Q3 2022 Skillz Inc Earnings Call
Yeah.
[music].
Thank you for joining us today for our skills third quarter 2022 earnings call I will now turn the call over to Taylor Giles to cover the Safe Harbor.
Right.
Good afternoon, and welcome to the skills third quarter 2022 earnings conference call with me today.
Anodize skills, Chief Executive Officer, Casey Chacon, Chief Revenue Officer, Jason Roscoe, Inc, President and Chief Financial Officer.
Note our full financial results were published earlier today and are available on our Investor Relations website before I turn the call over to Andrew. Please note that some of our 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 such work.
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.
We refer 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 the most directly comparable GAAP measures available in our third quarter 2022 earnings release with that I will turn the call over to Andrew for some brief opening remarks Andrew.
Good afternoon, and thank you for joining us today I will touch upon the quarter and update you on our initiatives to reaccelerate growth and improve the bottom line.
And then I'll turn the call over to Jason Ross <unk>, our new President and CFO Jay quickly touch on the numbers before we open up the call for Q&A.
Clearly skills isn't a time of transition as we rightsize the organization during.
During the quarter revenue continued to be impacted by both the macro environment for mobile gaming as well as some of the internal product and organizational challenges I referenced last quarter.
Conversely, we made good progress on our March to profitability.
Reduced adjusted EBITDA by 51% quarter over quarter, while improving our payback period through better platform engagement retention.
We also made many difficult strategic changes within the organization to better align talent with our desired business outcomes.
So there is no quick fix the path to Reaccelerate growth is now well defined across the company.
We've identified the things, we can and cannot control and have a plan in place to address those that we can control.
We are focused on four key pillars to enable us to return to durable growth and long term profitability.
Our first pillar is enhancing our platform to improve customer and developer engagement and retention.
I've taken back at the helm of the product organization and are working closely with our new CTO Vasily Philip off most recently a director of engineering matter was already dug in to make additional contributions to the platform.
We're rolling back of some product changes that were unsuccessfully introduced over the course of the prior 18 months.
And are returning to our foundation, a rigorous split testing and disciplined product rollouts.
From a product perspective cloud gaming is on target.
A proof of concept shows we can offer a game streaming technology they'll provide an experienced comparable to a native iOS or Android game.
We're currently testing to ensure we have the right onboarding experiences for new cloud players as we look forward to a full launch.
Our core user and live streaming experiences are proceeding on or ahead of plan with favorable results from Redesigns to keep cube, and our limited time live ops launches, including Sweepstakes Chase therapies and Blitz mobile.
We're always looking for ways to better help our developer scaled their content as you bring on new developers and brand partners of all sizes, including the NFL and UFC.
While very early days can leverage our platform to market their games.
In the quarter, we launched new tools to support more successful launches and improve developer support infrastructure and processes.
Clearly the success of our partners is our success and we will continue to improve the tools, we provide to these key constituents.
Our second pillar is up leveling our organization.
During this time of transition, it's crucial that each and every employee embraces the skills vision and commence to reigniting our potential.
During the quarter, we performance manage the organization further reduced head count to ensure this alignment.
Our head count now stands at a little more than half of what it was a year ago through thoughtful and deliberate decisions on structure.
These changes were difficult the existing team is fully capable of and focused on returning value to our players developers and shareholders.
In the quarter. We also began our return to office.
Central to our success as a team to be in lock step.
Given the magnitude and the complexity of the path ahead.
Really only happen in person.
The new talent that we're carefully adding understands that we must work swiftly and efficiently to fix the challenges that we've identified.
To this end we've added some key hires across the company during the quarter, including Vasili, who I just mentioned to restore the culture of innovation the skills was built upon.
We are also restructuring the Archie team.
To announce some important and compelling hires there in the next quarter.
Additionally, we've added two new board members, Henry Hoffman and experienced portfolio manager at SL advisors, and SaaS sure a seasoned gaming executive.
These strong experienced operators and advisors will be key as we make the tough decisions that rebuilding the company requires.
Our third pillar is our go to market.
Where we're focused on improving customer engagement and monetization through efficient spend.
Sorry, reducing end user discounts that were not driving profitable growth.
Coming more granular in our UA spend and increasing organic traffic through owned communication channels.
We believe we can return our user acquisition payback periods for the six months that we discussed on our IPO Road show.
No. It's early days, we've already reduced the payback period, which had grown unacceptably long by over 25% this quarter alone.
The most exciting part of improving the ratio of LTV to CAC is there are improvements this past quarter were from improving LTV.
As opposed to purely saving on acquisition costs.
We're seeing early signs that the new cohorts are performing much better than in recent quarters, and we are working hard to re engage the prior cohorts, where we've seen churn.
Our fourth pillar is straightforward.
Demonstrating a clear path to profitability.
I'll, let Jason cover the details, but you can see in the numbers that we are focused on reducing expenses, while staring toward a return to growth.
Looking at every single line item of spend to justify its potential return and we'll continue to do so with an eye towards the efficiency and productivity.
In the meantime, we have.
Over half a billion dollars.
<unk> as we navigate a return to growth.
Our mission of bringing out the best in everyone through fair competition, and the patents that differentiate our games of skill versus those of chance hold as true today as they did when we first went public.
We have reinvigorated with the potential of our mission and the opportunity to enable developers to monetize their games, while allowing our players to improve their skills and to compete in the thriving ecosystem.
We have lots of work ahead, but a much clearer vision on the United team.
Energize to tackle these challenges ahead.
We look forward to updating you on our progress going forward and with that I'll turn the call over to Jason to summarize the financials.
Jason.
Thank you Andrew.
Many of you know this is my first earnings call with skills.
I joined the team in early August from Blackstone, well aware of the many hurdles we face.
Now only three months in the team and I are focused on implementing a restructuring of people and processes.
What I've seen in my first quarter with skills validates the reasons I joined the opportunity ahead is enormous and untapped and were all rolling up our sleeves to make it happen it.
It will take some time to address the four pillars, Andrew laid out. So this quarter, we opted not to do shareholder letter as we reconsider how we communicate with investors.
Instead I'll quickly cover the numbers and we will open the call for your questions.
Revenue was $60 3 million.
Down 41% year over year, and down 18% sequentially driven by declines in paying Mou as a result, our planned pullback in advertising and incentive.
Our payer conversion rate, which is our paying mou divided by our Mou with 19%.
Two percentage points higher than prior year period.
With the prior quarter.
UA marketing was $18 6 million.
A decrease of 66% year over year and down 39% sequentially.
Engagement marketing was $23 8 million down.
Down, 52% year over year, and down 22% quarter over quarter.
Research and development was.
With $8 4 million.
Down 37% year over year.
This includes $1 1 million in restructuring charges.
By $2 million.
Credit stock.
Stock based compensation due to employee departures.
On a non-GAAP basis.
With 15% of revenue.
Up four percentage points year over year, and down four percentage points quarter over quarter.
Sales and marketing was $51 8 million.
Around 55% year over year.
This includes $2 1 million of stock based compensation and 0.2 million in restructuring charges.
On a non-GAAP basis.
Sales and marketing with 82% of revenue down.
Down 28 percentage points year over year, and down 14 percentage points quarter over quarter.
General and administrative was $20 3 million.
Down 50% year over year.
This includes $5 6 million in stock based compensation and <unk> 7 million of restructuring charges.
On a non-GAAP basis, G&A was 23% of revenue six percentage points year over year, primarily driven by the organizational restructure.
On a sequential basis G&A as a percent of revenue was flat.
Net income of negative $75 million was down $129 3 million year over year, and down $18 4 million or 30% sequentially due to the impairment of intangible asset impairment charges.
Weighted toward developed technology and customer relationships.
Q3, 2022, adjusted EBITDA was negative $15 4 million.
Up 63% year over year and 51% sequentially.
This was primarily driven by decreases in UA and engaging marketing spend as well as the restructuring.
Adjusted EBITDA for Q3, 2020 to exclude the impact of $63 1 million of adjustments.
Of which $47 6 million or from impairment of intangible assets.
$14 7 million from other noncash or nonrecurring items and $1 9 million from restructuring charges.
Adjusted EBITDA margin of negative, 26% was up 15 percentage points year over year.
On a sequential basis.
<unk> EBITDA margin increased by 18 percentage points.
We do not expect to raise additional capital for bringing the business to breakeven.
Our strategy is to use our capital to get to breakeven and then run an EBITDA breakeven as we invest aggressively to capture that 100 billion plus market opportunity in front of us.
We ended the third quarter with $558 million of cash cash equivalents and marketable securities.
$289 5 million.
Outstanding.
Providing us with a long runway to execute against the initiatives Andrew discussed above.
Turning now to guidance, we are maintaining full year 2022 revenue guidance of $275 million.
Our revised guidance it seems to gauge and marketing as a percentage of revenue of approximately 41%.
For UA marketing, we expect to spend in the range of 12 million to 16 million next quarter.
We expect to achieve before 2022.
Adjusted EBITDA margin of approximately negative 56%.
I'm excited to be part of the skills team. During this watershed time and as Andrew said look forward to updating you on our progress going forward as you look to once again return shareholder value.
With that we'll take your questions operator.
Thank you Sir.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question. It is star one and as a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Jason Tillson Mechanical <unk> Genuity.
Your line is now open.
Thanks for taking the question in the press release, you talked about would be hauling the go to market strategy and I was just wondering if you could maybe spend a minute expanding on that how much of that is simply reducing some of the inefficient spend that you've talked about the strategy and progress versus using different marketing messaging different channels maybe.
If you could touch on that that'd be great. Thanks.
Thanks, Jason that's a great question. This is Andrew.
So.
Overall, we've been we've been dialing back user acquisition.
We've reduced it pretty substantially quarter over quarter as it were.
Really accelerating on migrating more of our spend over to Archie.
In terms of in terms of any channels.
Sure Casey if you want to add anything and commentary that we.
I want to share at this time.
Jason This is Casey. Thank you for the question.
The big focus for us.
Improving the efficiency of our operations overall and so we think there's both opportunity to increase our customer lifetime value and continued decreasing our customer acquisition costs and that isn't that isn't a radical shift in what we're doing versus continued progress on the things that we talked about last quarter.
Okay, Great and then just one quick follow up the last few quarters revenue after engagement marketing was the big part of the messaging that you guys put out on the earnings call. It in the shareholder letters and I'm just wondering if the absence of that from the press release this time around.
With anything in particular does that signal a potential shift away from that metric or anything you could share on that would be greatly appreciated.
Sure.
Yes, that's a great question Jason.
And then im struggling a little bit because we were specifically instructed to discontinue that metric.
The FCC so.
We are not using we're not going to be reporting that metric that you can pretty much calculate it and look at it yourself.
But we still think.
Considering revenue.
The context of engagement marketing is the right way to think about the profitable growth of the business.
What do you think about the changes in our revenue.
Quarter over quarter.
Revenue declined $13 million, while adjusted EBITDA actually improved by over $60 million and so anytime we can trade one dollar revenue for $1 23 of EBITDA, we want to make that trade.
And it's really the changes into our top line revenue and the overall structure of our P&L are really focused around building profitable revenue as opposed to just growing revenue at all costs.
We talked about earlier in the year.
Great. Thank you.
Yeah.
Thank you for your question.
Our next final question comes from the line of Juan Clark Lampton with BP.
Your line is now open.
Hi, Thanks for taking the question I've got one for Andrew I've got one for Jason Andrew I wanted to see if you could talk a little bit more about the engagement pillar of before that you mentioned earlier you talked about improvements in LTV relative to CAC can you maybe drill down a little bit more on.
What you guys are doing now to build on that or what.
Some of that improvement that you saw in <unk> and then Jason very quickly I just wanted to make sure I understand you guys reiterated guidance for the year, which I think based upon what you've reported year to date would imply heavier EBITDA losses in the fourth quarter.
What what I guess, what we see in there that sort of driving a bigger maybe sequential step up is there a measure of conservatism or is there some planned spend thats more seasonal.
Even though in nature or maybe something else.
Thank you.
Awesome. Thanks for the question Clark. This is Andrew maybe I'll just go first and talk a little bit about how we're driving up retention and engagement.
So the.
There are quite a number of things that we're working on whether its features around chat lease redesigned.
Really thinking about how the the meta game on competing and can better engage players as we continue to scale our games.
Or doing limited time live ops events that we've been launching and seeing really strong results.
I think one of the things I would just say holistically, we really believe that having our team collaborated in person is a big part of of returning to great results in our business.
I think we're really excited about the potential for a product led initiatives.
Continuing to improve.
The quarter over quarter.
In the double digit percentage range.
We are also looking at initiatives like cloud gaming that we announced.
Q1, we think that's going to play an important role in helping us connect even more players with great teams in the future.
And we announced.
We announced that back in Q1, we actually are on or ahead of plan.
We advanced our cloud gaming initiative by releasing cloud versions, Salter, Q21 glass and actually other gains as well as AB testing. So we can really understand how to modify the onboarding experience moving from.
GAAP environment installed app environment to a cloud based experience. So web mobile web also distributing to devices for the first time a computer.
My personal computers.
But it's a little hard to evolve each of the different price changes and so to give you exactly which which numbers compounded to drive improvements in engagement and retention that improved LTV for the quarter.
A lot of little ideas.
Or kind of compounding everything from.
Introducing like Canada for example, a new.
Sweepstakes event that you can.
Dan.
When a and entry into two <unk>.
Certain types of push notifications triggered by on system player behavior.
But it's just a lot of little ideas compounding and I just one of the things I would say in returning to product one quarter in.
Yes.
First quarter, we were we've grown LTV it actually.
And quite a number of quarters and I, just I look around I see so many opportunities to improve the system. It's a very exciting time for me.
Let me hand over to Jason to talk a little bit about your second question.
Yeah.
Great. Thanks, Andrew Clark.
Thanks for the question I would say that.
First of all look forward to meet our expectations.
For full year guidance as we previously reiterated.
I would say that we are very confident as we are.
We're now going into fourth quarter of the year.
But we also wanted to be conservative.
To ensure that we have a strong position to hit it and as part of that we want to maintain optionality to ensure that we will hit it. So I would simply say that were.
We're fully on track and we're fully intend to have it.
Yes.
Great that's helpful and if I could I guess squeeze in one more maybe bigger picture around.
The operating environment right now I think theres been.
So to some discussion that's been a persistent theme throughout earnings so far around whether or not we're seeing sort of sequential degradation throughout the year in terms of engagement spending sort of player activity in the mobile ecosystem is that something you guys have seen is that reflected in guidance and is there a chance.
We think that that sort of persist into 'twenty Greg.
Yes.
Let's say that's a great question Carl.
From a player retention engagement monetization standpoint.
No that isn't is that something that.
So we're seeing a cohort level, we definitely when we we.
Scaled really aggressively on building cohorts between advertising as well as a lot of engagement marketing experiments.
The last 18 months up until this quarter on those cohorts are definitely overall, just weaker as the business I think.
But I think that's built into our forecast our cohorts prior to that period and post that period I think.
Our on arguably showing very similar characteristics to what they are bullish on.
Jason do you want to add to that.
Yes, Mark I would just say that I think of what we're seeing is the impact of Andrew stepping back into the product and it's very exciting for us. So I think that as we go into.
The first quarter next year, we are very optimistic we're going to continue to see.
Positive business improvement driven by our product enhancements.
Yeah.
Thanks, a lot.
Okay.
Thanks for the questions.
Yeah.
Thank you for your question Sir.
Our next line of questions comes from the line of one Brian Fitzgerald with Wells Fargo. Your line is now open.
Yes. This is Michael Rousseau on for Phil.
Just curious what you guys are seeing in terms of utilization argued data.
Our customers leaning on it more or less ATP plays out.
Has there been any pullback of spend post integration and then also curious to what extent you are seeing cost savings as you integrate <unk> and leverage that internally.
Thanks for the question Michael.
Yeah.
I think that's very near and Dear to our heart, especially with the impairment we had to report this quarter.
So a bit painful considering I think the revenue multiple we paid on acquiring Archie is.
Frankly superior to the revenue multiples.
Many acquisitions.
Close to the space.
In terms of the integration between Archie and skills competition business.
Still early days.
We are certainly looking at a situation where.
Buying a DSP and integrating the data flow from the auction level, where rq's participating in approximately five trillion.
<unk> auctions a month.
And integrating all the way through end user LTV on games that as you know still doesn't own but operates as a platform.
It gives us a very unique view on understanding.
From the auction level, all the way to final user payment how users behavior.
Having said that where we're just we're being.
Careful in terms of integrating the two businesses and moving very slowly and I think a lot of that Michael the answers.
Because of all the operational issues, we had in the last 18 months.
Yes.
We are.
<unk> really taken an approach of ensuring that we protect the core business.
And then build very carefully and on top of it while we clean up.
Clean up all of our operational issues.
Yes.
Jason or Casey, maybe case, you might like to comment a bit more as he has been most recently managing the rte business for us.
Sure Michael Thanks.
Thanks for the question I think Andrew.
Andrew hit it spot on that our first order of business is.
Making sure that the advertising platform that required recognizes its true potential and I think that there are challenges in the AD tech industry as a whole that you can see.
Stock prices of publicly traded companies.
Which are down typically 70% to 80% and on that basis. The impairment that we took on Archie is.
Is comparatively modest, which I think speaks to the underlying strength of the business and the asset itself.
The synergies.
That we went into the acquisition with are absolutely still there, but the in terms of an integrated data pipeline.
It's very very early put up for sale.
Awesome. Thank you guys.
Yeah.
Yeah.
Yes.
Thank you for your question Sir.
We currently have no more questions registered so again, if you'd like to ask the team a question star one on your telephone keypad.
Yes.
There are no more questions registered so I would like to pass the conference back over to the management team for any closing remarks.
This is Andrew.
Just wanted to to.
I think Dallas today for the coverage and four for engaging.
We're really excited about.
Where we are as a business despite the macro and displayed on the breakage in these last.
18 months.
I have to say as the CEO I feel more invigorated than ever seeing the opportunity ahead of us.
We look forward to meeting with all of you in the new year to discuss our Q4 and full year 2022 results until then thanks, everyone for participating.
Yeah.
And with that we'll conclude today's call. Thank you for your participation you may now disconnect your lines.
Yes.