Skillz Inc.

Good afternoon, and thank you for attending today's Skills second quarter 2022 earnings call. My name is Jason, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your cell phone keypad. I would now like to pass the conference over to our host, Charlotte Edelman with Skills.

Good afternoon, and welcome to the Skills second quarter 2022 earnings conference call. I will proceed shortly by reading our forward-looking statements and non-GAAP measures, immediately followed by brief introductory remarks and then a question and answer session. Hosting the question and answer session today, we have Andrew Paraday, Chief Executive Officer, Casey Chaskin, Chief Revenue Officer, and Ian Lee, Chief Financial Officer of the company. We hope you've had a chance to read our press release, which we published earlier today and which is also available on our investor relations website. Some of management's comments today will include forward-looking 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 conditions. 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 our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our second quarter 2022 earnings release. With that, I'll turn the call over to Andrew for some brief opening remarks. Andrew?

Thank you, Charlotte. Good afternoon, everyone, and thank you for joining us today to discuss our second quarter 2022 results. Before we begin taking your questions, I'd like to share a few thoughts. We entered 2022 with a change in strategy to focus on profitable growth, improving our efficiency, and driving greater impact on our player and developer experience through product-led initiatives. I'd like to share my thoughts on what's going well so far, what is not, and what we're going to do about it. Let me start with where it went well. In Q2, we continued to make progress on reaching profitability. We reduced our net loss by almost $90 million, while reducing RAIM, or revenue after engagement marketing, by only about $8 million. We lowered our user acquisition marketing spend by 49% quarter over quarter, and we also made progress in improving the efficiency of our user acquisition. This is a business that was running six-month payback periods at the precipice of our IPO. And we plan to systematically march our paybacks back towards those levels. As such, in Q2, we continue to reduce low return engagement marketing initiatives that aren't yielding or do not have indicative data that they will yield. And we executed a restructuring of our workforce to better align our resources for their changes and strategic priorities. Overall, we reduced our net loss and adjusted EBITDA burn rate. We improved the quality of our revenue by increasing revenue after engagement marketing as a ratio against revenue. Over these last three months, we didn't make the progress we wanted to see in product development, but we still had a few wins, which I mentioned here more for the sake of balance, as opposed to anyone thinking we're pleased with the progress this past quarter. We launched a public beta of our cloud gaming technology initiative, as we discussed we would in Q1. We launched a public beta of the refreshed core user experience. Okay, let me go into what didn't go well. Repositioning the company for profitability had a real cost. Revenue after engagement marketing, paying monthly active users, all fell sequentially quarter over quarter. We also have areas where we can and will get better. Several that I want to highlight here include our H1 product initiatives did not achieve our desired results yet. In fact, we've had slower product development velocity than we would have liked or anticipated. We've had too many new product features that aren't driving LTV and sometimes are even detrimental. We've had too many new experiments split tested that didn't yield LTV growth and also have sometimes been detrimental. On the marketing side, we still have more work to do on improving user acquisition efficiency. Moreover, we have more work to do on reducing low return engagement marketing initiatives. We're raising the bar across the board on any and all experiments in marketing and product to grow our business. It's a systematic decline in quality of work that I'll personally address in product development. The primary causes of the sequential decline in revenue and revenue after engagement marketing was really lower retention from some of the mature cohorts of users on our system. And we think we've now root caused that The main drivers of this are a mix of instances of users cheating us on our platform and past product modifications that shouldn't have rolled from our test phase to full rollout. So when I speak of cheating, let me give you an example. We've seen instances of users cheating on the platform, including abusing system discounts and incentives in other countries, such as the Philippines. where users are abusing our friend referral program to get financial incentives without delivering real user referrals. So here's what we're going to do next and why. We remain confident about the potential for product-led initiatives to drive a better experience for players and developers. It's frustrating, especially the progress in product lately with so many opportunities to improve consumer and developer experiences on our platform. As I mentioned earlier, when we approached IPO, we had a six month payback. I plan to get us back there. And the first step to fixing our paybacks is I'm returning to our product development to fix our products, to help build superior paybacks and a superior LTV to CAC profile. This work has already started. There is a lot more coming in the days ahead as we fix and write skills business. Repositioning the company for profitability is far from easy from where we were ending last year. And as such, we need to lower our full year 2022 revenue guidance to $275 million. We're going to share more detail on all the things that are happening in our business in our Q2 stockholder letter, which will be published tonight. While the scope of our ambitions and the drive of our team, as always, leaves us wishing we had accomplished more, we did make some progress towards our long-term goals this past quarter by rationalizing our cost structure. There's still much more work ahead to do, and I'm more determined now than ever to do it. Our focus remains on a path of durable growth and efficiency in the years ahead. This means we're going to continue to reduce costs, we're going to continue to drive improvement in marketing efficiency, and we're going to increase the velocity of new product development. It's incredibly exciting to think about the long-term opportunity for this business ahead to transform the existing $92 billion mobile gaming market through competition. It's truly a huge opportunity. And we're steadfast in our belief that through competition, we can enable everyone to achieve their greatest potential, both the player and the developer alike. I wish I had better news to deliver today. I can only tell you that we are pushing very hard to execute the transition strategy that we've outlined last quarter and we will outline again this quarter. And I thank you for your support, your patience, and your understanding now more than ever as we continue on this journey and this path. With that, let me open up for questions.