Skillz Inc (SKLZ) 2023 Q1 法說會逐字稿

Good afternoon. Welcome to Skillz First Quarter 2023 Conference Call.

I will now turn the call over to Susan Swanson for opening remarks. Please go ahead.

Good afternoon, and welcome to the Skillz first quarter earnings conference call. With me today are Andrew Paradise, Skillz CEO; Casey Chafkin, CFO; and Jason Roswig, President and CFO. Note, our full 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, 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 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 in the most directly comparable GAAP measures is available in our first quarter 2023 earnings release.

With that, I'll turn the call over to Andrew for some brief opening remarks before we open the call for questions. Andrew?

Thank you, Susan, and to all of you for joining the call. In the first quarter, we continued to make progress on the 4 strategic pillars that we laid out last year, while we continue to gain difficult demand in 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 it'd be premature to say we're out of the woods.

To briefly review the quarter before I turn the call to Jason, let me begin with the first pillar, enhancing 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 customers' stickiness and engagement as seen in our payback improvements.

To this end, to name a few of the product 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 play screen user interface, resulting in positive trends in pro tournaments engagement as well as pro retention.

For developers, we rolled out the Skillz Discord server to enhance community support. We updated SDK release process to provide greater clarity to all releases, including OTA and we added site instrumentation to enhance usage insights inside of our developer console.

This brings me to our second pillar, up-leveling our organization. We made a lot of progress in reshaping the organization to fuel growth and innovation. We're really excited to welcome Ellie Ryu, our new Controller and Global Head of Accounting. She's joining our staff and has already made a significant impact on upgrading our accounting team's talent. It has been challenging to be sure and in some cases, we found that we don't have the right talent to guess 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 that we can place the right people into the right roles. A majority of the Skillz employees that during last fall are now fully up to speed, which will be exciting to report. And it's gratifying to see. As you'd 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 2 new experienced Board members, amongst 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 the last 3 quarters, and we have line of sight to get payback back to best-in-class of 6 months or less within the next 3 quarters. Having said that, PMAU, or paying monthly active users, continued to decline quarter-over-quarter as we've reported.

In terms of our developer community, our team focused our energy in the first quarter and preparing for a transition to our new developer revenue share model. As planned, the new model launched 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 relations 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 2 specific variances that we do not anticipate we'll incur in future quarters.

Specifically, we spent $3.2 million on operational consulting services for turning around our business, and we spent $3 million for accounting advisory services in 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 in the future of our business.

We're intensely focused on the 4 pillars that I've named, and we are committed to returning shareholder value over the long term. We'll continue to be transparent with you to build shareholder trust. And with that, I'll turn the call over to Jason to discuss our 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 our paying MAU 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 as we continue to improve and lower our payback period and user acquisition cost. Q1 engagement marketing was $17.6 million, down 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. On a 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 4 percentage points quarter-over-quarter.

Q1 general and administrative expense was $28 million, down 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 $60 million positive impact for us over the next 3.5 years. It's an incredibly material development to extending our runway to fix our business to revert it to the growth engine than 2017 caused us to win the Inc. 5000 as America's fastest-growing private company.

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 Skillz to sustained profitable growth.

(Operator Instructions) The first question we have comes from Jason Tilchen from Canaccord Genuity.

Great. 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 top games in the platform today versus where it was prior to the strategy to sort of reduce marketing and engagement spend? And then I have a follow-up there.

Thanks, Jason. This is Andrew Paradise. I was going to turn it over to Jason Roswig, who I think would be best to comment on that.

Thanks, Jason. I would mention that our concentration has been relatively consistent over time. It has been about 80% now consistently for this quarter and last quarter. I would note that our intent with our new standardized developer revenue share model is to bring new content onto the platform over time and continue to diversify that number.

Great. And just sort of on the same topic, as it relates to sort of ongoing efforts to sort of expand the genres in the platform, could you talk about some of the initiatives that are in place there and where that stands? And maybe any updates on sort of 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 few games like other media platforms. And now I can maybe draw an analogy here to something like HBO when Game of Thrones was the most popular show on HBO, where they probably saw the majority of usage being watching that show. So I don't think we anticipate that in the future that there won't always be some level of concentration in the top 1 or a few pieces of content on the platform.

In terms of expanding genres, so we did the deal with Exit Games to integrate the Photon multiplayer engine so that we could have more sophisticated multiplayer games on the platform and really move out of asynchronous video games like Solitaire Cube or Blackout Bingo into more sophisticated games, first turn-based genres. So we have games like Dominoes 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 on to the platform over time as we really saw a significant disparity between our form of monetization as Skillz-based gaming monetization versus IP and ads with the old revenue share model.

And what I mean by that is both with ads and in-app purchasing, they provide the developers with real-time revenue reporting. The way we ran and built this business is 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 -- our business, as you may know, we've taken a deposit from a user. We actually don't recognize revenue from that deposit until the user enters into competition using that deposit.

The user may receive promotional currency against that deposit. They also may withdraw that deposit, which -- and each of those things actually are not revenue recognition for us. It's only when they're entering into competition that's generating entry fees where we actually apply a take rate.

So when we go to share our money with the developers historically, we would share -- it was still 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 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 1, actually, what we are doing is we're actually sharing a percentage of gross revenue. So actually sharing a percentage of the entry fees of the developers. And that revenue share starts at 3.75% of the -- of every dollar of entry fees and it scales upwards as the developer drives more traffic to the network.

The reason -- 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 games through in-app purchasing or ads. So they have the same level of data and ability to use that data to drive machine learning algorithms on DSPs, or demand-side platforms, which is one of the primary ways that games in our industry are advertised.

Separately, this 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 and in far more genres.

Great. That was really helpful. And maybe just one more quick one, if I can. Last year, the conversion rate of paying users from the total MAU peaked at sort of low 19% range and it 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 -- this is Andrew talking again. Maybe I can turn it over to Casey Chafkin, our Chief Strategy Officer, to talk a little bit about that.

Sure. And thank you for the continued engagement, Jason. From a conversion perspective, lowering engagement marketing is -- 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 DAU versus our playing DAU, we expect that to remain relatively stable and potentially increase a little bit as we continue to decrease marketing spend and have more mature users on the platform.

There are no further questions. So I will turn the call back to Andrew Paradise.

Okay. Well, thank you, everyone, for tuning in today to listen to our earnings call. We look forward to reporting on the 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. Thank you for the time, and we'll talk to you definitely.

That concludes the conference call. Thank you for participation, and enjoy the rest of your day. You may now disconnect your lines.