Q4 2021 Skillz Inc Earnings Call
Good evening. Thank you for attending today's skills fourth quarter 2021 earnings call. My name is Selena and I will be your moderator all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you like.
To ask a question. Please press star one on your telephone keypad I would now like to pass the call over to our host define gearhart with V.
D P of finance with skills. Please go ahead.
Thank you.
Good day and welcome to the skilled 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 quick answer and question and answer session. Today, we have Andrew Paradise, Chief Executive Officer.
Thank you Jack and 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 CTO 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.
Good 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.
This 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.
Yeah.
Thanks, Stefan and good afternoon, everyone and thank you for joining us today to discuss our fourth quarter and full year 2021 results are key for stockholder letter was published to the investors side 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 are 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 any geezer user base and added key leaders.
And talent across the company, we acquired Archie.
Positioned us for our long term vision of registering every person on earth into the competitive platform skills.
Having said that.
Recently, we've spoken with a number of our shareholders and we've been listening to your feedback.
Sooner that as we're thinking through and building out our 2022 planned in 2022 and 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 of 2022.
Revenue after engagement marketing our.
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 'twenty, 'twenty, four and well within the net cash we have on hand.
To accomplish this there are a few things we need to 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 will be engaging in 2022 to drive LTV improvement.
First we're going to eliminate our low return get your 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 in technology around how they socially engaged you compete.
And then third it's been about 10 years now for the popcorn, but we haven't refreshed the user interface of our core game loop.
We will be refreshing the interfaces this year, which we think will have a a really nice impact on retention for our users.
In terms of customer acquisition costs and 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. We've heard the message loud and clear that we need to continue to increase the quality of the content of 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 Archie to capture margin that we're giving away right now to third party dsp's.
We've shared a more granular details there Q4 stockholder letter but.
Nothing that we really believe that the result of these efforts will be a far stronger business and perhaps even more importantly, it will position us to continue to officially grow the company and then attractive pace at the end of 'twenty, two and into 2020 three and beyond.
Yeah, 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 a mobile gaming competitive mobile gaming, we're still very much in the early innings when.
When we started 10 years ago, we invented this industry mobile gaming as a part of the video game industry. It was really it was the rest of the industry today, it's grown from being the smallest part of gaming to being a 90 billion dollar plus industry inside of video games, it's actually the majority share of all video games.
And we had the foresight than to built here for now.
We're going to continue to follow Gretzky his 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 monetize it through competition, it's a multibillion revenue opportunity, but it's not going to happen overnight.
Very much focused on this vision of building the competition there for the Internet on focusing first time video games and building game by game developer by developer and we remain very much convinced that the thoughtful sustainable growth of this business is the best path for skills to define this new industry.
The path to pioneering the future competition for the entire world is definitely a long run it's a huge undertaking that we were contemplating that we talk about with you.
But it has the potential to create a trillion dollar opportunity in the long term.
It's a 100 year journey that we've been on we continue to be on now at 10 years 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, and with that let me open up here for questions.
Thank you if you like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you liked to remove that question. Please press star followed by team again to ask a question Press Star one as a reminder, if you are using a speaker phone.
Please remember to pick up your handset before asking your question. We will pass your briefly ask questions are registered.
The first question comes from Michael Graham with Canaccord. Please proceed.
Hey, Thanks for the shareholder letter and for the opening thoughts there Andrew.
I wanted 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 a 11% growth.
But you just mentioned do you want to exit the year Q4 at over 30% growth. So maybe just talk about sort of what that are sort of looks like and why that's the shape of the year. Thanks. So much.
Alright. Thank you for the question, Michael Let me a handout first to Casey our Chief revenue officer Who's on the call to talk about marketing and then Ian.
Illegal our CFO will follow up to talk about revenue guidance.
Thanks, Andrew.
Thanks, Michael for the question.
Candidly, we spent more than we should have in both user acquisition engagement 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 were already leaning into those learnings and inclusive of the things that Andrew mentioned and you just alluded to like getting rid of the.
The programs that we've seen are not are not driving profitable growth for the business, but the reality is we spend more than we should have and as the orient towards a more profitable 2022, we're already reducing both our engagement marketing and user acquisition budgets and the result of that is.
Going to be an 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.
Thanks, Thanks, Andrew and thanks, Michael for the question so on the topic via the anchors referring to so that was regarding revenue after engagement marketing. So as you know it and they laid out 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 through the year, if not perfectly linear.
We expect some of these product initiatives that we're launching in the theater.
Generate more tunes in the back half of beer and into and your specific point, we would expect in Q4 of this year our revenue after engagement marketing growth rate above 30%.
It goes with an adjusted EBITDA margin of better than negative 30% coming out of the year. So just some high level color on gain on that comments Andrew made on on the revenue after engagement marketing truth.
Okay perfect. Thanks, so much Ian and thanks, everyone.
Thanks, Michael Thanks, Michael.
Thank you. The next question comes from drew Crum with Stifel. Please proceed.
Okay. Thanks, Hey, guys good afternoon.
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 could be breaking.
Even by 2024, and then I have a follow up.
Sure. Thank you for the question drew.
Let me hand applications. He is responsible for managing engagement marketing.
Thanks, Andrew.
Hi, drew the way to think about the optimization of engagement spend is.
It's exactly as I just mentioned is 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 short term in orientation, and which aren't and so the 10% drop that we expect this year.
It is.
The optimizations that we were confident we can execute inside of the calendar year that we expect to continue optimizing that expenditure over time, just as we will do with all of our other expenditures.
Got it thanks, KC and then just as my follow up any more detail you can share around the sequential growth you experienced in <unk> with paying mouse.
You know at least the past few years, you've seen that sequential uptick going from <unk> to <unk> is that something that we should be anticipating this year with <unk>.
Yeah, Hey, Andrew.
Yeah. So just.
Mr. Andrew Smith.
Just before I finish that just on the prior question drew I'd say you will see in terms of negation marketing certainly a.
Sequential decrease can be engaged marketing from Q4 of last year into Q1. So just a note that because we are starting that.
Marketing right away.
I would say that we.
We did see obviously, it's sort of an increase in.
The user base in Q4, so all the CSP ecosystem the user acquisition.
Marketing I would note that in prior years, we have seen a boost from Q4 to Q1 of <unk>.
Of prior years again, I don't want to give specific guidance on the particular.
The flow of the sequential growth into Q1, but I would say again, we aren't going to be.
Boosting user acquisition in the same way that we haven't probably is what we'd be focusing much more on the efficiency of that user acquisition, starting again in Q1, which has already commenced.
Okay. Thanks, guys.
Thank you drew the next question comes from Brad Erickson with RBC. Please proceed.
Hi, there. Thank you I guess first just on the.
Apologies for my voice on the lower engagement marketing.
Two in 'twenty two.
Do you think you need to make maybe any sort of structural changes is as you look to sort of keep players engaged.
On the platform.
And then and the second question is just when you're talking about the breakeven in 'twenty four I think that was for adjusted EBITDA EBITDA can you maybe just help us what sort of a bridge or lag may exist from a free cash flow perspective. Thank you.
Yeah, I'm not sure I'm not sure if I'm Andrew.
Andrew from Yours right now.
Casey do you want to take that first one on geis marketing I'll take the second part.
Brad I wasn't sure I wasn't sure I understood. The question. This is Casey I wasn't sure I understood. The question regarding the BK structural changes.
Yeah, I think you guys have right.
You 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 some of them going out 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 is really you know.
A what what does that mean in be.
And second like are you looking to make any sort of bigger structural changes as you try and execute that strategy. Thanks.
Okay.
Got it yeah and.
I think the way the way to think about it is the engagement marketing spend is typically manifests manifested in terms of specific incentives that are that were giving out and what we've seen over time is that some of those incentives are effective in.
Driving increased engagement retention and.
And resulting monetization and in other cases, the incentives that we're giving are actually cannibalizing existing existing players spend on system and so as we think about 2022 and the concept that are starting in 2021 and the concept that we're really in very early innings there.
<unk> 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.
And I think that I.
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 I think we could have cut some of those underperforming programs faster.
And Steve for the money and had and had a higher profit margin. So I think that what you're seeing US do we do in 2022 and beyond is harvesting the learnings from 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 loser sooner.
And hey, Brad its Ian.
And you're thinking okay, not guiding specifically to free cash flow, but certainly on a unlevered free cash flow basis, there really shouldnt be too much of a lag to EBITDA, given we're not a capex intensive business.
That's great. Thanks.
Thank you Brad again to ask a question it is star one.
We have no additional.
We have no additional questions waiting at this time, so I'll pass.
The conference back to the management team for closing remarks.
Yeah, and thank you operator, and before we hit the closing remarks.
We do have some questions that we collected from our shareholders through our St.
<unk>.
Laurel and wanted to go to those questions now.
So the first question that was about it was.
<unk> are the following.
When will we get more news on the NFL partnership.
Yes.
Great question. Thanks. Upon this is Andrew.
We're right on track with NFL competition, I and close a little surprised at some of the the.
Trolls out there on the Internet.
We will be announcing.
Announcing developer finalists this quarter were on plan.
Xactly as we said when we announced that its all partnerships. So we are if you'll recall and go and look at when we announced it about this time last year. We said that we would be we would be prepared with that that's all to have the game or games to launch by the 2022 NFL season.
That's still the timeline with the finalists being being announced this quarter. So.
Basically unchanged for initial plans and are excited as ever for the partnership with the NFL.
Great. Thank you.
Next question was.
Are there any plans to be involved in the med averse.
That's a great question. When we are 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 is the amount of versus.
Our first markets mobile gaming and isn't the future of our platform.
We see extending this beyond gaming to markets our range as far flung as education and exercise.
The concept of skills. This abstraction competition out of software and competition is the human activity that.
Has existed probably time and memorial It says, it's an important part of being human when do 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 are headed.
Sure.
Great. Thank you next question is.
Skill set a trial for a pilot launch in India do.
Can we expect an official launch.
So in 2021, we started building out a team to establish our business in India.
I'm, just being very candid, we hired the right people and.
And we are we're retrenching.
It's certainly Ah.
At least a little bit upsetting to say, let's say.
More about it but 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 a 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.
Fewer things in our business really well.
But India, it's launching in India is still an important initial step in skills longer term journey to capture the massive international gaming market and we absolutely continue to believe the India and other international markets are a big long term growth opportunity for us, but it can't be a near term priority.
Thank you.
Next question is.
Is.
When will you start adding games like call of duty or pub G or fortnite.
Yeah.
Hi, Casey would you like to answer that question.
Sure and I think.
I suspect there are kind of two questions. Within this question I imagine the first question that's being asked here is kind of what.
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 two sided marketplaces. The the initial chapters.
The growth story and I think this is the case with ebay Airbnb Uber Uber, but the initial chapters of that story, we're really focused on building the demand side of the platform.
Companies and we as well thought to establish a new normative consumer behavior in an industry that previously didn't exist.
And when I reflect on the year is behind US we've been largely successful in establishing that consumer behavior as evidenced by the transaction volume that is now flowing through the system.
But our investment is shifting towards towards building.
Better content and better products for our developer customers as.
As we see the supply side of our business and the games on the platform at the long term growth engine of our business and so as we invest in those develop our customers as we 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 bar in that content as well.
The second part of the question when I hear that question.
When will you have a game like call of duty or pub to year Fortnite.
Imagine the question is is when his skills going to have just an absolutely massive game with the huge embedded audience like a call of duty or a fortnight 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 that's going to be whether that's going to be a new game for the skills platform.
Exactly when that day is going to be that that a game like fortnite or call of duty are of that size join.
Joins our 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 Mou and so you can do the math on a single piece of content that.
That brings 20 ex 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.
<unk> set a promise for when it's coming.
Great. Thank you Kathy.
And then our last question.
You recently borrowed 300 million and.
And in a quarter percent interest can you clarify what this is for considering you still have around $500 million of cash on hand.
Thanks, Tom.
Oh, sorry, sorry interest [laughter].
Sorry, and I was just going to hand off to you I'm glad you're already jumped in right. After this question.
Sorry for jumping in.
Thanks. Thanks for the question. So we did complete a $300 million senior secured debt offering at the end of last year, so that financing.
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 of growth and profitability and I can tell you that we are actively evaluating opportunities, but as you know with the nature of M&A.
Different opportunities, it'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 paradigms for closing comments.
Just wanted to thank everyone sincerely for taking the time to join US today I know how busy everyones lives are these days.
We are we very much look forward to providing an update on our progress for 2022, when we report our first quarter results until then thank you.
That concludes the skills fourth quarter 2021 earnings call. Thank you for your participation you may now disconnect your lines.
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