Skillz Inc.

Thank you for joining us today for a skills third quarter 2022 earnings call. I will now turn the call over to Taylor Giles to cover the safe harbor. Taylor?

Good afternoon, and welcome to the skills third quarter 2022 earnings conference call. With me today are Andrew Paradise, skills chief executive officer, Casey Chapkin, chief revenue officer, and Jason Roswig, president and chief financial officer. Note, our full financial results were published earlier today and are available on 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-looking statements within the meaning of the federal security clause. Forward-looking statements, which are usually identified by the use of such words as will, expect, should, or other similar phrases, are subject to numerous risks and uncertainties that could materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer 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 our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our third quarter 2022 earnings release. With that, I'll turn the call over to Andrew for some brief opening remarks.

Andrew? Good afternoon, and thank you for joining us. Today, I'll touch upon the quarter and update you on our initiatives to reaccelerate growth and improve the bottom line. Then I'll turn the call over to Jason Roswig, our new president and CFO, to quickly touch on the numbers before we open up the call for Q&A. Clearly, skills isn't a time to transition as we right-size the organization. During the quarter, revenue continued to be impacted by both the macro environment for mobile gaming as well as some of the internal product and organizational challenges that I referenced last quarter. Conversely, we made good progress in our march to profitability. We reduced adjusted EBITDA by 51% quarter over quarter while improving our payback period through better platform engagement retention. We also made many difficult strategic changes within the organization to better align talent with our desired business outcomes. So there's no quick fix. The path to re-accelerating growth is now well defined across the company. We've identified the things we can and cannot control and have a plan in place to address those that we can control. We are focused on four key pillars to enable us to return to durable growth and long-term profitability. Our first pillar is enhancing our platform to improve customer and developer engagement and retention. I've taken back the helm of the product organization and I'm working closely with our new CTO, Vasily Filipov, most recently a director of engineering at Meta, who has already dug in to make crucial contributions to the platform. We're rolling back some product changes that were unsuccessfully introduced over the course of the prior 18 months and are returning to our foundation of rigorous split testing and disciplined product rollouts. From a product perspective, cloud gaming is on target. Our proof of concept shows we can offer our game streaming technology to provide an experience comparable to a native iOS or Android game. We're currently AB testing to ensure we have the right onboarding experiences for new cloud players as we look forward to a full launch. Our core user and live streaming experiences are proceeding on or ahead of plan with favorable results from redesigns to cube cube and our limited time live ops launches, including sweepstakes chase trophies and blitz mobile. We're always looking for ways to better help our developers scale their content as we bring on new developers and brand partners of all sizes, including the NFL and UFC, who, while very early days, can leverage our platform to market their games. In the quarter, we launched new tools to support more successful launches and improve developer support infrastructure and processes. Clearly, the success of our partners is our success. And we will continue to improve the tools we provide to these key constituents. Our second pillar is up leveling our organization. During this time of transition, it's crucial that each and every employee embraces the skills vision and commits to reigniting your potential. During the quarter we performance manage the organization for the reduced headcount to ensure this alignment. Our headcount now stands at little more than half of what it was a year ago through thoughtful and deliberate decisions on structure. Though these changes were difficult, the existing team is fully capable of and focused on returning value to our players, developers, and shareholders. In the quarter, we also began our return to office. It's essential to our success as a team to be in lockstep, which, given the magnitude and the complexity of the path ahead, can really only happen in person. The new talent that we're carefully adding understands that we must work swiftly and efficiently to fix the challenges that we've identified. To this end, we've added some key hires across the company during the quarter, including Vasili, who I just mentioned, to restore the culture of innovation that Skills was built upon. We are also restructuring the Archie team and expect to announce some important and compelling hires there in the next quarter. Additionally, we've added two new board members, Henry Hoffman, an experienced portfolio manager at SL Advisors, and Seth Shore, a seasoned gaming executive. These strong, experienced operators and advisors will be key as we make the tough decisions that rebuilding the company requires. Our third pillar is our go-to-market, where we're focused on improving customer engagement and monetization through efficient spend. By reducing end-user discounts that were not driving profitable growth, becoming more granular in our UA spend, and increasing organic traffic through owned communication channels, we believe we can return our user acquisition payback period to the six months that we discussed on our IPO Roadshow. Though it's early days, we've already reduced the payback period, which had grown unacceptably long by over 25% this quarter alone. The most exciting part of improving the ratio of LTV to CAC is their improvements this past quarter were from improving LTV as opposed to purely saving on acquisition costs. We're seeing early signs that the new cohorts are performing much better than in recent quarters, and we are working hard to reengage the prior cohorts where we've seen churn. Our fourth pillar is straightforward, demonstrating a clear path to profitability. I'll let Jason cover the details, but you can see in the numbers that we are focused on reducing expenses while steering toward a return to growth. We are looking at every single line item of spend to justify its potential return and will continue to do so with an eye toward efficiency and productivity. In the meantime, we have over half a billion dollars in our war chest as we navigate a return to growth. Our mission of bringing out the best in everyone through fair competition and the patents that differentiate our games of skill versus those of chance hold as true today as they did when we first went public. We are reinvigorated with the potential of our mission and the opportunity to enable developers to monetize their games while allowing our players to improve their skills and to compete in a thriving ecosystem. We have lots of work ahead, but a much clearer vision and a united team. We are energized to tackle these challenges ahead. We look forward to updating you on our progress going forward. And with that, I'll turn the call over to Jason to summarize the financials.

Jason? Thank you, Andrew. As many of you know, this is my first earnings call with Skills. I joined the team in early August from Blackstone, well aware of the many hurdles we face. Now, only three months in, the team and I are focused on implementing a restructuring of people and processes. What I've seen in my first quarter with Skills validates the reasons I joined. The opportunity ahead is enormous and untapped, and we are all rolling up our sleeves to make it happen. It will take some time to address the four pillars Andrew laid out. So this quarter, we opted not to do a shareholder letter as we reconsider how we communicate with investors. Instead, I'll quickly cover the numbers, and we will open the call for your questions. Revenue was $60.3 million. down 41% year-over-year and down 18% sequentially, driven by declines in paying MAU as a result of planned pullbacks in advertising and incentives. Our payer conversion rate, which is our paying MAU divided by our MAU, was 19%, two percentage points higher than prior year period and consistent with the prior quarter. UA marketing was $18.6 million. a decrease of 66% year-over-year and down 39% sequentially. Engagement marketing was 23.8 million, down 52% year-over-year and down 22% quarter-over-quarter. Research and development was 8.4 million, down 37% year-over-year. This includes 1.1 million in restructuring charges offset by $2 million credit of stock-based compensation due to employee departures. On a non-GAAP basis, R&D was 15% of revenue, up 4 percentage points year over year, and down 4 percentage points quarter over quarter. Sales and marketing was $51.8 million, down 55% year over year. This includes $2.1 million of stock-based compensation and $0.2 million in restructuring charges. On a non-GAAP basis, sales and marketing was 82% of revenue, down 28 percentage points year over year, and down 14 percentage points quarter over quarter. General and administrative was $20.3 million, down 58% year over year. This includes $5.6 million in stock-based compensation and $0.7 million of restructuring charges. On a non-GAAP basis, G&A was 23% of revenue, six percentage points year over year, primarily driven by the organizational restructure. On a sequential basis, G&A as a percent of revenue was flat. Net income of negative $78.5 million was down 129.3 million year over year and down 18.4 million, or 30%, sequentially due to the impairment of intangible asset impairment charges related toward developed technology and customer relationships. Q3 2022 adjusted EBITDA was negative 15.4 million, up 63% year over year, and 51% sequentially. This was primarily driven by decreases in UA and engagement marketing spend, as well as the restructuring. Adjusted EBITDA for Q3 2022 excludes the impact of 63.1 million of adjustments, of which 47.6 million were from impairment of intangible assets, 13.7 million from other non-cash or non-recurring items, and 1.9 million from restructuring charges. Adjusting EBITDA margin of negative 26% was up 15 percentage points year over year. On a sequential basis, adjusting EBITDA margin increased by 18 percentage points. We do not expect to raise additional capital before bringing the business to break even. Our strategy is to use our capital to get to breakeven and then run an EBITDA breakeven as we invest aggressively to capture the 100 billion plus market opportunity in front of us. We ended the third quarter with $558 million of cash, cash equivalents, and marketable securities, and $289.5 million of debt outstanding, providing us with a long runway to execute against the initiatives Andrew discussed above. Turning now to guidance, we are maintaining full year 2022 revenue guidance of $275 million. Our revised guidance assumes engagement marketing as a percentage of revenue of approximately 41%. For UA marketing, we expect to spend in the range of $12 million to $16 million next quarter. We expect to achieve a full 2022 adjusted EBITDA margin of approximately negative 56%. I'm excited to be part of the skills team during this watershed time. And as Andrew said, look forward to updating you in our progress going forward as you look to once again return shareholder value. With that, we'll take your questions. Operator.

Thank you, sir. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, it is star one. And as a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of one Jason Pilchen with Canaccord Genuity. Your line is now open.

Thanks for taking the question. In the press release, you talked about rehauling the go-to-market strategy, and I was just wondering if you could maybe spend a minute expanding on that and how much of that is simply reducing some of the inefficient spend that you've talked about, the strategy that's been in progress, versus using different marketing messaging, using different channels. Maybe just if you could touch on that, that would be great. Thanks.

Thanks, Jason. That's a great question. This is Andrew. So, Overall, we've been dialing back user acquisition. We've reduced it pretty substantially quarter over quarter as we're really accelerating on migrating more of our spend over to ARCHI. In terms of new channels, I'm not sure, Casey, if you want to add anything in commentary that we want to share at this time.

Jason, this is Casey. Thank you for the question. The big focus for us is just improving the efficiency of our operations overall. And so we think there's both opportunity to increase our customer lifetime value and continue decreasing our customer acquisition costs. And that isn't a radical shift in what we're doing versus continued progress and the things that we talked about last quarter.

Okay, great. And then just one quick follow-up. The last two quarters, revenue after engagement marketing was a big part of the messaging that you guys had put out on the earnings calls and the shareholder letters. And I'm just wondering if the absence of that from the press release this time around with anything in particular, does that signal a potential shift away from that metric or anything you could share on that would be greatly appreciated.

Yeah, that's a great question, Jason. And I'm only struggling a little bit because we were specifically instructed to discontinue that metric by the SEC. So we are not using, we're not going to be reporting that metric. You can still pretty much calculate it and look at it yourself. But we still think considering revenue in the context of engagement marketing is the right way to think about the profitable growth of the business. When you think about the changes in our revenue quarter over quarter, revenue declined 13 million while adjusted EBITDA actually improved by over 16 million. And so anytime we can trade $1 in revenue for $1.23 of EBITDA, we want to make that trade. And it's really the changes in our top line revenue and the overall structure of our P&L are really focused around building profitable revenue as opposed to just growing revenue at all costs, as we talked about earlier in the year.

Great. Thank you.

Thank you for your question. Our next line of questions comes from the line of one, Clark Lampin with PTIG. Your line is now open.

Hi, thanks for taking the question. I've got one for Andrew and I've got one for Jason. Andrew, I wanted to see if you could talk a little bit more about the engagement pillar of the four that you mentioned earlier. You talked about improvements in LTV relative to CAC. Can you maybe drill down a little bit more on what you guys are doing now to build on that or what drove some of that improvement that you saw in 3Q? And then, Jason, very quickly, I just want to make sure I understand you guys reiterated guidance for the year, which I think based upon what you've reported year to date would imply heavier EBITDA losses in the fourth quarter. What I guess are we seeing there that's sort of driving, you know, a bigger maybe sequential step up? Is there a measure of conservatism or is, you know, there's some planned spend that's more seasonal in nature or maybe something else? Thank you.

Awesome. Thanks for the question, Clark. This is Andrew, and maybe I'll just go first and talk a little bit about how we're driving up retention and engagement. So there are quite a number of things we're working on, whether it's features around chat, leagues redesigned, so really thinking about how the metagame we're on competing can better engage players as we continue to scale our games. or doing limited time live ops events that we've been launching and seeing really strong results. I think one of the things I just say holistically, we really believe that having our team collaborate in person is a big part of returning to great results in our business. I think we're really excited about the potential for product-led initiatives. to continue to improve LTV quarter-over-quarter in the double-digit percentage range. We are also looking at initiatives like Cloud Gaming that we announced in Q1. We think that's going to play an important role in helping us connect even more players with great games in the future. And we announced that back in Q1. We actually are on our head of plan We advanced our cloud gaming initiative by releasing cloud versions of Star Trek Cube, 21 Blitz, and actually other games as well as A-B testing so we can really understand how to modify the onboarding experience moving from an app environment, installed app environment to a cloud-based experience, so web, mobile web, also distributing to devices for the first time like personal computers. But it's a little hard to devolve each of the different product changes to give you exactly which numbers compounded to drive the improvements in engagement and retention that improved LTB for the quarter. Because it's a lot of little ideas that are kind of compounding everything from introducing like, kind of an example, a new sweepstakes event that you can win an entry into to certain types of push notifications triggered by on-system player behavior. But it's just a lot of little ideas compounding. And one of the things I'd say in returning to product one quarter in, it's the first quarter we've grown LTV and actually in quite a number of quarters. And I look around and I see so many opportunities to improve the system. It's a very exciting time for me. Let me hand over to Jason to talk a little bit about your second question.

Great. Thanks, Andrew. Clark, thanks for the question. I would say that, first of all, we fully intend to meet our expectations for full-year guidance, as we previously reiterated. I would say that we are very confident, as we are now going into the fourth quarter of the year, but we also want to be conservative to ensure that we have a strong position to hit it. We want to maintain optionality to ensure that we will hit it. So I would simply say that we're fully on track and we're fully intent to hit it.

Great. That's helpful. If I could just, I guess, weave in one more, maybe sort of bigger picture around the operating environment right now. I think there's been, you know, sort of some discussion that's been a persistent theme throughout earnings so far. around whether or not we're seeing sort of sequential degradation throughout the year in terms of engagement, spending, and sort of player activity in the mobile ecosystem. Is that something that you guys have seen? Is that reflected in guidance? And is there a chance you think that that sort of persists into 23?

That's a great question, Clark. From a player retention engagement monetization standpoint, no, that isn't something that we're seeing at a cohort level. We definitely, when we scaled really aggressively on building cohorts between advertising as well as a lot of engagement marketing experiments, kind of last 18 months up until this quarter, those cohorts are definitely overall just weaker as a business, and I think But I think that's built into our forecasts. Our cohorts prior to that period and post that period, I think, are unarguably showing very similar characteristics to what they've always shown. Jason, do you want to add to that?

Yeah, Clark, I would just say that, you know, I think of what we're seeing is the impact of Andrew stepping back into the product. And it's very exciting for us. So I think that as we go into the first quarter of next year, you know, we are very optimistic. We're going to continue to see, you know, positive business improvement driven by our product enhancements.

Thanks a lot.

Thanks for the questions. Thank you for your questions, sir. Our next line of questions comes from the line of one Brian Fitzgerald with Wells Fargo. Your line is now open.

Yeah, this is Michael Ruchon for FITS. Just curious what you guys are seeing in terms of utilization of ARCHI data. You know, are customers leaning on it more or less as ATT plays out? Has there been any attrition or pullback of spend post integration? And then also curious to what extent you're seeing cost savings as you integrate ARCHI and leverage that internally?

Thanks for the question, Michael. I think that's very near and dear to our heart, especially with the impairment we had to report this quarter. It's a bit painful considering I think the revenue multiple we paid on acquiring Archey is frankly superior to the revenue multiples that many acquisitions were closed in the space. In terms of the integration between Archey and the skills competition business, Still early days. We are certainly looking at a situation where buying a DSP and integrating the data flow from the auction level where our key is participating in approximately 5 trillion live auctions a month and integrating that all the way through end-user LTV on games that, as you know, Skills doesn't own but operates as a platform. It gives us a very unique view. on understanding from the auction level all the way to final user payment how a user's behaving. Having said that, we're being careful in terms of integrating the two businesses and moving very slowly. And I think a lot of that, Michael, the answer is because of all the operational issues we had in the last 18 months, we are really taking an approach of, ensuring that we protect the core business and then build very carefully on top of it while we clean up all of our operational issues. Jason or Casey, maybe Casey might like to comment a bit more as he's been most recently managing the R&D business for us.

Sure. And Michael, thanks for the question. I think Andrew Andrew hit it spot on that our first order of business is making sure that the advertising platform that we acquired recognizes its true potential. And I think that there are challenges in the ad tech industry as a whole that you can see in the stock prices of publicly traded companies, which are down typically 70 to 80 percent. And on that basis, the impairment that that we took on our key is is comparatively modest, which I think speaks to the underlying strength of the business and the asset itself. The synergies that we went into the acquisition with are absolutely still there. But in terms of an integrated data pipeline, it's very, very early for that for us still.

Awesome. Thank you, guys.

Thank you for your question, sir. We currently have no more questions registered. So again, if you'd like to ask the team a question, it is star 1 on your telephone keypad.

There are no more questions registered.

So I'll pass the conference back over to the management team for any closing remarks.

This is Andrew. I just wanted to thank the analysts today for the coverage and for engaging. We're really excited about where we are as a business. Despite the macro and despite all the breakage in these last 18 months, I have to say, as the CEO, I feel more invigorated than ever seeing the opportunity ahead of us. We look forward to meeting with all of you in the new year to discuss our Q4 and full year 2022 results. Until then, thanks to everyone for participating.

And with that, we will conclude today's call. Thank you for your participation. You may now disconnect your line.