Skillz Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

Key Takeaways

  • Skills reached a $80M settlement in its patent infringement suit with Avia Games, receiving $50M in April and set to get $7.5M annually for four years.
  • Q1 revenues were $25M (down 43% YoY and 19% sequentially) with an adjusted EBITDA loss of $18M, marking a 15% year-over-year improvement.
  • New customer onboarding issues caused a decline in paying users to 121,000 in Q1, but fixes implemented in late April are already slowing audience attrition.
  • The company’s turnaround rests on four pillars—platform enhancements (e.g., Instant Match and upcoming Live Brackets), organizational up-levelling, disciplined marketing spend, and a clear path to profitability.
  • Skills is aggressively pursuing litigation and industry reforms to eliminate bot fraud, arguing that a fair-play ecosystem will significantly enhance LTV/CAC and accelerate its recovery.
AI Generated. May Contain Errors.
Earnings Conference Call
Skillz Q1 2024
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good afternoon, all. I would like to welcome you all to Skills Incorporated 2024 First Quarter Results Call. My name is Elliot, and I will be your moderator for today's call. I'd now like to pass the conference over to your host, Jim Leahy from JCIR to begin. So Jim, please go ahead.

Speaker 1

Good afternoon, and welcome to the Skills' 2024 First Quarter Earnings Conference Call. On the call today are Andrew Paradise, Skills' Co Founder and CEO Casey Chafkin, Co Founder and CSO and Gitano Franceschi, CFO. This afternoon, Skillz issued its earnings release reporting preliminary unaudited Q1 results, which is available on the company's Investor Relations website. The company is in the process of completing its unaudited interim financial statements and other disclosures for the fiscal quarter ended March 31, 2024. Accordingly, we are announcing preliminary results for the Q1, which are based on currently available information and are subject to revision as management completes its internal review.

Speaker 1

Our independent registered public accounting firm has not finalized its review of these preliminary financial results. In the event the company determines it will not file its quarterly report on Form 10Q by the prescribed deadlines, it will file an extension on Form 12b-twenty 5 with the Securities and Exchange Commission. In addition, the company is still in the process of completing its financial statements and other disclosures for the fiscal year ended December 31, 2023. We were not able to file our Form 10 ks during the requisite extension period. As a result, we previously announced we received a notice from NYSE that the company was not in compliance with NYSE listing standards.

Speaker 1

The company is working diligently to complete the necessary work to file the Form 10 ks as soon as practicable and currently expects to file the Form 10 ks within the 6 month period granted by the NYSE notice and intends to take all necessary steps to achieve compliance with the applicable NYSE listing standards as soon as practicable. Because the results for the quarter last year are preliminary and still subject to review an audit by our independent registered public accounting firm. Actual results may differ from these preliminary financial results and other financial information due to the completion of our internal procedures, final adjustments and other developments that may arise between now and the time the results are finalized. 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.

Speaker 1

Therefore, you should exercise caution in interpreting and in 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 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 the company's 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 Q1 2024 earnings release.

Speaker 1

With that, I'll turn the call over to Andrew for some opening remarks, followed by Gattano for a discussion of the company's financial performance before we open the call for questions.

Speaker 2

Before I review the progress we've made on our 4 strategic pillars, I want to share some comments on the significant strides we're making related to key litigation matters our Fair Play initiative. As you know, our proprietary platform provides certainty that every player is fairly matched against another real player. That is the foundation of competition and a critical tenant of skill based gaming. Unfortunately, companies such as ABA Games and we believe Papaya Gaming do not follow ethical fairness practices and utilize bots to deceive players, often matching their consumers against bots instead of against real opponents. We previously reported that a jury awarded Skills approximately $43,000,000 in our patent infringement case against Avia Games.

Speaker 2

Subsequent to this jury award, Skills and Big Run Studios entered into a settlement agreement with Avia Games for a total of $80,000,000 which is almost twice the jury award. We received the 1st cash payment of $50,000,000 for the settlement as of the end of April. Beginning next year, Skittles will receive $7,500,000 for licensing royalty payments annually for 4 years. Let me be absolutely clear. The settlement does not end our fight to eliminate bots that defraud consumers in our industry.

Speaker 2

The evidence that came out of the Avia Games trial shows what we believe is a willful pattern of deceit by Avia Games and its executives. ABA Games tried to mask the usage of bots in their internal documents by referring to them as cucumbers and guides, But the evidence presented in court clearly showed the presence of bots in their code. In fact, the word bots and robots appeared thousands of times in Avia's documents. More specifically, the evidence revealed different types of bots created to lure players in and keep them playing and paying. Shark robot, comfort robot, induction robot and cash robot are just a few of the bot types, video games engineered and based on evidence to ensure the match outcome they desired.

Speaker 2

Evidence further indicated that the so called shark robot is deployed to take a player's money when the player is winning too much. Comfort Robot is used to give them a little win to keep them going if they were on a losing streak. The evidence presented at trial shows ABA Games employees knew what they were doing was wrong. Internal emails highlighted and I quote, on a certain level, it can be said that bad money drives out good money, quote, and that the skilled listed company will not dare to use bots No wonder their stock is bound. Avia Games documents show that even the most senior members of Avia Games' finance team were unsure how to attribute revenue coming from these bots.

Speaker 2

We believe this evidence is damning and is now part of the public record. But perhaps most concerning for our industry as I address you today is that Avia Games is still operating as normal in the app stores. They are still using bots this very second to take consumers hard earned money. Avia Games is not the only company we understand is using bots in this way, which is why we will do everything in our power to help stop these dishonest practices. While our settlement is in the interest of our shareholders, the $80,000,000 is just a drop in the bucket in comparison to the magnitude of the fraud we believe is being perpetrated on American consumers daily.

Speaker 2

Winning this first case was a big milestone, but we're far from done in our fight to uphold fair play and protect consumers from what we believe is fraudulent inducement, misrepresentation and the outright theft of 1,000,000,000 of hard earned dollars. We're 100% committed to this effort and believe that in addition to the trial verdict already won and subsequent settlement, we will prevail in similar circumstances in the future, while at the same time eliminating bad actors from the gaming industry. In addition to Avia Games, we're in the early stages of the lawsuit we filed in March against Papaya alleging fraudulent use of bots. We also note that class action lawsuits have already been filed against AV Games and Papaya. We're hopeful that the government authorities, if they're listening out there, will take note of Skillz progress in identifying fraudulent use of bots in this industry and take action to protect consumers.

Speaker 2

As we uncover proof of fraudulent use of bots at any company in this industry, we intend to initiate additional actions to help protect both our company, our industry and our consumers. Our goal isn't to reduce competition, but rather to ensure a level playing field where all companies in our industry maintain the same level of commitment to providing a transparent and fair player experience. Skills will continue to combat the deceptive usage of bots until systemic fraud in our industry is eliminated. Creating a star future in gaming is good for consumers, our industry, as well as for skills. Since we're the leading company that doesn't engage in consumer bot fraud, we anticipate the elimination of this practice will dramatically change LTV to CAC to our benefit, which would greatly accelerate the turnaround of our business.

Speaker 2

It's also important to note that our expectations for achieving positive adjusted EBITDA by late this year are not contingent on our legal activities. Our path to achieving this goal is in our control and will be determined by the success of our turnaround initiatives. Turning now to the business performance in Q1. Progress continues to be made on our 4 key pillars for returning skills to consistent top line growth and positive adjusted EBITDA enhancing our platform to improve customer and developer engagement retention, up leveling the organization, go to market initiatives and positioning skills for a path to profitability. With that said, we had some near term challenges in Q1, which masks some of the progress.

Speaker 2

We know the progress our turnaround initiatives will take time and it won't always be linear every quarter, particularly in a period such as Q1 where we implemented several initiatives. That said, our ability to make further progress in improving retention, engagement, monetization and increasing our audience was not optimized in Q1. This is evident in our paying users for the quarter with paying now declining to 121,000 in Q1, 2024 from $137,000 in Q4 2023. While this rate of sequential decline is significantly less than the sequential rate of decline from Q3 2023 to Q4 2023, we expect it to perform better than we did. In Q1, we saw issues with new customer onboarding and while we quickly took several actions, these actions did not fix the onboarding issues enough to benefit our performance in Q1.

Speaker 2

We continue to address new player onboarding issues and believe that as of late April, we've implemented the necessary changes to improve onboarding of new customers and get us back on track to execute on our improvement initiatives. While our fixes to onboarding issues are still in the early stages, the data we have so far indicates our audience decline has slowed. At this time, we do not believe the onboarding issues and our execution in Q1 will stop Skillz from being adjusted EBITDA positive in Q4 2024. At the same time, we continue to do a good job with expense management with Q1 2024 OpEx in line with Q4 2023, excluding Q4 one time accrual reversals. Our adjusted EBITDA loss again improved on a year over year basis.

Speaker 2

Our focus remains on optimizing CAC and growing LTV and when we feel we're at the right levels for those metrics, our intent is to refocus on scaling traffic. In Q1, we're trending towards a 6 month payback period on our user acquisition spend. We achieved this through both reducing user acquisition spend while also being focused on spending in the best channels. We're beginning to focus on scaling in areas where we see good returns. As we execute on our turnaround initiatives, we continue to believe our unique platform can generate significant returns for our shareholders.

Speaker 2

With that baseline of expectations, as I think about the first of our 4 key pillars, enhancing our platform to improve customer developer engagement retention, The Q1 reflected some ongoing progress despite our uneven execution. A key initiative for this is new product pipeline we have in place. New updates or features introduced since our 4Q call include Instant Match, which we introduced in Q4 and which we continue to refine to improve performance, including by encouraging players to play in match templates once you're higher. In addition, at GDC, we previewed an exciting new feature, which received a strong response, Live Brackets. We believe Live Brackets, which is planned to launch on our game player this year, will be a great retention engagement vehicle to help drive new players to the platform.

Speaker 2

We also continue to refine single sign on, which is improving the early user experience. As we look over the balance of 2024, we intend to build on the momentum in our pipeline of new features. Our best and most active players are VIPs, and we continue to focus on improving their experience. In Q1, we introduced VIP exclusive cash events on 2 of our most popular games with encouraging participation and we'll continue to host these events going forward. Overall, our VIP programming initiatives helped maintain revenue of these players from Q4 to Q1, while also driving an increase in GLP AI.

Speaker 2

We also continued to enhance our LiveOps capabilities, which allowed us to look at trends in real time and initiate offers to drive engagement and monetization. We expect this will be particularly beneficial to our VIP initiatives. For our 2nd pillar, up leveling the organization. In Q1, we continued to optimize our product development, marketing, data and analytics resources. And as we discussed on our Q4 call, we've strengthened our finance team with the addition of our new CFO, a new controller and a new head of FP and A.

Speaker 2

The move into our new Las Vegas headquarters in January continues to foster a greater level of collaboration, accountability and idea generation. Across the board, I can sense a greater sense of optimism from our team for the goals we want to achieve in the near and long term, Reflecting the benefits of the culture and collaboration we've established by being together in one location, we'll continue to reduce our reliance on expense of third party contractors and remote workforce, with that work being absorbed by our Las Vegas and Bangalore based teams. Moving on to our 3rd pillar, our go to market. UA spend in Q1 was consistent with Q4 levels and remains at our lowest level since 2018 and fairly stable approaching a 6 month payback. In Q2, our focus will turn towards scaling spend to facilitate growth as we continue to focus on optimizing UA spend.

Speaker 2

We continue to spend through ARQ, which provides us with better pricing, pricing transparency and keeps the margin within the Skills family. Going forward, we will continue to focus on spending in the areas that work well for us to drive profitable growth while maintaining our financial discipline on UA spend. We are continuing to focus on incubating games that are difficult for companies engaging in bot fraud to replicate and to deliver a payback period within our return timeline. The revised share agreements we've discussed previously will continue to open up new opportunities in this area and we're beginning to seed developers to build games for specific high value in demand genres. We will complement these actions with prioritizing investment in user acquisition to scale the user base.

Speaker 2

Finally, I'll talk a little bit about our 4th pillar, which is demonstrating a clear path to profitability. Despite the onboarding issues I highlighted earlier that impacted Q1 performance, I'm still 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 in Q4 this year. Our adjusted EBITDA loss was negative $18,000,000 in Q1 2024 and excluding legal expenses related to lawsuits, adjusted EBITDA was negative $14,000,000 This compares to negative $21,000,000 in Q1 2023. Operating cash flow in Q1 was negative $4,000,000 Excluding the increase in accounts payable in Q1, our operating cash flow is negative $14,000,000 in line with adjusted EBITDA.

Speaker 2

We ended Q1 with cash and cash equivalents of 301,000,000 dollars The cash balance as of the end of Q1 does not include the $50,000,000 received in April from Abea. Given this cash position and our continued improvements and our monthly operating cash burn, there's significant runway to return our business to sustainable profitable growth. I want to reiterate something I highlighted on our Q4 call and then in our view, our current valuation gives no weight to the value of our operating platform. The progress we've made to date on our turnaround plan and our trajectory to generate a positive adjusted EBITDA run rate by late this year. In closing, even with the new customer onboarding setback in Q1, we remain cautiously optimistic that our actions undertaken to date are positioning us to return to profitable growth.

Speaker 2

We know that we still have significant work ahead of us, but we're confident that we're on the right path with the execution against our 4 strategic pillars. And with that, I'll turn it over to Gaetano.

Speaker 3

Thank you, Andrew, and good afternoon, everyone. First quarter revenue was $25,000,000 down 43% year over year and down 19% sequentially. Our paid user conversion rate, which is paying MAO divided by MAO, was 14% in Q1, slightly down from 15% in Q4 due to continued focus in the quarter on new user onboarding. As Andrew indicated, we are confident in our ability to continue to maintain our current payback period and begin to invest to grow sequentially. Turning to OpEx.

Speaker 3

Research and development expense was 5,000,000 dollars down 48% year over year. On a GAAP basis, R and D was 18% of Q1 revenue. Sales and marketing expense was $21,000,000 down 40% year over year, including $2,000,000 of stock based compensation. On a GAAP basis, sales and marketing was 83% of Q1 revenue compared to 79% in the year ago quarter and 75% in Q4. Q1 UA marketing was $5,600,000 a decrease of 33% from Q1 of last year and a 3% decrease quarter over quarter, while Q1 engagement marketing was $8,900,000 down 50% from Q1 of last year and down 34% from Q4.

Speaker 3

General and administrative expense was $23,000,000 down $5,000,000 or 18% year over year, inclusive of $6,600,000 in stock based compensation. On a GAAP basis, G and A was 91% of Q1 revenue. The net loss of $27,000,000 compares to a net loss of $36,000,000 in Q1 2023. The adjusted EBITDA loss in the Q1 was $18,000,000 a 15% improvement year over year. Adjusted EBITDA margin was negative 70% in Q1 2024 compared to negative 47% in Q1 2023.

Speaker 3

We continue to expect 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 year over year given the reduction in outstanding debt. We ended the Q1 with $301,000,000 of cash, comprised of $291,000,000 in cash and cash equivalents and $10,000,000 in restricted cash. As Andrew noted earlier, this does not include the $50,000,000 received from Avia at the end of April. At the end of Q1, we had $129,700,000 of total outstanding debt.

Speaker 3

With our improving cash burn, 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 and A session.

Operator

Thank Ladies and gentlemen, this concludes our Q and A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.

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