Q1 2023 Skillz Inc Earnings Call

Thank you for your patience, ladies and gentlemen, this skills first quarter 2023 conference call will begin shortly.

We remain on the line.

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Yeah.

Good afternoon, welcome to skills third quarter 2023 conference call.

I'll now turn the call it 30, Susan Swanson.

Opening remarks please.

Please go ahead.

Good afternoon, and welcome to the skills first quarter earnings Conference call with me today are Andrew Paradise go CEO , <unk> Chan CFO , and Jason <unk>, President and CFO .

<unk> financial results will be published tomorrow and will be available in 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 facing 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.

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 financial results prepared in accordance with GAAP. A reconciliation of these measures and the most directly comparable GAAP measure is available in our first quarter of 2023 earnings release with that I will turn the call over to Andrew for some brief opening remarks before we open the call for questions.

Thank you Susan and to all of you for joining the call.

In the first quarter, we continued to make progress on the four strategic pillars that we laid out last year, while we continued to navigate difficult demand and macro environments.

We're cautiously optimistic about the progress we're making.

And also want to be honest with our shareholders and ourselves that we're in the middle of tremendous change and then be premature to say we're out of the woods.

So briefly review the quarter before I turn the call to Jason Let me begin with the first pillar.

<unk>, our platform to improve customer and developer engagement and retention.

Our product team continues to grow and mature and we're seeing positive changes in terms of the rigor and discipline and perhaps most importantly, our customer stickiness and engagement as seen in our payback improvements.

To this end to name a few of the price initiatives, we achieved over the quarter, we launched and scaled new limited time challenges, which have driven improvements in paying user behavior.

We also launched a new place screen user interface, resulting in positive trends in pro tournaments engagement as well as per retention.

For developers.

Rolled out the skills discord server to enhance community support we updated that Cta release process to provide greater clarity to all releases, including <unk>.

And we added site instrumentation to enhanced usage insights inside of our developer console.

This brings me to our second pillar up leveling our organization.

Made a lot of progress in reshaping the organization to fuel growth and innovation, we're really excited to welcome Lee redo, our new controller and global head of accounting.

He is joining our staff and has already made a significant impact in upgrading our accounting teams talent.

And it's been challenging to be sure and in some cases, we found that we don't have the right talent to get through the hurdles ahead and back to the growth. We believe we can achieve.

In these cases, we're taking quick action to ensure the organization is not further taxed and then we can place the right people into the right roles.

A majority of the skills employees that joined last fall are now fully up to speed, which is really exciting to report and it's gratifying to see.

As you would expect it's making a huge difference in the morale and productivity of our team.

We're continuing to add more key hires and multiple experienced engineering directors to support our product initiatives along with two new experienced board members.

Others that I won't name now for the sake of brevity.

We still have some hiring to do to round out our organization, but we're feeling good about the changes we've made and the future of the team.

Third let me talk about our pillar of improving our go to market.

In the quarter, our payback period continued to improve and our user acquisition cost was the lowest it's been since 2020 reinforcing that our strategic focus is working.

As such we began scaling marketing.

We are ensuring optimal ROI and a continued improvement in payback.

This improvement in payback has been significant over last three quarters and we have line of sights get payback back to best in class of six months or less within the next three quarters.

Having said that now are paying monthly active users continues to decline quarter over quarter as we've reported.

Okay.

In terms of our developer community our team focus our energy in the first quarter and preparing for a transition to a new developer revenue share model.

As planned the new model launch at the beginning of May.

And we will provide more details during our second quarter earnings call about the impact of that on our business. We believe this is the first part of meaningful steps forward to building our relationship with the developer community.

That said, we're very excited about the opportunity for existing developers to increase their revenue share by driving more traffic to the platform.

Last but not least our fourth pillar.

Demonstrating a clear path to profitability.

I'll, let Jason talk more about our numbers, but we'll share that we continue to make progress here and intend to continue progressing through 2023.

As we thoughtfully consider each and every investment with the goal of adjusted EBITDA positive by the end of 2024.

As expected our losses in the first quarter were greater than Q4.

Historically, we've always increased spend in our business in Q1 over Q4, However, I do want to note two specific variances that we do not anticipate we will incur in future quarters.

Specifically, we spent $3 2 million on the operational consulting services for turning around our business and we spent $3 million for accounting advisory services and preparation of our 10-K filing.

We anticipate being able to handle these functions in house going forward.

Finally, we recorded $2 8 million more for our bonus accruals in Q1 compared to Q4 as we didn't achieve our bonus targets for 2022.

In short there are many reasons to be cautiously optimistic within our company about what's happening.

However, we need to acknowledge that there's still a lot of work ahead of us.

We have to remain cautiously optimistic about our direction.

To keep putting one foot in front of another as we make the changes that are necessary to drive the achievements, we want to see the future of our business.

We're intensely focused on the four pillars that named <unk>.

And we are committed to returning shareholder value over the long term.

We will continue to be transparent with you to build shareholder trust.

That I will turn the call over to Jason to discuss the numbers.

Thanks, Andrew.

Revenue in the first quarter was $44 4 million down 52% year over year and down 5% sequentially.

Our payer conversion rate, which is are paying now divided by our MAU was 18% in the quarter.

First quarter user acquisition marketing was $8 4 million, a decrease of 86% year over year and down 11% sequentially.

Due to improved lower our payback period and user acquisition cost.

Q1, and get your marketing was $17 6 million.

59% year over year, and down 11% quarter over quarter.

Research and development was $8 9 million in the quarter down 52% year over year.

Our non-GAAP basis, R&D was 17% of quarterly revenue.

Q1 sales and marketing was $34 9 million down 70% year over year.

This includes $1 9 million of stock based compensation.

On a non-GAAP basis sales and marketing was 74% of Q1 revenue.

Down 50 percentage points year over year, and up four percentage points quarter over quarter.

Q1 general and administrative expense was $28 million.

Around 70% year over year.

This includes $7 4 million in stock based compensation.

On a non-GAAP basis, Q1, G&A was 46% of revenue up 25 percentage points year over year.

On a sequential basis G&A was up 13 percentage points as a percent of revenue.

Net loss of $35 6 million decreased $114 million year over year and decreased $107 4 million or 75% sequentially for the first quarter.

Q1, adjusted EBITDA was negative $20 9 million down 67% year over year and up 121% sequentially.

Q1, adjusted EBITDA margin of negative, 47% was down 21 percentage points year over year and up 27 percentage points sequentially.

We ended the quarter with $521 million of cash cash equivalents and marketable securities.

And $273 6 million of debt outstanding.

With that I'll turn it over to Andrew for closing comments.

Thanks, Jason to note as we disclosed in April we repurchased approximately $160 million of our outstanding debt obligations. This will.

Have a nearly $16 million positive impact for us over the next three and a half years.

It's an incredibly material development to extending our runway to fix our business to refer to the growth engine than 2017 caused us to win the ink 5000 as America's fastest growing private companies.

Thank you all again for taking the time to join us today.

We look forward to providing updates throughout the year on our progress of returning skills to sustained profitable growth.

We will now begin the question and answer session.

If you'd like to ask a question. Please press star followed by one on your telephone keypad.

We would like to remove that question.

Press Star followed by tube.

The first question, we have comes from Jason Duncan from Canaccord.

Please go ahead.

Great. Thanks for taking my question.

Two if I can the first I was wondering if you could maybe just talk for a minute about the concentration of the user base around some of the tuck ins in the platform today versus where it was prior to the strategy to sort of reduced marketing and engagement spend.

And then I have a follow up there.

Okay.

Thanks, Jason This is Andrew Paradise.

Ill turn it over to Jason and Brian .

It would be.

Best to comment on that.

Thanks, Jason.

I would mentioned that hour.

Concentration has been relatively consistent over time.

It has been about 80% now consistently for this quarter and last quarter.

Note that our intent with our new standardized Devon develop a revenue share model is to bring the new content onto the painful over time and continue to diversify that number.

Okay.

Great and just sort of on the same topic.

As it relates to sort of ongoing effort to sort of expand the gone with on the platform can you talk about some of the initiatives that are in place, there and where that stands and maybe any updates on further engagement with the NFL games and other sort of recent partnerships that you had over the past few quarters.

Sure.

So just one thing I wanted to add also on concentration.

We've always seen concentration in the top two teams.

Like other media platforms.

And I can maybe drawing an analogy here something like HBO when that when <unk> was the most popular show on HBO.

They probably saw the majority of usage.

Watching a show.

So I don't think we anticipate that in the future that there will always be some level of concentration in the top one or a few pieces of content on the platform.

In terms of expanding genres.

So we did the deal with with extra games too.

The photon multiplayer engine, so that we could have more sophisticated multi player games on the platform and really move out of asynchronous.

Video games, like Solitaire cube or black.

Blackout bingo into more sophisticated games first turn based on rates. So we have games like Domino's gold that are now running turn based playing dominoes, if you'd like you can imagine all the other different turn based games potentially being moving onto the platform over time as we we really saw.

Significant disparity between.

<unk>.

Our form of monetization, so skill based gaming monetization versus IAP and adds with the old revenue share model and what I mean by that is.

Both with ads and in App purchasing.

Provide the developers with real time revenue reporting.

The way, we ran and built this business. So it's very much from my background as a person.

Building and inventing in the payments industry. So we pioneered the space, we set up our revenue share with the developers in the same way that our business makes money which are.

Our business as you May know, we've taken the deposit from a user.

You don't recognize revenue from that deposit until the user enters into competitions have you seen that deposit.

The user may receive promotional currency against that deposit. They also may withdraw that deposit in which each of those things actually are not revenue recognition for us. It's only when they're entering into competition is generating expertise, where we actually apply a take rate. So when we go to share money with the developers historically.

We would share it was so called a revenue share, but it was effectively a net profit share on each game and the issue with that is given that we're running payment processing and these incentive systems for users to <unk>.

The store account balances that actually are not revenue.

We were only able to effectively calculate their share of the profits once a month.

With the new developer revenue share that we launched on may 1st actually.

What we are doing is we're actually sharing a percentage of gross revenue.

Actually sharing your percentage of the entry fees are the developers.

And that revenue share starts at 375% of the of every dollar of entry fees and it skills upwards as the developer drives more traffic to the network.

The reasons, so one of the huge benefits of this and we've actually already launched the developer analytics now that give them real time revenue reporting.

It really puts us on parity with other ways the developer can monetize their teams through in purchasing our ads. So they have the same level of data and the ability to use that data to drive machine learning algorithms on DSP user demand side platforms. Just one of the primary ways that games in our industry are advertised.

Separately.

Really unlocks bigger developers from coming online being first mover and driving a lot of traffic.

And we think as we continue to evolve the platform for this year. This is one of the critical steps to getting far more games onto the platform.

In far more genres.

Great.

Helpful and maybe just one more quick one if I can.

Last year.

Conversion rate.

Paying users from the total Mou peaked at sort of low 19% range and it's sort of flattened out here around 18% I'm just curious with the new strategy with lower engagement marketing spend and focus on more efficient programs, there, where you see that conversion rate trending over time.

Sure and maybe I can Matt. This is Andrew talking again, maybe I can turn it over to keeps checking our chief strategy officer to talk a little bit about that.

Sure and thank you. Thank.

Thank you for the continued engagement Jason.

From a conversion perspective.

Lowering lowering engagement marketing as decreases the incentive for potentially for new users to convert into paying users, but increases the profitability on those users that we generate and so in terms of our paying.

<unk> versus are playing.

<unk>.

We expect that to remain relatively stable and potentially increase a little bit as we as we continue to decreased marketing spend and have more mature users on the platform.

Yeah.

Great. Thank you.

There are no further questions. So ill turn the call back to Andrew.

Okay, well. Thank you everyone for tuning in today to listen to our earnings call I will look forward to reporting on progress with the next quarter.

I think we are not out of the woods, yet in terms of turning around and really rebooting. The operations of our business, but I think I would message as I said earlier cautious optimism that we're making headway.

And we will talk to you then.

That concludes the conference call. Thank you for your participation and enjoy the rest of good evening you may now disconnect your line.

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Sure.

Yeah.