Q3 2023 Skillz Inc Earnings Call

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 in the company's third 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 for questions Andrew.

Thank you and good afternoon to everyone throughout the third quarter. We made continued progress on our four strategic pillars, we laid out last year that we expect to return skills to generating consistent topline growth.

Cash flow.

These four pillars are first enhancing our platform to improve customer and developer engagement and retention.

Second up leveling our organization.

Third improving our go to market efficiency.

And for demonstrating a clear path to profitability.

I want to level set expectations, because more progress needs to be achieved ahead in order for us to fully achieve our business turnaround objectives. As an example, our traffic levels continue to lag, where we want them to be.

Monthly active users was 168000 in Q3 compared to 200000 in Q2 ultimately we still have more work ahead to grow skills platform to generate consistent profitable growth and enhance shareholder value.

Our near term focus has been to improve our user economics before focusing on growing traffic for the sake of growth.

<unk> been focusing on reducing customer acquisition costs and on growing LTV by improving our product experience to drive higher engagement.

Once we reach our target of a sustained six months payback period will shift focus to growing traffic.

On the product experience itself, we're working on our VIP program to ensure our most valuable players are recognized for awarded and retained.

We've built a unique platform and if we prioritize continuing to improve retention, while maintaining healthy user economics we.

We can generate significant returns for our shareholders.

Let me turn to a brief review of our third quarter progress in Q4 to date before I turn the call to Jason for you on financials.

I'll begin with some of the highlights of our efforts to enhance our platform to improve customer and developer engagement and retention.

As we discussed on our Q2 call our product team is developing a new future pipeline that is driving higher customer retention engagement and monetization.

And we introduced two new product features in Q3 daily challenges and progressive leagues, which have now been rolled out to games that accounted for the majority of our revenue.

When we introduced new features we're targeting a 10% or greater improvement in retention engagement and monetization and I'm pleased to share that the two new features accomplish this goal in Q3.

For Q4, we expect to rollout two to three new features and then we will look to extend that momentum into 2024.

It's truly exciting to see the platform launching new meaningful features for our players.

Turning to our second pillar up leveling our organization.

Our focus on performance ownership and accountability is making a tangible difference in productivity as evidenced by the new accretive features of our product and engineering organizations that had been built this past quarter.

As well as the lineup of new product features for Q4 and 2024.

In Q3, we filled key roles that we expect will significantly benefit our company and included roles such as Vice President of consumer head of developer product and head of mobile engineering.

We're also making progress with transitioning away from our dependence on contract labor to full time permanent employees that are committed to skills mission.

While we still have work to do we've made measured progress in putting the right people in the right roles, while bringing our newer employees fully up to speed with our strategic priorities.

In this respect we expect our upcoming move into our new Las Vegas headquarters will further enhance collaboration and productivity and accountability across the organization.

Moving onto our third pillar our go to market.

Our Q3 user acquisition cost was the lowest since 2020.

We're on track to achieve a payback period of six months in the next few quarters.

This will position skills of having well above the industry average payback period for companies in the mobile gaming market.

Moreover, in Q3, we launched our highest number of prize meaningful gains since Q2 of last year.

So that's the highest since it started turning around our business.

This reflects the changes we made in Q2 to relaunch our developer revenue share agreement.

To remind listeners we now share revenue based on entry fees as opposed to a percentage of profits, which is much easier for developers to understand and calculate in real time.

So this changed several of our biggest developers introduce new gains in Q3.

Developers such as bigger on studios and <unk> Studios released new content for the first time in several quarters and are re engaged in growing the platform.

The on getting our developer community to launch more content. We're also improving the transparency and monitoring of gains there candidates under our skills publishing model.

As we finish improving user economics and transition into growing traffic is our top priority, we will look to grow new titles beyond the existing core library.

We monitor the game level economics by channel to ensure that every dollar spent generates an attractive return on investment.

Before we move to discuss our fourth pillar on moving the company to profitability I wanted to revisit a topic that we discussed on our Q2 call.

Critical to the customer and developer engagement in our industry is addressing the disruptive use a box.

<unk> players have their winnings, which has become prevalent across our industry.

I want to expand on this topic now as it's essential to ensuring the future of our industry.

To be clear our industry cannot exist without assuring players are not to see buy box is this attacks the very essence of fair and meaningful competition.

Skilled proprietary platform fairly matches players against other real players you always play humans when you play on skills.

This is not the case with all companies in our market.

Reserved in the industry, we've created we've deployed a meaningful amount of resources to combat this deception.

An example of this lawsuit we filed alongside Big run studios against AVM games.

It's evident to us and big run at EA games users box.

This is a company that is committed consumer fraud.

To date amounts to over $1 billion.

There's a set of use of bots means the games on our platform are ranked pure and simple.

Stealing money from players that don't know Theyre, playing against the Bot and believe they are playing against another human opponent.

Despite clear evidence to the contrary NBA games continues to publicly state that they do not use bots and continues to entice consumers based on a false promise of fairness.

I want to thank the news outlets in the past months that its already covered this fraud in our industry and I'd encourage everyone on this call to read the press coverage.

We know there are other companies in our industry, who use bots and that makes them justice crop. This Eva gains and we will continue our efforts to expose those practices.

This year, our legal spend will approximately amount to $18 million and while it certainly impacts our near term operating results and cash burn we know that readiness. This industry of these deceptive practices is the only path forward for the industry.

Since we are the leading company that created this industry and we don't engage in box we have to fight this.

We anticipate the elimination of this practice to dramatically change the future of the industry.

Absent our actions consumers to engage with skill based games will continue to be deceived.

Industry would eventually lose the public's trust is.

Absolutely critical for both players and developers that are 100% of the industry and leased the highest level of trust for consumers.

Now let me discuss the fight for fairness, let me talk a little bit about our fourth pillar, which is demonstrating a clear path to profitability.

Jason will review the details of our Q3 results in a moment, but I am encouraged by the progress we've achieved it become profitable.

Provide us with cautious optimism that we're on pace to generate quarterly sequential topline growth in 2024 and achieve our goal of generating positive adjusted EBITDA on a run rate basis by the end of next year.

In Q3, we continued to improve our cash management as our operating cash burn was $18 $5 million and our total cash burn, including onetime items Kingdom approximately $21 million.

Given our net cash position of approximately $210 million in quarter over quarter improvements of our operating cash burn.

Difficult runway to return our business to sustainable high velocity profitable growth.

In closing while real progress has been made I.

I hope, it's evident that we are well aware that we have much work to do.

The skills Board management team and the entire organization remains firmly dedicated to successfully executing on our four pillars.

And creating a strong foundation to create value for our shareholders.

With that I'll turn it over to Jason.

Thanks, Andrew.

Revenue in the third quarter was $36 4 million.

Down 38% year over year and down nine 3% sequentially.

Our paid user conversion rate, which is paying mou divided by Mou with 16% in Q3.

Slightly down from 18% in Q2, due to prioritizing and optimizing our platform over user acquisition in the prior quarter.

Third quarter, UA marketing with $6 2 million a.

A decrease of 66% year over year at a 21% decrease quarter over quarter.

As Andrew indicated we are confident in our ability to continue to improve our payback period with the goal of achieving a best in class six month target.

Q3, and get your marketing was $16 9 million.

Down 28% year over year and in line with Q2.

Research and development expense was $7 9 million in the quarter down 1% year over year.

On a GAAP basis, R&D was 21, 6% of quarterly revenue.

Sales and marketing expense was $31 9 billion down 38% year over year, including $2 5 million of stock base compensation.

On a GAAP basis sales and marketing was 88% of Q3 revenue.

Up one basis point year over year, and up seven basis points quarter over quarter.

General and administrative expense was $24 4 million.

Inclusive of $8 5 million in stock based compensation.

Up 16, 5% year over year.

On a GAAP basis, G&A was 67% of revenue.

Up 31, six basis points year over year.

Quarter over quarter, G&A was up two basis points as a percent of revenue.

Net loss of $33 5 billion decreased by $49 $7 million year over year.

Adjusted EBITDA in the quarter was negative $18 5 million.

A 14% year over year decrease and a 2% decrease quarter over quarter.

Adjusted EBITDA margin decreased by 4% from negative 47% in Q2 to negative 51% in Q3.

We ended the third quarter with $339 9 million of cash comprised of $331 billion in cash and cash equivalents.

$7 billion of marketable securities.

$2 9 million and restricted cash and we ended the quarter with approximately $130 million of total outstanding debt.

With our improving cash burn rate, we have the flexibility to deploy capital towards enhanced shareholder value.

Last I would like to touch on an adjustment we made to our Q2 2023 financial statements that will be reflected in our Q3 2023 10-Q filing.

During the preparation of condensed consolidated financial statements for the period ended September 32023, the company identified certain immaterial errors related to stock compensation expense and operating expense accrual for the three months ended June 30th 2023.

Which resulted in a net overstatement of operating expenses for the period.

First we identified that accrual related to professional services was incorrectly over accrued in Q2.

As a result of the adjustment our Q2 financial statement operating expenses improved by $1 3 billion and adjusted EBITDA.

Resulted in a change in Q2 from negative $22 billion to negative $18 4 billion.

Second we identified an error in how we reported stock based compensation, resulting in a benefit of $4 billion to our net loss.

Both of these areas resulted in an improvement in Q2 net loss of negative 22 million to negative $16 7 billion.

We have the proper controls in place to ensure these errors only impact Q2 and will not be repeated.

At this time I will turn the call to the operator for the Q&A session.

Thank you.

If you would like to ask a question at this time. Please press Star then one on your telephone keypad.

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He would like to ask any questions today. Please press star one on your telephone keypad.

We have the first question on the line from Ed <unk>.

Chat with Jefferies. Your line is now open.

Yes.

Hi, everyone. This is that alter on for Andrew just.

Andrew.

I had an update on the new Rev share agreement and how studios at larger.

Reacting to that and when we can expect to see some of them, putting some of their own marketing dollars behind their games and what that impact would be.

Sure and thank you for the question.

So the <unk> share went live in May.

To give everyone a good idea of timing of how long it takes to build a mobile game and bring it to market and scale.

We should expect six to 18 months and probably more realistically 18 months six months being kind of the fastest time to market to build a game.

We've seen a.

<unk> content creation community building games again on the platform and I mentioned in my remarks are both big run in tether built and launched games.

In Q3, which are two of our top customers, but we have a mix of both existing and new customers. The makeup all became so went live in Q3.

From an expectation standpoint of windows can scale.

I would say, we should look for them.

Impact on revenue and more like six to 12 months.

Oh, great. Thanks for that and then looking at the take rate looks like it's dipping down in the last couple of quarters, just talk through kind of the drivers of that is that is that the rev share coming through on that or whats driving that.

And that's a great question.

Jason do you want to take that one.

Thanks, Ed So I think we've had over the last several quarters.

You know as we've had lower.

User acquisition, we have less users, but we've been seeing that the users on our platform.

Have become more valuable to us so over time, we've seen our mature more mature user economics, improving despite lower.

Despite overall.

What we're users on the platform.

I would also say that as you lower your marketing expense right share with developers.

Also reduces their payments.

So you also have that effect showing through in the financials.

Ed This is Casey chapter.

To make sure I clarify what what Jason is saying there.

When we spend money on consumer acquisition.

That money is treated as an operating expense, meaning it actually it increases our revenue.

The developer portion of that though is there a <unk>.

Is it contra revenue and that expense is shared with our developers so when our marketing expenses higher that developers are sharing in that expense.

And and that increases our effective take rate when the marketing expenses lower developers arent sharing aren't don't have as much of that expense burden and so their revenue share goes up as a percentage of revenue.

Paul.

I see I see to them, what would be kind of a longer term target to think about it.

Of course that profitability Mark important 24, what would it take rates tend to be in the ballpark for that scenario.

Yes.

Yeah.

Yeah.

From my perspective, I think I think what you can expect us.

If skills is running the acquisition budgets you could expect the take rate roughly in line with where we are right now, but as we see as we see games that are running their own marketing budgets.

That's a great would conceivably be lower and so right now we don't from a forecasting perspective, we don't break out those those two possibilities in terms of growth.

But you could you kind of expect in a status quo environment, where we're skills is largely the driving force of marketing on the platform of the take rate would be in line with where it is now.

Great great. Thanks, that's all I had thanks guys.

Uh huh.

Thanks, Ed.

Thank you.

I would now like to hand, it back to Andrew paradigm for closing remarks.

Yeah.

Great Alright, well. Thank you all again for joining US today, we looked hard to providing updates on our progress as we return skills to sustained profitable growth in 2024, and we'll look forward to meeting with you to discuss our fourth quarter results on our next call until then take care.

Thank you for joining the scans and 2023 third quarter results call.

Ken Consignments has now concluded please have a lovely rest of your day.