Skillz Inc (SKLZ) 2023 Q4 法說會逐字稿

Good afternoon, all. I would like to welcome you all to the Skillz Inc. 2023 fourth quarter results call. My name is Bailey, and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the conference over to your host, Jim Leahy from JCIR to begin. So, Jim, please go ahead.

Good afternoon and welcome to the Skillz third quarter earnings conference call. On the call today are Andrew Paradise, Skillz's Co-Founder and CEO; Casey Chafkin, Co-Founder and CSO; and Gaetano Franceschi, CFO. This afternoon, Skillz issued it's earnings release reporting the preliminary fourth quarter release, for the year ended December 31, 2023 results, which is available on the company's Investor Relations website.

The company in the process of completing its financial statement and other disclousers for the fiscal year ended December 31, 2023. As result the company will file an extension for following our annual report on form 10-K to the year ended December 31, 2023. Accordingly the company is announcing preliminary results for the year. Which are based on currently available information subject to revision is management complete internal review. The company's independent registered public accounting firm as not finalized which will give you this preliminary financial results over it's all of the financial statements for the year end December 31, 2023.

Actual results may differ from its preliminary financial results from other financial information due to completion of our internal appreciation all other companies financial statments final adjustments and other developments that (Inaudible) between now and the time result to finalize, further disclosures included in the form [12B-25 file with the SEC]. The company expects the file its annual report on from 10-K for the year ended December 31, 2023 by March 29, 2024

Before I turn the call over to Andrew, please note that some of 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. The reconciliation of these measures to the most directly comparable GAAP measures is available in the company's fourth quarter 2023 earnings release.

With that, I'll turn the call over to Andrew for some opening remarks, followed by Gaetano for discussion of our financial performance before we open the call for questions. Andrew?

Thank you, and good afternoon to everyone and throughout the fourth quarter, we made further progress on the four strategic pillars we laid out last year that we expect will position skills to return to generating consistent top line growth and positive cash flow. These four pillars are First, enhancing our platform to improve customer and developer engagement and retention. Second, up-leveling our work, third, improving our go-to-market efficiency, and fourth, demonstrating a clear path to profitability.

But before I review the progress we've made on our four strategic pillars, I want to revisit the key topic that we've discussed in our most recent calls. Our fair play initiative for bringing attention to the disruptive use of bots to defraud players of their hard-earned money is critical to ensure the long-term viability of our industry. We're standing firm on our commitment to eradicate unfair bots as companies deploy them are attacking the very essence of fair competition [While eroding aircraft].

With our proprietary platform, every player has ensured fair matchups against real opponents of the same skill level as part of our patent infringement lawsuit against a big games, we uncovered evidence indicating that Avia games is committing consumer fraud through the deceptive use of bots, which means the games on our platform are rigged against [supplier].

We know there are other companies acting in a similar manner and believe these companies deceptive use of bots as defrauding consumers have more than $1 billion. Last week, we initiated a lawsuit against proposed gaming in regards to the fraudulent use of bots. There's now a federal class action lawsuit brought by players against the big gains related to its use of bots.

And we anticipate more lawsuits like these being brought against our competitors for using bots to engage in fraud. It's important to note that these are not small companies. They engage with millions of players in billions of tournaments, and their games are now top-ranked in app stores.

And highlighting this issue, we're not trying to reduce competition, but rather ensure that there's a level playing field for all industry players maintain the same level of commitment to fairness and to providing a transparent experience since we're the leading company that does not engage in bot fraud, we anticipate the elimination of this practice would dramatically benefit our CAC, LTV., which will greatly accelerate the turnaround of our business as pioneers and leaders, it's our responsibility to lead the charge for their future while building trust suppliers scale.

I mentioned our patent infringement lawsuit against a big games and in that case has been a very positive development for skills. Recently, a jury awarded $42.9 million after finding that a big games did, in fact, will fully infringed on our patents as the jury found a big games active willfully. Our initial damages award may be enhanced to include treble damages and attorney's fees.

In addition, there's important evidence introduced in that patent lawsuit, which were useful in the prosecution of our copyright infringement and false advertising claims against a big games. We remain dedicated to fostering fair play across our industry.

And along those lines, we continue to enhance our trust and safety teams. We also have an expanding portfolio of advertising content that promotes Fair Play while at the same time educating consumers. It's important to note that our expectation for achieving positive adjusted EBITDA by late this year is not contingent on the favorable outcome of the EB Games lawsuit or for that matter on the eradication of bots by other industry players.

Our path to achieving our goal of adjusted positive EBITDA is determined by the continuing success of the turnaround initiatives.

So with that, let me turn back to our fourth quarter and first quarter-to-date progress and update on our four pillars before turning over the call to our CFO, Gaetano, for a review of the financials, improving retention and monetization, along with growing our audience takes time. And while we're making progress, we continue to see an impact on our near term operating results.

Our Q4 results reflect the continued lag in our traffic levels, including from our VLTs as paying monthly active users were 137,000 in Q4, compared to 168,000 in Q3. Importantly, we've significantly slowed audience decline in January and February and are attracting to a more stable audience in March, we believe we've reached a level from which we can grow our paying audience.

We're also doing an increasingly better job and expense management as reflected in the 25% decline in operating expenses compared to both the year-ago period and Q3 and the continued improvement in our adjusted EBITDA loss. Our focus has been to improve our unit economics, which we believe we have achieved now in the early part of Q1, and we're now transitioning to growing our audience.

We've been focusing on new feature launches to improve retention and engagement proactively engaging our customers where they're on the platform and reactivating lapsed users as well as continuing to optimize customer acquisition costs to drive profitable growth. We're getting closer to this inflection point as we are approaching our goal of a six month payback or begin to transition our efforts towards scaling in areas where we see positive returns.

A key focus in this regard is our VAT engagement or retention and reactivation efforts of the segment account for a large part of our profits. We built a unique platform. And as we prioritize retention engagement improvements alongside healthy user economics, we believe we can generate significant returns for all of our shareholders.

Turning to the highlights of our first pillar, our efforts to enhance our platform to improve customer and developer engagement retention, our product teams building a new future pipeline. And on our Q3 call, we highlighted that retention engagement, virality and monetization uplift generated by the introduction of daily challenges and progressive leagues.

In Q4, we introduced instant match feature, which offers players immediate results on tournaments as they play the events to match pop-up. And we're seeing again results in line with expectations. We also released account merge, which allows our players to inadvertently created multiple accounts on multiple apps and different games to now merge all of their experience the purpose of this feature is really to offer a better player experience, but also to reduce the number of players or requests as we look over the balance of 2024.

We expect our future lease momentum will continue today in Q1, we've introduced several new features, and we expect to introduce several additional new features. But then in Q2, it's really exciting to see the platform launching meaningful new features for all of our players worldwide, an important part of our initiatives to enhance our platform to improve customer engagement, retention as our work to improve the experience of our best and most active players are DSPs.

The goal of this program is to increase the ARPPU satisfaction and drive an increase in the number of weekly tournaments played by our VAPs. We're also focusing on reactivating prior VIPs by targeting those that have decreased their play in the past. Once we continue to enhance our live ops capabilities, which allow us to look at trends on the platform in real time and initiate offers to drive retention and engagement should be particularly beneficial to our efforts to improve the [ARPPU] experience.

Turning to our second pillar, up-leveling, our work in the past several months, we brought on several new product development management hires. We've also continued to expand our marketing team as well as our data and analytics resources.

We strengthened our finance team with the addition of Gaetano as our new CFO and the hiring of a new controller head of FP&A. Our move into our new Las Vegas headquarters in late January has reduced our physical footprint and led to an improvement in collaboration productivity and accountability across the network.

Moving on to our third pillar, our go to market. We reduce user acquisition in Q4 from Q3, and UA remains at its lowest level since 2018. The payback period for UA in Q4 was sequentially better than prior quarters, and we exited February the payback period that's approaching closer to our stated goal of six months. As such we're looking to transition our focus to spending to drive profitable growth while maintaining financial discipline on UA spend.

As part of this effort, we're now spending more through our key, which provides us with better pricing and better transparency and keeps the margin within skills more for in Q4, we launched our highest number of private-label games since Q2 of last year, which is also the highest since we started.

Turning on our business. As we discussed in Q2 last year, we relaunched our developer revenue share agreements. This means we now share revenue based on entry fees as opposed to percentage of profits, which is much easier for our developer partners to understand and monitor real-time. With this change, we've seen developers, including several of our biggest introduce new games for the first time in quite a while.

We see developers re-engaging and growing the platform for over a dozen new games launched on the platform in Q4 and we expect two to three times that number of games launched between Q1 and Q2 this year. New game development typically takes 6 to 18 months to develop and scale and so the return profile of these activities will be lagging but necessary for the future of a healthy platform.

Finally, before turning over the call to Gaetano for a review of our Q4 results. I'll talk a little bit about our fourth pillar, which is demonstrating clear path to profitability. Based on our Q4 performance and the trends in Q1. I'm encouraged by the progress we've achieved to become profitable. We remain optimistic that we're on pace to achieve our goal of generating positive adjusted EBITDA on a run-rate basis by the end of this year.

Our adjusted EBITDA loss continued to improve in Q4 to negative $12 million from negative $18 million in Q3 on $7 million lower revenue, excluding legal fees for the AV games lawsuit. Our adjusted EBITDA loss in the quarter was $8 million. In Q4, we continued to improve our cash management as our operating cash burn was negative $12 million compared to negative $18 million in Q3.

Given our net cash position of approximately $178 million in the quarter over quarter, improvement of our operating cash flow we have significant runway to return our business to sustainable and profitable growth. I also want to highlight that our view, our current valuation gets no weight to either the progress we've made against our plan to improve the business trajectory, [Ron] to generate a positive adjusted EBITDA run rate by late this year and the value of our operating platform as such in the second half of last year, we're active on our $65 million share repurchase authorization. We still have over $50 million remaining in our share purchase reauthorization program as of the end of December 31, 2023.

In closing, while real progress is being made, I hope it's evident. We still have a lot of work to do skillz Board management team and the entire organization is firmly dedicated to successfully executing our four pillars and creating a strong foundation to create value for our shareholders.

And with that, I'll turn it over to Gaetano.

Thank you, Andrew, and good afternoon, everyone. I am pleased to be with you on the call today following my joining skills in early January and looking forward to speaking to you going forward for the 2023, fourth quarter, revenue was $29 million, down 38% year over year and down 20% sequentially. Our paid user conversion rate, which is paying now divided by mall was 15% in Q4, slightly down from 16% in Q3 due to our prioritizing the optimization of our platform over user acquisition in the prior quarter. As Andrew indicated, we are confident in our ability to continue to improve our payback period and begin to invest to grow sequentially.

Turning to OpEx research and development expense was $3 million, down 54% year over year. On a GAAP basis, R&D was 12% of Q4 revenue. Sales and marketing expense was $23 million, down 28% year over year, including $2 million of stock-based compensation. On a GAAP basis, sales and marketing was 79% of Q4 revenue compared to 74% in the year-ago quarter and 88% in the prior quarter. General and administrative expense was $22 million, down slightly year over year, inclusive of $8 million in stock-based compensation.

On a GAAP basis, G&A was 75% of Q4 revenue, net loss of $21 million, inclusive of a $3 million impairment charge on goodwill and long-lived assets compares to a net loss of $144 million in Q4 2022, which included a $117 million impairment charge adjusted EBITDA loss in the fourth quarter was $12 million, a 34% improvement quarter over quarter.

Adjusted EBITDA margin improved from negative 51% in Q3 to negative 42% in Q4 for the 2023 full year period, adjusted EBITDA loss of $70 million improved by $52 million from a loss of $122 million for 2022. Our cost structure will benefit this year from lower costs for items, including legal, audit and insurance fees, as well as continued prudent management of our cost base. Additionally, interest expense will continue to decline given the reduction in outstanding debt.

We ended the fourth quarter with $312 million of cash comprised of $302 million in cash and cash equivalents and $10 million in restricted cash. At the end of 2023, we had approximately $123 million of total outstanding debt. With our improving cash burn rate, we have the flexibility to deploy capital to enhance shareholder value.

At this time, we'll turn the call to the operator for the Q&A session.

(Operator Instructions)

Clark Lampen, BTIG.

Thanks for taking the questions. I've got two maybe first, Andrew, I'll ask for your help sort of bridging the gap on two fronts and maybe Gaetano can chime in here. But as we think about about a $12 million EBITDA loss this quarter tracking towards sort of a positive number a year from now. Can you help us with I guess sort of the high level guardrails is going to be mostly revenue driven or is there a sort of cost reduction component here?

And then as part of the sort of revenue improvements, how much does sort of what's going on with the Fair Play initiative really play into this. I understand that it's important. But on the you know, as as you're sort of working through things with severe right now, are these sort of monetary penalties? Are you seeing the elimination of sort of harmful practices? Just curious how much that that's going to sort of contribute here. Thank you.

Thanks, Clark. Those are great questions. So maybe I'll just recap for everyone on the call. First question is thinking about our losses and what the guardrails are for improvements from the second question is really thinking about how important is Fairplay overall to getting the cash flow positive. Gaetano do you want to hit the EBITDA losses and then I can talk a little bit about Fairplay.

Yes, sure. Thanks, Clark, for the question. The way we're kind of thinking about this is that for us on the on the growth that's going to come through our sequential user growth as well as continued retention and monetization improvements through launches in our platform. And we have a large slate of activities that we want to do to improve the platform, improve our unit economics. Now that we saw that we've kind of flattened off, but we think we've kind of flattened on that on our audience.

Maybe I can chime in. And I think one of the things that we're really we've been talking about for several quarters is getting our paybacks down to six months, which would be probably about two to three times better than the industry average at 12 to 18 months, assuming cutting user acquisition, we've been focusing on really getting very efficient in all of our digital marketing, and we're approaching that six month level now in Q1.

And so regardless of whether or not we can change it, the buying practices throughout the industry, that's something we can control and something that we're working on. So we don't need fair play to drive profitability, and we don't need to stop us to get to our goal of cash flow positive this year and to grow revenue from here out, it certainly would be a very helpful tailwind to the business overall and the United States.

Even beyond that, the things that are going on with companies like Avia, it's not just business related. It's also potentially criminal. And these are companies where they're they're marketing to players that they're running a similar service to skills, a multi-player competition system where the people that are actually paying these companies when they go to play their incentive playing real people, they're playing against box and Avia, for example, it's already been and publicly announced that they've received different federal grand jury subpoena.

They're also in a class action lawsuit. Now it's been filed. And it's also, I think, out there we filed in the last two weeks against prepared games for their fraudulent use of bots. We have we are known as the inventors of the space. It's one of the things that I really kind of think about it almost every day that we went out at our IPO and talked about all the data science we built to stop cheating to stop fraud, insure fair play some of the work that went into building out systems.

So we can actually process not just withdrawals for players of real money funds, but also as many may know, we ship a variety of railroad goods ranging from everything from a T-shirt to a Jet Ski to a car to players depending on their winnings and one of the things I'd point out that it's a lot easier if the players aren't earning a kind of service.

So if all the players are engaging in spots and the company and one of these companies in the industry is just capturing, are those payments, they really don't have any have you seen them cheating fraud payment and fulfillment issues that are important issues and things that we had to solve to build this platform.

So I think to have gone a little long-winded here, but I do think it's really important to drive awareness of this. It's something that every investor or prospective investor on this call, just by letting them know about this happening in their industry. It's already helping change the future of the industry. And to give you an idea of how big this is, we estimate that bot driven fraud is over $1 billion in the US.

And so it's it's very, very sizable and it doesn't adjust I deprive our business from being able to acquire those players. So it's driving up the customer acquisition costs across the industry because Additionally, some of our products are being marketed to the same audience.

That's obviously creating trust issues from other players where they've been defrauded, and they're now potentially in a class action lawsuit against one of these companies. So and yes, I can't I can't say enough how much how much it's impacting the industry and how important it is for us all to think about it's now over $1 billion of fraud and growing.

Thank you.

Thank you. We have no further questions in the queue today. So I'd like to hand back to Andrew Paradise for any closing remarks.

Well, I just wanted to thank everyone for joining us today. I know we have historically been fielding just analyst questions. We're going to start to engage much more deeply with our investor audience in the next few quarters as we finish our turnaround, I look forward very much to providing you with an update on our progress as we return skills to sustained and profitable growth. And we look forward to speaking to you again when we report our first quarter results until then, thank you.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.