk a little bit about I know the CPI.
<unk> on near and Dear to your heart.
Yes.
Yes, absolutely and I wasn't sure I wasn't sure of the question was about <unk> and the potential impact to CPI.
Or about the Archie revenue when it and the flow through to the P&L.
Yes, I guess you broke out your forget you updated the guidance if you kind of broke out the revenue side of <unk>.
Archie just curious if there is a breakout on the SG&A side.
On.
Without getting too deep into the impact on CPI.
Yes sure. Thanks, Andrew just a couple of the points of basis. So just to recap I think what.
Andrew had mentioned earlier, so we assumed roughly $13 million of revenue contribution from Aki for the remainder of the year. Following the close in terms of their <unk>.
Impact on the Opex I won't give specific hopefully that will give you a little color that's hopefully helpful.
When you walk down the P&L for them. So the gross profit margin, it's a little lower than the skills parents. So call. It in the 70% range and then when you look at across the Opex kind of categories. The largest of the sales and marketing followed by R&D and G&A and then at the adjusted EBIT the lines, So archeus historically being profitable at the adjusted EBITDA.
Your line of roughly helping the scale as the public part of the public company. So we would assume that the contribution would be they would be slightly better than breakeven on a standalone basis. So you can use some of those assumptions when you kind of combine them with skills of the whole.
Got it that's super helpful. Thank you okay. Thank you.
We have an additional question from Brad Erickson. Your line is open. Please go ahead.
Uh huh.
Hi, again, just had 1 more follow up just a little confused on some of the language here in terms of the user acquisition.
The spend you call out the engagement spend and then the UA spend on it sounds like all of that is comprised of 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 revenue and if so can you can you break that out for us if possible. Thanks.
Hey on Brad It's Ian you will so yes, you will see that the there was a specific breakdown in the financials between user acquisition and engagement marketing so those broken out.
You look into our filings you'll see that there is a differentiation is based on the fact that al and use of development.
So based on that if they'd have a valid expectation of some of that expense. So it can be a breakdown between what is considered in contra revenue on sales and marketing depending on that valid expectation. So happy to go into that with you in detail, but thats all broken out.
And just for context, those roughly about.
The $20 million of end user incentives and contra revenue in the quarter of Q2.
Got it that's great, yes, I don't think the filing the quite yet so that's helpful. Thanks, Dan.
Thanks.
We have no further questions on the lines.
Okay well. Thank you. Thank you very much everyone for your time today, we look forward to providing an update on our continued progress when we reported our third quarter results and until then thank you everyone.
Great. Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yeah.
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Yes.
Okay.