Skillz Inc.

Good afternoon. Thank you for attending today's Skill Third Quarter 2021 Earnings Conference Call. My name is Nye, 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 questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to your host, Stephon Gerhard with Skills. Thank you. You may proceed, Mr. Gerhard.

Thank you, Nye. Good day and welcome to the SCIL 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 Paradis, Chief Executive Officer Casey Chapkin, 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 gap 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. 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 just published to our investor site this afternoon, I wanted 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 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 in the convergence of the online and offline worlds for the first time. Our investment with Exegames, we were able to integrate advanced synchronous technology onto the skills platform through Exegames' 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 skills platform. And finally, we grew our executive team with the addition of Vauxhall Bajouard, who joins us as Chief Product Officer from Amazon, where he led the teams responsible for game development services, including transforming how large-scale multiplayer games are developed, operated, scaled, and distributed using the cloud. At Skills, Votsel will be responsible for leading our product development teams. Before taking everyone's questions, I just wanted to take a moment to thank everyone on our team that makes it all possible. The Skillsians 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 games and their creativity, they bring us imagination and fun. With that, let me open up for questions.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from Michael Graham with Canaccord. Please proceed.

Hey, thanks a lot, and thanks so much for all the information in the shareholder letter. I wanted to dig into ARKI a little bit. You mentioned that your guidance for the year doesn't really kind of incorporate any benefit, I guess, on the marketing side from ARKI yet, but you do have plans to kind of shift your spend there and get that integrated. So I wonder if you could just give us some commentary around the expected pace of that integration, and then You know, you did have a comment at the end of the letter talking about the possibility of seeing some leverage on UA spend next year. And so just wanted to kind of maybe get, you know, now that you've had a chance to kind of get more deeper into ARCHI, get a little bit of a sense of your updated thinking on UA versus engagement, you know, spend and just how you're thinking about that whole equation going forward.

Yeah. Hi, Michael. It's Ian Lee here. I hope you're doing well. So yes, we're very pleased so far with the integration of Aki. As we've noted in the letter, the CPI improvement we saw in the quarter didn't yet include any benefits yet from the synergies from Aki. We're continuing to integrate Aki 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 was 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 were able to scale several new ad networks, which enabled us to increase our bidding precision. There were also some traffic initiatives that we were able to use, such as search engine and apps to 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 before we 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. Again, as we know, 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. All right.

That's helpful. Thanks a lot, Ian.

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

Thanks a lot. Good evening. I'll make this easy. I'll follow up on Mike's question, maybe on the SSP side with our team. 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 you know, particularly as we've seen the MAU base increasing this quarter. You know, 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?

Andrew, would you like to take that one?

Yeah, I'd love to take that. So generally, I think we've been messaging that the ARCHI 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 um if i could uh maybe just with a quick follow-up sort of on the guidance you guys talked about 200 million or so in um

investment for the year. Is that still the right target as we think about you guys tapering spend?

Hey Clark, it's Ian Lee again. We haven't given a specific target for the overrun rate for the full year of 2021. Again, we will look in Q4 to be aggressive but also disciplined, but we haven't given a specific target for the full UA budget for 2021.

Got it. Thanks, guys.

Thank you, Mr. Lampin. Again, ladies and gentlemen, to ask a question, press star 1. Again, to ask a question, press star 1. The next question is from Brad Erickson with RBC Capital Markets. Please proceed.

Thanks, guys. It's Dan Parham 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 20. And then I have two questions on Big Buck Hunter after.

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.

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.

I'll pass it to Casey to take that one. Hi, Sam. 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 skills. One of the highlights of our business is that the – The demographics between genres tend to be substantially different. And so we've used a lot of new games and new experiences as a creative 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.

Thanks. Thank you.

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

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, you know, sort of pursue those as the first ones? Was there maybe sort of pent up demand that you guys were seeing amongst the developer community?

I'll pass it to Andrew. Yeah, look, we've only really scratched the surface of the market opportunity ahead of skills. 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 is the number one trivia game in the world. It has about 40 million now and pretty wide geographic availability as well. It's a truly international game. The partnership also, 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 a Call of Duty or Counter-Strike. I think where we're really excited about in the mid-term ahead of the rollout of 5G is leveraging our partnership with Exegames 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 skills platform when they're playing for real prizes.

Understood. Thanks for the call.

Thank you.

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

Thanks, guys. 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. um from from the tools perspective app loving bought um machine zone and zynga bought chart boost and you bought archie how do you think about the need to own other critical parts of the value chain tool sets game engines uh uh dsps uh distribution channels are there other pieces um you would like to have inside your toolkit i'll pass it to andrew uh

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 skills, 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.

Got it. Appreciate it, Andrew.

Thanks, Brian.

Thank you, Mr. Fitzgerald. Again, ladies and gentlemen, to ask a question, press star 1. Again, to ask a question, press star 1. The next question is from McAllister Henry with Contentful. Please proceed. McAllister Henry Hi there. On September 20th, 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 Skills. And the Form 4 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?

Hi, 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. Can we move to the next question if there is any, please?

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

Well, thank you all for, again, for taking the time to join 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.

Great. Thanks, everybody.

That concludes the Skills Third Quarter 2021 Earnings Conference Call. Enjoy the rest of your day.