Q2 2023 Skillz Inc Earnings Call
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Hello, and welcome to today's skills in 2023 second quarter results call. My name is Bailey and I'll be your moderator for today 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 one on your telephone keypad.
I'd like to pass the conference over to Jim Leahy, the restroom or they should the skills Inc. Please go ahead.
Good afternoon, and welcome to the skills second quarter earnings Conference call.
On the call today are Andrew Paradise skills, co founder and CEO , Kasey Jenkins co founder and CSO, and Jason Ross President and CFO .
This afternoon skills issued its 2023 second quarter results release, which is available on the company's Investor Relations website.
Before I turn the call over to Andrew. Please note that some of the management's comments today will include forward looking statements within the meaning of 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 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 it believes 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 GAAP measures is available on the company's second quarter 2023 earnings release.
That I will turn the call over to Andrew for some opening remarks, followed by Jason for a discussion of our financial performance before we open the call to your questions Andrew.
Thank you for that introduction and good afternoon to everyone throughout the second quarter. We made further progress on the four strategic pillars, we laid out last year that we expect will position skills to deliver consistent top line growth and positive cash flow.
As a reminder, these four pillars are first enhancing our platform to improve customer and developer engagement and retention.
Second up leveling our organization.
And third improving our go to market efficiency.
Our successful execution against these first three pillars, then leads into the progress, we're making with achieving our fourth key pillar demonstrating a clear path to profitability.
But the goal of generating positive adjusted EBITDA by the end of 2024.
While our progress to date is encouraging we remain confident in our ability to continue to improve the business.
We still have much more work to do to get skills positions, where I can generate consistent growth and enhance shareholder value.
Certainly proud of the effort and commitment demonstrated by our team to date and I'm excited for the continued progress we will achieve through our collective efforts with that let me turn to a brief review of our second quarter progress and then re queue to date before I turn the call to Jason for a review of <unk> financial results.
I'll begin with some of the highlights of our efforts to enhance our platform to improve customer and developer engagement and retention.
Our product team continues to develop an extensive new feature pipeline that is expected to drive higher customer retention engagement and monetization. The cascading effects of those improvements are higher ltvs and the optimization of our user acquisition payback period.
Our new feature product pipeline currently covers next 18 months.
Our team is continuing its development efforts as we work hard to catch up after a hiatus last year, where he focused on achieving operational efficiency.
In Q2, we released daily challenges, New limited time challenges, which have been scaled across our platforms. The games. They account for approximately half of our total revenue.
Well the numbers are still in the early stages, we've already seen an uptick in LTV based on improved retention and engagement.
We're working on ensuring we have a regular cadence of new product introductions as we look to roll out a number of additional player engagement features by the end of 2023, and we look forward to sharing these with you in upcoming calls.
For our developers the changes we implemented in May which revised the revenue share agreements based on entry fees, rather than net revenue had been well received.
Thanks to these changes developers increasingly see skills as a partner that's committed to helping them grow their business by increasing our revenue as they drive more traffic to our platform.
We've also made progress in how we prioritize games that would benefit from being skills powered or.
We invest in user acquisition to scaled user base versus the normal game password developers run their own marketing plan and spend.
Along those lines, we're excited to be adding more content from both existing and new developers with the potential to properly scale.
I'd like to also share an update on our deepening relationship with extra games, which will drive benefits to our developer community.
Working closely with exit team, we've simplified the path for our developers to incorporate their photon multiplayer engine more comprehensively into games on our platform.
Exits best in class technology gives developers the ability to create games with sophisticated multi player functionality quickly and easily making it simpler than ever for developers to bring an even broader range of innovative experiences to skills.
The last topic I'd like to address for customer and developer engagement has been accepted to use a box in our industry.
<unk> is a unique inventory in this market and will continue to innovate that ctrip competitive gaming.
Well message sports have suggested that we're taking our proprietary technology claims. The reality is those that have been able to seemingly near our technology are doing so by using box.
<unk> platform has never use bots and never will a proprietary platform provides certainty that every player it's fairly matched against another real player.
Skills stands alone and our commitment to fair play for skill based gaming.
Because we seek to preserve our reputation in the industry. We've created we intend to address the issue and increased customer has visibility into those competitors, they're using box will deploy resources to combat the usage of bots in our industry. So customers are no longer misled by certain companies.
Further we'd ask that our shareholders join us in our mission to keep the competitive gaming industry fair and transparent with our shareholders can help drive this change by engaging with the appropriate regulatory bodies and their local jurisdictions to address this practice and eradicate the deceptive used to box.
Absent taking action consumers to engage and skill based games will continue to be deceived.
Industry will eventually lose the public's trust.
It's absolutely critical for both players and developers we ensure fairness is everywhere, it's 100% of industry and this industry meet consumers' trust and accountability.
Turning to our second pillar up leveling our organization.
We continue to make progress in optimizing our workforce to drive consistent growth.
I've discussed on prior calls the challenges we had post IPO as we significantly scaled organization and then very quickly we are faced with the impact of the pandemic and how remote work negatively impacted our culture.
I'm pleased to report we're on a good path to getting back to the core tenets of our culture.
High performance high accountability strong collaboration and product ownership at every level.
This quarter, we filled key roles, including General counsel head of user acquisition for performance marketing head of games marketing and head of people operations.
That's in addition to Onboarding a team of nearly 10 recruiters to accelerate our ability to finish rebuilding.
In Q3, we're focusing on key roles, which will have a significant impact to our company in the second half of the year, including ahead of player advocacy to ensure compelling experiences for our Vips and a gem of our developer platform to ensure we are optimizing our platform to best serve the needs of our developers and to maximize the profitability of their games.
Well, we're not all the way there we have made significant progress with putting the right people in the right roles and bringing our newer employees fully up to speed.
We don't expect the bat a thousand so even as we bring on promising new talent, we're equally focused on our performance management process and apply new areas of our business, where further changes may still be necessary.
Our performance management mindset has made a tangible difference in productivity and ownership as evidenced in part by the great work, our product and engineering organization are doing to create an extensive lineup of new product features that I discussed a moment ago.
Yeah.
Our upcoming move into our new Las Vegas headquarters will also enhance the culture for our current team members and position us to recruit new World class talent that can help us grow.
With employment displacement in Silicon Valley, we're seeing some of the brightest most capable potential team members and we're positioning skills as an employer of choice for team members. They can further strengthen our culture of performance.
With respect to Archie a leading advertising technology platform I'm answering and his team have made consistent progress towards strengthening and optimizing the platform and turning around the business.
We look forward to supporting their team to help them drive additional growth.
Moving on to our third pillar improving our go to market.
Exiting the second quarter, our user acquisition cost was the lowest it's been since 2020 reinforcing the effectiveness of our efforts.
Our payback period for UA exiting July was approximately 11 months, which compares favorably to 28 months a year ago.
Placing us on track to reach a best in class payback period of six months in the next few quarters.
In addition to the benefit from consistently rolling out new product features topline growth is largely driven by how much we can invest to attract and retain new players.
Our UA spend is now generating solid returns and with the right system and leadership in place to ensure we generate an appropriate ROI going forward.
We launched 20 price enabled games in Q2, which is our biggest quarter in the last three quarters. Our goal for the second half of 2023 is to begin to scale as we plan to allocate UA funds to incubate between five and 10 new games, while also achieving continued improvement in or payback period.
We also intend to continue adding in promoting more games to our platform to round out content in existing content categories as well as to establish footholds in promising new categories to attract an even wider and more diverse audience.
I highlighted at the start of my comments that our first three pillars are the initiatives that will drive our ability to achieve our fourth pillar.
Demonstrating a clear path to profitability.
<unk> will review the details of our second quarter results in a few moments, but I will share the progress we are achieving and the further progress we expect to make up the second half of the year is encouraging.
So we have the cautious optimism that we're on a pace to achieve our goal of generating adjusted EBITDA positive by the end of 2024.
We're encouraged with our recent improvements in cash management, specifically a reduction in our operating cash burn to approximately $17 million over the past six months, which compares favorably to our adjusted EBITDA over the same period.
Given our net debt cash position of approximately $230 million. This implies six years of runway to return our business to high velocity profitable growth now.
We anticipate needing anywhere near that long as reflected in our goal to generate adjusted EBITDA positive by the end of next year.
In closing over the last several quarters made consistent progress with our operating priorities and while I'm pleased with its progress it should be said that we still have much work to do.
Hill's Board management team and the entire team is entirely committed to successfully executing our four pillars. So the company will have a significantly better foundation to create value for our shareholders.
And with that I'll turn it over to Jason.
Thanks, Andrew.
Revenue in the second quarter was $40 2 million down 44% year over year and down 10% sequentially.
Our payer conversion rate, which is paying <unk> divided by any U with 18% in the quarter.
Theres favorably to 17% in Q1.
Second quarter, UA marketing was $7 8 million.
The decrease of 74% year over year, and a 6% decrease quarter over quarter.
Andrew indicated.
Evident in our ability to continue to improve or payback period with the goal of achieving best in class six month target.
Q2 induced marketing was $17 1 million down 45% year over year and down 3% quarter over quarter.
Research and development was $8 9 million in the quarter.
Down 51% year over year.
On a GAAP basis.
R&D was 22% of quarterly revenue.
Sales and marketing was $33 1 million down.
55% year over year, including $2 5 million of stock based compensation.
On a GAAP basis sales and marketing was 82% of Q2 revenue down 2100 basis points year over year and up.
You mentioned 50 basis points quarter over quarter.
General and administrative expense was $30 1 million inclusive of $11 6 million in stock based compensation of 12% year over year on a GAAP basis, G&A with 75% of revenue up 200 basis points year over year.
On a quarterly sequential basis, G&A was up 1200 basis points as a percent of revenue.
No.
$21 9 million decreased by $46 million year over year.
Adjusted EBITDA in the quarter was negative 22 million, a 42% year over year improvement an improvement of 3% quarter over quarter.
Adjusted EBITDA margin of negative, 50% improved 600 basis points year over year and decreased 700 basis points quarter over quarter.
We ended the second quarter with $361 million of cash price of 328 million cash and cash equivalents of 33 million of marketable securities.
Following a repurchase in April of approximately $160 million of outstanding debt. We ended the quarter with approximately $130 million of total outstanding debt.
In addition to driving and nearly $60 million benefit over the next three years. When you purchased the debt. We also received consents to an amendment of the indenture that increase the general restricted payments basket, a $40 million from $25 million to $55 million.
This provides us attractive liquidity, which will have management and the board to immediately evaluate opportunities to deploy capital to enhance shareholder value.
At this time I will turn the call to the operator for the Q&A session.
Thank you.
Would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like somebody asked that question. Please my staff on a bike chain again to ask a question. Please press star followed by one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question and please do ensure that you have unused hits.
Our first question today comes from the line of Jason <unk> from Canaccord. Please go ahead, Jason Your line is now.
Yeah.
Great. Good afternoon. Thanks for taking my question maybe.
Maybe to start how do you view the current competitive landscape for a developer talent.
How has the introduction of those new developer terms.
Several months ago impacted your relationship with developers helped attract new talent so far.
Yeah.
Okay.
Jason Thanks for the question. This is Andrew I think it would probably be best if we.
We had Casey comment a bit on our overall strategy of how were working against our competitors in our space.
Thank you Andrew and thank you Jason for the question.
Jason I think broadly it's important to remember the skills is essentially the only platform in in this skill.
Skill gaming or casual esports business and when you look at the gaming sector as a whole in the early days of any new category or sector being a fast follower is a relatively lucrative strategy and thats because the cost to replicate the best games is low the time to market as fast and you can see the historically with businesses like Zynga.
That use this strategy to enter Facebook gaming kind of in the 2008 ish timeframe.
For me, which subsequently followed them using this to enter the mobile gaming sector. What you see is that as the economic opportunity of any of these new categories has proven out as it wasn't Facebook as it was in mobile and now as it's being proven out in in casual esports content creators will increase their level of investment into more intricate and complex play.
Answers to match the size of the economic opportunity they have in front of them and so as the games become more complex the ability to fast follow AK really copy these reduced and thats not just because of the direct expenses that that come from development, but it's also because of the time to market and because of the nuances of what make a game great arent always over.
<unk> visible and that makes copying difficult or or even unpredictable.
So what you see is increased complexity of.
Skill games or what we see happening is that the increased complexity of.
Skill based games or casualty sports is inevitable as the as the industry grows the play experiences will become more robust the investment.
We can talk about how the how the creators have received some of the changes.
Yeah. Thanks, Casey Uhm, we've received initial positive feedback from the entire developer community in a really so we've moved every developer now over to the new model, which is no small feat reengineering the Rev share in our partnership with the developers it is a.
Pretty mature platform in getting all of our developers moved over to this traffic based approach, which frankly it makes more sense for both the developers and for skills platform, because we want to align all parties on creating network effect that in turn benefits all parties on the platform and accelerates the benefits for.
Each new developer, who would look to join so we've we've made that happen. We've had positive feedback from our existing developers in fact multiple of our existing developers who may have been on pause on on further investment into the platform have actually started investing again and building new content. It's also led to.
Second to to several developers that I considered using skills to go to market in the past that are there now actually putting their games on the service and then and then I'd say third we've been getting a growing amount very positive feedback and one on one discussions at developer conferences. So.
I think in general the feedback is that the new model is a lot better it's easier to understand and it has rewards for developers performing games, which I think every one of our customers once.
Great that that was really helpful. One other question Uhm, maybe you could just share a little bit more about the types of releases. We can may be expecting that product pipeline you talked about how you sort of see visibility for 18 months or anything else you can share.
<unk> will be can maybe expect on that front.
Yeah, and thanks for asking about about that because you know.
Probably the most encouraging thing that happened for me personally in the quarter is that we started to release mid size features again and make meaningful changes to retention engagement and monetization and can we really entered turnaround this business about a year ago that just wasn't in case, we hadn't put up.
Meaningful product and over 18 months Uhm. So we really came to a standstill on on the the development phase as well as the testing phase and roll out so where we are and some of the things. They can talk about from Q2, we launched daily challenges and we're doing a full roll out and.
This quarter in Q3.
That is seeing double digit improvements in in our core metrics to pretension engagement and motivation uhm, we have key he experienced changes for the player coming in in the back half. This year. So one of the things they call out his his overhauling our leagues.
System is a tournament platform you'd expect us to have really great leagues, we built a league technology, but hadn't seen an overhaul in quite some time.
New leagues will will will I, I'd say really deliver a more meaningful experience for every player at every level and and we think we you know it's too early to comment yet on the metrics there and what were we will see but we do believe that that can result in a double digit improvement in these core metrics of retention and <unk>.
<unk> monetization, we launched actually pretty Excitingly, and and we were able to release a feature in under five weeks, which is.
Much more like the old skills before before we we gone to all.
All the situation with with releasing products and that features instant match and what that is is being able to pop a basically a tile for users are playing and that says if that gives them an opportunity to participate in a real time match or or potentially a.
Flight upsell to their existing play behavior that feature is already live in testing on the popcorn and then I believe will see rollout in Q3.
Uhm, we've overhauled chat, but that's in testing and not rolled so that'll be that'll be in the back half. This year and also introducing probably long overdue for a platform, but getting single sign on up and I'm really making that a reality for all the players and the platform.
So the <unk>, maybe to recap that because it's quite a few things, but progressively instant matching chat and single sign on.
With a daily challenges launched in queue to enrolling in Q3.
Great. Thanks, a lot.
Thank you.
There were no additional questions waiting at this time, so <unk> brings me a bit to Angie Paradise for any closing remarks.
Alright, well. Thank you all again for joining US today, we look forward to providing updates throughout the year on our progress as we return the company to sustain impossible growth, including longer report on our third quarter results of November I really appreciate the time and everyone's patience as we complete this turnaround and I I.
Felt confident that we can achieve many many great things for the competition popcorn for it together.
This concludes today's conference cool. Thank you will feel participation you may now disconnect your lines.
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