Skillz : Fourth Quarter 2020 Earnings Conference Call Transcript

Skillz, Inc.

Fourth Quarter 2020 Earnings Conference Call

March 12, 2021

Skillz, Inc. - Fourth Quarter 2020 Earnings Conference Call, March 12, 2021

C O R P O R A T E P A R T I C I P A N T S

James Marsh, Head of Investor Relations

Andrew Paradise, Chief Executive Officer

Scott Henry, Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Michael Graham, Canaccord Genuity, Inc.

Drew Crum, Stifel

Eric Sheridan, UBS

Brian Fitzgerald, Wells Fargo Securities

P R E S E N T A T I O N

Operator

Welcome to Skillz Inc. Fourth Quarter 2020 Earnings Conference Call.

Please note that this conference call is being recorded today, March 10, 2021.

I will turn the call over to Mr. James Marsh.

James Marsh

Thank you, Operator, and good afternoon.

Everyone should have access to the Company's fourth quarter 2020 earnings release. The release can be found in the Investors section of the Skillz's website at www.skillz.com/investors.

Some of the Management's comments today will be forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements, which are usually identified by the use of the words such as will, expect, should, and 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 upon them. We refer you to the Company's SEC filings for more detailed discussion of the risks that could impact future operating results and financial conditions.

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Skillz, Inc. - Fourth Quarter 2020 Earnings Conference Call, March 12, 2021

During the call, Management will discuss non-GAAP measures, which we believe can be useful when evaluating the Company's operating performance. These measures should not be considered in isolation, or as a substitute for financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 2020 earnings release.

Hosting the call today, we have an Andrew Paradise, Chief Executive Officer, and Scott Henry, Chief Financial Officer of the Company.

With that, I'll turn it over to Andrew. Andrew?

Andrew Paradise

Thank you, James, and good afternoon, everyone. Welcome to our first earnings call as a publicly traded company.

We're incredibly proud of the strong results that we've delivered throughout this year, and are pleased to share some highlights.

Skillz is the predominant mobile eSports platform in the world, growing rapidly in a massive 2.7 billion gamer market. We continue to strategically invest in growth to deliver an incredible user experience and capitalize on our vision to build the competition layer of the Internet.

Q4 marked our twentieth consecutive quarter of sequential revenue growth. During the quarter, we expanded and enhanced our platform capabilities, added many new and engaging games, and most notably, we beat our revenue forecasts, all amidst the challenges brought on by the pandemic.

Before digging into the details, I wanted to take a moment to highlight a major milestone. We successfully went public after closing our merger with Flying Eagle. I want to thank Harry Sloan, Jeff Sagansky, and Eli Baker at Flying Eagle. They shared our vision for Skillz. They were amazing partners throughout the process.

I also want to take an opportunity to acknowledge and thank our amazing team at Skillz who designs, builds, and markets our platform that enables our game developer partners to achieve success. For all the innovators, the creators that make this possible, we love you and we will always be a shining bastion of the future state of tech for you to call home.

I'm also excited to welcome all of our new shareholders to our journey. One of our goals in going public was to make it possible for everyone to own a stake in the future of competition. We sincerely appreciate your support, and we're grateful to have you join us for this journey.

Finally, I wanted to take a moment to welcome our two new Board members. The first, as announced, is famed film and television producer Jerry Bruckheimer. Jerry is the only person in history to have three of the top 10 TV shows at the same. He has captivated global audiences and enriched the lives of billions of people, and we're thrilled to have him join us on our journey at this pivotal moment as we're helping accelerate the shift towards interactive entertainment.

We're also very fortunate to add Chris Gaffney, the Co-Founder of Great Hill Partners, to our Board. Chris is an early investor in Skillz, and he's been an incredible partner and supporter of Skillz ever since. Throughout his career, he served on 48 boards and he has participated in more than 100 acquisitions, and with this addition we're looking forward to having his expertise in gaming and in media on our Board.

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Skillz, Inc. - Fourth Quarter 2020 Earnings Conference Call, March 12, 2021

We launched Skillz's eight years ago with a mission to enable developers to share the art with the world and to connect gamers to meaningful competition. In building the Skillz platform, we've remained focused on gaining and maintaining the trust of our users and developers. Winning this market is entirely about protecting the consumer from cheating and fraud, which is why our platform is underpinned by data science and has a robust portfolio of 58 pending and issued patents.

Our success in the platform has brought on a surge of copycats and clones (inaudible) way, and for all of those who are newer to our Company and our story, our number one value is honor. We plan to vigorously defend our intellectual property against these criminals who represent the tearing down of the very pillars of the foundation of capitalism.

Today, gaming is larger than movies, music, and books. At $86 billion today, mobile's the largest segment in gaming, and the fastest-growing market in media and entertainment. Our current forecasts show that by 2025, the mobile gaming market will reach 161 billion, driven by the proliferation of mobile devices. Smartphones and tablets are expected to double by 2025. Mobile gaming is interactive content built for interactive devices, and that's what makes it the future of entertainment. We power more than two billion tournaments a year, enabling developers to monetize through competition. Our developer partners are building successful businesses with us. They generated 1.6 billion in GMV, or gross marketplace volume, for 2020.

The Skillz platform delivers superior player engagement and monetization. In 2020, 2.6 million monthly active users, or MAU, enjoy games on our platform, a 62% increase over 2019. Our users are deeply engaged in our platform. The average paying users spend roughly an hour per day on the platform. We continued to improve our value proposition, and will continue to do so into the future for the gamer and for the developer. We're becoming more effective at converting playing users into paying users.

In 2020, 13% of our users engaged in prize competition versus 2% for the average mobile game for in- app purchases. This high level of engagement, together with the increased number of payers, powered our revenue to grow to $238 million for the year and $68 million for the quarter, representing 92% and 95% growth respectively over those prior periods. As we look ahead, we will continue to prioritize our developer success, drive innovation, and expand the reach of our platform.

Today, I want to highlight three areas for investing in to support these goals.

First, in-partner enablement. Over the past year, of the many areas we've continued to invest in is our synchronous gameplay ecosystem. We're expanding the reach of the platform to enable new gaming genres ranging from real-time strategy, to fighting, to racing, to first-person shooters. These are incredibly popular genres, and Skillz is uniquely positioned to deliver the same fidelity, trust, and reliability that have been the hallmarks of our platform since inception. Synchronous content will deliver even higher player engagement than we've seen before and will further expand our universe of players, and more importantly, perhaps, payers.

Second, in highly-scalable technology infrastructure. We've made significant investments in our fault tolerant and microservices architecture, our fast data architecture, and automated incident response systems. These enable us to efficiently scale our platform with cutting edge performance and resilience, while continuing to deliver industry-leading reliability of over 99.9% uptime as we scale, and results in less than half of the outages of a typical gaming company. Our fast data architecture in the future will continue to unlock new opportunities for AI, such as greater personalization. Our modern technology infrastructure and scalable architecture are very much the key to achieving our 95% gross margins.

Third, in talent. We have a proven and scalable approach for talent acquisition that yields superior hiring outcomes; a stronger, happier workforce; and best-in-class retention. In Q4, we grew headcount by 16%,

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Skillz, Inc. - Fourth Quarter 2020 Earnings Conference Call, March 12, 2021

making high-impact talent additions across the Company. This new talent strengthens our benches to continue our journey to build a 100-year independent Company. We're building a dynamic ecosystem with powerful network effects.

The challenge facing many developers today is that scaling a mobile game requires significant capabilities that are beyond the reach for many of the world's 10 million game developers. Our platform is easy to integrate and provides developers with a powerful set of analytics, payments, customer service, and live operation solutions that they need to deliver a fun and fair competitive gaming experience to their users. With Skillz, developers can focus on what they do best, which is making great games.

I'm going to share a recent example, so you can get a sense of the power of the platform.

Big Run Studios is a gaming studio founded by industry veteran Andrew Bell. Andrew worked on some of the top games at LucasArts before leading production design for FarmVille at Zynga. He then left Zynga and he built Harry Potter: Wizards Unite for Warner Brothers. He spent four years there, and then he quit his job. Why? To found a gaming studio dedicated to building Skillz games for under-represented audiences. He decided to raise his first venture capital. The round was oversubscribed so quickly, when I introduced arm investors, they couldn't get in. Three months later, their first game, Blackout Bingo, was one of the top 20 free games on the iOS App Store. Off that success, they raised another venture financing, a Series A, to continue building nothing but Skillz content.

Today, as of Q4, I'm excited to share that Big Run's games is now the number one game on our platform. Skillz makes this path accessible to any game developer whether they're independent or currently at a big studio. We stand for anyone who wants to bring their art to the world and enable these creators to build long-term, independent companies.

As we advance our mission, there's a long runway ahead of us and many opportunities to drive growth. We've captured just a fraction of the market at 0.1% of the world's gamers on our platform.

Next, I'd like to share four investment initiatives that are incremental to our forecast; content, distribution, international expansion, and brand integration.

First on content. We still have not had a true blockbuster game. Certainly, Big Run was number 17 when it launched, but we've never had a number one hit on either App Store. This is one of the most exciting things I look forward to. We have a significant opportunity to bring new content offerings to consumers. To that end, this quarter, the popular arcade game, Big Buck Hunter, announced that they're building the next version of their game on Skillz. This is really exciting because they were an early partner in 2014. They didn't see success in their first version, but they've come back to build again. It's a strong testament to the growing power of the platform that they've come back to us, and we're all wishing them a lot of success with their next mobile version of the popular arcade game. Additionally, this partnership expands our content to the first-person shooter genre, one of the most popular categories in modern gaming.

Second, on distribution. I wanted to talk about the new multiyear agreement with the NFL. We're giving mobile game developers a path to develop an NFL-branded mobile eSport using Skillz platform. The NFL is one of the most iconic brands in the world. We're honored to bring it to the Skillz platform. In Q2, the NFL and Skillz will launch a developer challenge, but it'll take multiple quarters before our winning games in market. The winning developer will have joint marketing support from both the NFL and Skillz, and with a fan base of hundreds of millions, promotional marketing from the NFL represents a unique distribution opportunity that's not in our forecast.

Third, on international expansion. Today, more than 90% of our revenue comes from North America, and the international market is four times the size of that. Our first international market outside of North

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