Skillz Inc.

Good afternoon, all. I would like to welcome you all to the Skills Inc. 2024 Sanko Corridor Results Call. My name is Carla, and I will be moderating your call today. During the presentation, you can register to ask questions by pressing star followed by one in our telephone keypad. And if you change your mind, please press star followed by two. I would now like to pass the conference call over to your host, Liam Hale, from JCIRR, to begin. So, Jim, please go ahead.

Good afternoon and welcome to the skills 2024 second quarter earnings conference call on the call today or Andrew paradise skills co founder and CEO Casey chaffin co founder and CSO and katana for chesky CFO. This afternoon skills issued its earnings release reporting preliminary on audited second quarter 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 June 30, 2024. Accordingly, we are announcing preliminary results for the second quarter, which are based on currently available information and are subject to revision as management completes its internal review. 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 deadline, It will file an extension on Form 12B-25 with the Securities and Exchange Commission. In addition, the company was not able to file its Form 10-K for the fiscal year ended December 31, 2023 during the requisite extension period. The company was also not able to file its Form 10-Q for the fiscal quarter ended March 31, 2024 by the required deadline. As a result, we previously announced we received a notice from the NYSE that the company was not in compliance with NYSE listing standards. The company is working diligently to complete the necessary work to file the 2023 Form 10-K and First Quarter 2024 Form 10-Q as soon as practicable, and currently expects to file the Form 10-K within the six-month period granted by the NYSE notice. The company also intends to take all necessary steps to achieve compliance with applicable NYSE listing standards as soon as practicable. Because the results are preliminary and subject to completion of our internal review procedures and review, and review and audit by our independent registered public accounting firm, actual results and other financial information may differ from these preliminary results due to 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 law. 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 can 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 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 second quarter 2024 earnings release. With that, I'll turn the call over to Andrew for some opening remarks, followed by Gitano for a discussion of the company's financial performance before we open the call for questions. Andrew?

Thank you. Before turning to an update on the progress made against our four pillars, I want to share the ongoing strides we're making in our fair play initiative and key litigation matters. For skill-based gaming to thrive, all gaming companies this space must provide consumers with certainty that they're being matched with real players of similar skill and fair competition. Just as we demand fairness and integrity in traditional competitive sports, we should uphold the same standards in esports. This is especially true when real money is on the line. This is precisely what the skills proprietary platform delivers. We believe there are more companies than just AV games that use bots to deceive players into believing they're competing against real human opponents, when in fact they face predetermined gameplay or robots. This manipulation alters match results to those companies' advantage, defrauding American players of billions of hard-earned dollars and eroding trust in the skill-based gaming industry. To preserve the industry's tremendous value and protect our stakeholders' interests and consumers' trust, we're committed to uncovering and aggressively combating fraudulent practices. We stand ready to continue to pursue every necessary action to foster significant progress and safeguard fairness within the industry we pioneered. As a US-based company, it's our belief we should do this for the safety of all players, which will ultimately benefit skills and our shareholders. As I mentioned in our Q1 call, we executed a settlement agreement with ABA Games for $80 million. ABA Games paid $50 million in cash at the end of April. Next March, we'll receive the first of four annual payments of $7.5 million from ABA Games. However, we remain concerned that ABA Games has not altered their behavior regarding the use of bonds. As I addressed to you today, ABA Games titles remain on the app stores, topping charts while continuing to lure new, unsuspecting consumers daily through aggressive advertising. We're encouraged this issue is attracting significant press coverage, including from Bloomberg, which recently highlighted these deceptive practices and supported our efforts to raise awareness. Bloomberg conducted its own investigation, speaking to players who filed class action lawsuits against Avia and Papaya. According to Bloomberg, Quote, the suit suggests there are millions of potential class members. One plaintiff who asked to remain anonymous said in an interview with Bloomberg that she spent over $240,000 on Solitaire Clash, a figure confirmed by bank records reviewed by Bloomberg. She withdrew money from her retirement plan to play, stopping only when she learned about the allegations of bots. Hearing the stories from a consumer standpoint reveals the severe harm it's causing the American consumer every day. Bloomberg also spoke to Joe Maloney, a spokesman for the American Gaming Association, who said this about games that use bots. Quote, these games are examples of emerging threats online intentionally designed to circumvent or exploit ambiguity in state gambling laws and regulatory frameworks. Such games place consumers at significant risk and prevent local governments from realizing a revenue opportunity for their residents. We believe that Avia Games is not the only company that uses bots in cash games. In our Q1 call, we discussed the lawsuit we filed in March against Papaya Gaming, alleging their fraudulent use of bots. This litigation is advancing as scheduled. I want to highlight that class action lawsuits have already been filed against both Avia Games and Papaya Gaming. But we're not stopping there. Last month, we filed a similar lawsuit against Voodoo Games. who he also alleged is using bots in their skill-based mobile games. Voodoo is a significant player in the mobile gaming industry, and their portfolio of games achieved widespread popularity in millions of downloads. The filings for this lawsuit are publicly available in the Southern District of New York. As mentioned on our Q1 call, we'll continue to go after any company skill-based gaming uses bots or other methods to directly deceive players out of their hard-earned money. We're ready, willing, and capable of competing against any other skill-based gaming provider that wants to compete on a fair and level playing field without the deceptive use of bots. To create a fairer future for all, we're advocating for enhanced policies and legislation to strengthen regulatory oversight. We're hopeful that government authorities will take note of our progress in identifying fraudulent bot use in this industry and take the quick and needed actions to protect consumers. I strongly believe, since we're the leading company that does not engage in consumer bot fraud, the elimination of this practice should dramatically change LTV to CAC to our benefit. Turning now to the business performance in Q2. We entered the second quarter with a strong balance sheet and change position, and the new quarter made some progress on our four key pillars for returning skills to consistent top-line growth and positive adjusted EBITDA. While Q1 saw a decline in our audience, we achieved moderate progress on this front in Q2. This is evident in the increase in paying monthly average users to 122,000 in Q2, up from 121,000 in Q1, representing the first quarterly sequential increase for paying users in 10 quarters. Our paying monthly average users grew every month from a trough of April of 113,000 to 131,000 in June. At the same time, we continue to make positive strides with expense management. With Q2-24 OpEx excluding cost of sales and the ABA game settlement declining $6 million from Q1-24 and adjusted EBITDA loss again improving year over year. Our focus remains on optimizing CAC and growing LTV. In Q2, we continue to trend toward a six-month system-wide payback period, achieved through our focus on spending in the best channels. With the consistency of our payback period in the last few quarters, We continue to focus on scaling in areas where we see good returns. Turning now to an update on the first of our four key pillars, enhancing our platform to improve customer and developer engagement retention. We've discussed our recent calls for execution of a detailed new product pipeline, and in Q2, we had some limited progress on this front. This included further development of our live brackets feature, followed with a strong response at GDC, the largest industry-wide conference in North America, for this feature, but where we receive positive feedback from players. We're now working to further refine this feature before its official release later this year. Live Rackets will be a great format to help drive interest of new players to the platform, and it will also improve retention engagement through a mechanic where players will be able to come back and play in later scheduled tournaments. For our VIP initiatives, we continue to see the benefits of the enhancements we made to our LiveOps capabilities, which allows us to look at trends in real time and initiate offers to drive engagement. We've also created a pre-VIP conversion program to convert new paying users to VIP status faster. And we're ramping our team of VIP account managers to help achieve our goal of growing our VIP population. For our second pillar, up-leveling the organization, In Q2, we continued to optimize our product engineering, data, and analytics resources. The move into our new Las Vegas headquarters earlier this year continues to drive more collaboration and accountability. There's buy-in across our organization for our vision and our need to execute. We're continuing to reduce our reliance on expensive third-party contractors in the remote workforce, with this work being absorbed by our Las Vegas and Vancouver-based teams. Moving on to our third pillar, our go-to-market. UA spend in Q2 is consistent with the levels of the last several quarters and remains at its lowest level since 2018 as we can change the trend near six-month system-wide paybacks. In Q3, our focus will increasingly turn towards scaling spend to facilitate growth as we continue to optimize user acquisition spend. Finally, I'll talk a little bit about our fourth pillar, demonstrating a clear path to profitability. While we made modest progress in some areas in the quarter, Given the challenges we had in Q1 with onboarding new players and the lack of more meaningful progress on launching new product features in Q2, we now expect it will be difficult to achieve our goal of generating a positive adjusted EBITDA run rate by late this year. However, we still remain optimistic that we can continue to execute our turnaround strategies and we can achieve this goal in 2025. premature to say when in 2025 as of yet, we do feel that while we are not there yet, we are making progress towards the goal. Our adjusted EBITDA loss continues to improve year over year with a loss of 12.6 million in Q2 2024 compared to 18.9 million in Q2 2023. Excluding legal expenses related to lawsuits against bought companies, our adjusted EBITDA would have improved to a loss of 9.8 million. Adjusted EBITDA loss also improved 29% in Q1 2024 on essentially the same revenue base. Cash flow from operating activities was $28 million in Q2 2024, excluding the impact of AP gains settlement, the time frame for accounts and certain other accruals. Our cash flow was negative $9 million in line with adjusted EBITDA for the quarter. We ended Q2 with cash and cash equivalents of $326 million, which includes the cash received in April from ADA Games. We continue to gradually improve our monthly operating cash burn, which combined with our strong balance sheet provides us with a runway to return our business to sustainable and profitable growth. I'll conclude my comments by reiterating that despite our Q1 and Q2 setbacks, our view that our current valuation gives no weight to the value of our operating platform and the progress we've made towards achieving our goals. We remain under no illusions that we have significant work ahead of us. We're confident that we're executing on the right strategies to position the company to return to profitable growth. As we execute on our turnaround initiatives, we continue to believe our unique platform can generate significant returns for our shareholders. With that, I'll turn it over to Gaetano.

Thank you, Andrew, and good afternoon, everyone. Second quarter revenue was $25 million, down 37% year over year and flat sequentially. Our paid user conversion rate, which is paying now divided by now, was 15% in Q2, up from 14% in Q1. As Andrew indicated, we are confident that we can maintain our current system-wide payback period as we return to investing in growth. Turning to OPEX, research and development expense was $4 million, down 47% year-over-year, and excluding the impact of stock-based compensation was 16% of Q2 revenue. Sales and marketing expense was $21 million, down 36% year-over-year, and excluding the impact of stock-based compensation was 75% of Q2 revenue. Q2 UA marketing was $4.2 million, while Q2 engagement marketing was $10.6 million. General and administrative expense was $17 million, down 34% year-over-year, and excluding the impact of stock-based compensation was 46% of Q2 revenue. The quarterly positive net income of $26 million compares to a net loss of $17 million in Q2 2023. Net income in Q2 2024 includes the gain on the settlement of the Avia Games litigation. Adjusted EBITDA loss in the second quarter was $12.6 million, a 33% improvement year-over-year. Adjusted EBITDA margin was negative 50% in Q2 2024. and compared to negative 47% in Q2 2023. We continue to expect our cost structure will benefit this year from lower costs for items, including legal and insurance fees, as well as continued prudent management of our cost base. Additionally, interest expense will decline year over year, given the reduction in outstanding debt. We ended the first quarter with $326 million of cash, comprised of $360 million in cash and cash equivalents, and 10 million in restricted cash. As Andrew noted, our cash balance at June 30th includes the cash received from AVA gains at the end of April. At the end of Q2, we had 127.9 million of total outstanding debt. With our improving cash burn, we have the flexibility to deploy capital to enhance shareholder value. At this time, we'll turn the call over to the operator for the Q&A session.

Thank you. We will begin now the question and answer session.

If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please make sure your device is unmuted locally. We will make a quick pause here for the questions to be registered. And our first question comes from Ed Alter from Jefferies. Your line is now open.

Hey, guys. Thanks for the question. Great to hear you have the confidence to return in spending more on growth marketing. Can you just walk through what drove that decision and how you're going to measure the effectiveness of that spend?

Sure, Ed. Thank you for the question. This is Andrew Paradise. We've been pushing to get to six-month payback on deployed capital. We're running right about that rate now. So our top focus is expanding on the channels where we're running that level of payback and maintaining that payback. So not just deploying more capital, but of course controlling CAC and ensuring that we're continuing to see similar levels of LTV.

And, and how about, you know, going forward, you know, is it still that same payback or is there more kind of ROAS targets you have in mind as well? Or just, you know, can you talk to the networks you might be using?

Uh, I don't think we can, uh, we can share the networks right now, but, uh, we are targeting, uh, maintaining between call it a six and eight month payback. Um, obviously as we, uh, as we increase marketing budget on a given channel, Where we're running a six-month payback, we're going to see a temporary fluctuation upwards in customer acquisition costs. So we're looking at kind of same ROAS, same overall CAC, same payback periods, and running in a pretty tight range, targeting six months and allowing some fluctuation upwards as we scale budget, but being pretty controlled. So certainly nothing like even a 12-month payback would be acceptable right now.

Okay, awesome. And if I can ask a follow-up, the mobile gaming industry is having a better year this year compared to the last couple. Are you guys seeing that on your own platform? And, you know, what has the macro mobile industry looking for where you guys sit?

Sure, that's a great question. Maybe, Gaetano, do you want to talk a bit more about the broader market?

Yeah, I think we are seeing some level of stabilization in our business, as you can see in our results. I think we're focused on what Andrew just said, which is focusing on scaling our digital marketing and focusing on building new features on the platform that we think will engage and retain new customers. But for now, we feel like we're in a good cycle as it relates to where we were even a quarter or a year ago.

You know, I'd even add to that, Gaetano. I do think that the amount of bot fraud in our particular sector and the impact of that on running, let's say, confusingly similar marketing messages as companies that are committing fraud is definitely influencing that kind of overall shadow on our part of mobile gaming is definitely probably overcasting any overall benefit that the broader mobile gaming industry is seeing in terms of a bounce back year over year. So it's a little hard to say we're seeing a big macro effect. But I do think that we are making a lot of progress on the bot site. and on bringing justice for the players forward and working with a growing amount of regulatory to try to ensure that bots are not part of this industry. And that process, we think we will see a lot of progress on it in the next couple of quarters, which will really change the landscape for our company.

Great. Thanks for the color.

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