Skillz Inc.

Good afternoon, everyone. I'd like to welcome you to the Skillzinc first quarter 2026 results call. At this time, I would like to turn the conference over to your host, Joe Giaffone from JCIR to begin.

Good afternoon, everyone. Skillz issued its 2026 first quarter earnings release on May 15th, which is available on the company's investor relations website. Let me read the safe harbor language and then we'll get right into the call. All statements and comments made by management during this conference call other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. SCILS cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during the call. For additional details on these risks and uncertainties, please see SCILS' annual report on Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange Commission, and SCILS subsequent public filings with the SEC. Skills undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Additionally, we will reference various non-GAAP financial measures and KPIs during this call. Please refer to our earnings release for an explanation of these measures and how we use them and, in the case of the non-GAAP financial measures, reconciliations to the nearest GAAP equivalents. Now, my pleasure to turn the call over to Skill's CEO, Andrew Paradise. Andrew, please go ahead.

Thank you, Joe, and good afternoon, everyone. I'll begin today's call with a review of our first quarter results. For the first quarter, GAAP revenue was $29 million, down 3% quarter over quarter, and up 33% year over year. Adjusted EBITDA loss was $13 million, compared to a loss of $10 million in the fourth quarter. The increase in adjusted EBITDA loss is driven by higher litigation-related expenses during quarter. Importantly, excluding litigation-related expenses, adjusted EBITDA in Q1 2026 improved to a loss of $7 million, representing a 15% improvement quarter-over-quarter on a normalized basis. At Razor, adjusted EBITDA was $2 million, marking a third consecutive quarter of profitability. We expect this improvement in underlying profitability across our portfolio as we continue to move into the second quarter. Paying MAU for the skills platform was 128,000, down 9% quarter over quarter, and up 3% year over year. This quarterly sequential decline in PMAU is partly driven by our decrease in UA spend, resulting in fewer new user cohort additions. While top line PMAUs decreased, we're encouraged that retention across our more mature cohorts improved from the previous quarter. This reflects a healthier platform demonstrated by our 7% quarter-over-quarter increase in average revenue per paying user. Moving to our Fair Play initiative and an update on our litigation against Papaya Gaming. In April, a unanimous jury in the U.S. District Court for the Southern District of New York found Papaya liable for false advertising under the Lanham Act and deceptive practices under New York law. Awarding skills $420 million in actual damages. the largest false advertising award in U.S. history under the Landon Act. The jury also made advisory findings supporting disgorgement of either $719 million based on Papaya's profits or $652 million based on Papaya's cost savings. These are alternative theories and will not be added together. The court will determine whether to award disgorgement, and if so, the final amount. It may accept, modify, or decline the advisory findings entirely, ensuring There is no recovery where actual damages and discouragement overlap. Under the Lanham Act, the court has the ability to enhance the actual damages award by up to three times the $420 million. For any discouragement the court chooses to award, there is no cap on enhancement. In simple terms, the total potential award ranges from $420 million to over $1.2 billion, depending on the court's determination on discouragement enhancement. To understand what this verdict means for the category we pioneered, it helps to understand some of the why. Skills founded the skill-based competitive gaming category on a single premise, that players compete fairly against real human opponents for real prizes. As the category grew, we saw competitors gaining market share in ways that defied explanation. This turned out to be what we believed to be fraud. We had to use the legal system to fight back on behalf of our players and our shareholders. What we alleged against one of these competitors was confirmed by Papaya's own internal documents. Bots were being deployed at scale. Bot scores selected by Papaya determined the outcomes, and none of it was disclosed to the players. I remind you, we've taken this path before. In 2024, a federal jury found ABA Games liable for patent infringement and awarded $42.9 million in damages. We subsequently pursued a separate false advertising case against AVM, and the two cases ultimately sold together for $80 million. We applied those learnings and brought Papaya to trial on false advertising grounds directly. The evidence at trial was clear. Papaya's bots outnumbered human players. Across tournaments advertising approximately $6.7 billion in prize pools, only about $2 billion was actually paid to real users. leaving roughly 4.7 billion in, quote, imaginary money, quote, a term used by Papaya's own defense counsel that was never paid to human players. The jury's verdict confirmed that these practices violated the Lanham Act's false advertising standards. We founded this industry, and we remain committed to ensuring that fair competition is the standard every participant is held to. On collectability, based on publicly available data Papaya operates at substantial scale, with leading titles ranking among the most downloaded in the U.S., generating significant revenue. Based on independent analyst coverage notes, Papaya's annual net revenue is approximately $950 million to $1.1 billion. We believe this scale supports Papaya's capacity to satisfy a judgment of this size. Looking ahead, we expect that the court will determine the final discouragement award in June. The parties have been ordered to engage in settlement discussions, which we're actively pursuing. We're also evaluating alternatives to secure capital against the judgment and are monitoring closely whether an appeal bond or other secured capital will be required. This verdict confirms that false advertising in a skill-based gaming category violates federal law. We believe the Papaya verdict supports the integrity of the category and may improve competitive dynamics over time. Our litigation against Voodoo Games continues to proceed on the same principles of fair play. The papaya verdict is a significant milestone, and our focus remains on operating and growing their business. As we move through 2026, we're organizing our execution around three core initiatives that build on the foundation established during our turnaround. First, strengthen demand and engagement. Second, execute a more efficient and disciplined go to market. And third, improve our platform performance and infrastructure. Across each of these initiatives, we're leveraging the skills competition platform, Razor's performance marketing engine, and Beamable, our newly acquired developer platform. Together, our businesses are building a connected ecosystem designed to improve performance and drive efficiency. Turning to our first initiative, strengthening demand and engagement. On the skills platform, we remain focused on quality and long-term value. We saw continued strength in our core player base, particularly among longer-tenured cohorts. Retention across our three-plus-month cohorts improved quarter-over-quarter, driving higher engagement and monetization on a per-user basis. This reflects the underlying health of the platform. Solitude of Skills continues to scale as the top title on the platform. We also strengthened our own content portfolio through the acquisitions of Blackout Bingo and Domino's Gold and are expanding the pipeline with new titles launching later this year. At Razor, engagement is driven by precision targeting and performance marketing and scale. We added several new advertisers across gaming, consumer applications, retail, and entertainment. We grew revenue across both new and existing customers and launched our connected TV business, opening a new channel for advertiser spend. Turning to our second initiative, efficient and disciplined go-to-market. On the skills platform, we remain focused on executing an efficient and disciplined go-to-market strategy. In Q1, user acquisition spend continued to focus on attracting profitable long-term players. Our approach reflects concentrating investment in channels with attractive returns. At Razor, we continue to scale our performance, expanding our advertiser base and deepening relationships with existing clients. During the quarter, we continue to optimize media margins through improved product mix. Our machine learning platform continues to drive stronger targeting efficiency and return on ad spend for advertisers. Additionally, the launch of connected TV has attracted initial advertiser commitments, broadening Razor's addressable market and opening a new channel for advertising spend. Turning to our third initiative, improving platform performance and infrastructure. On the skills platform, we continue to invest in systems supporting player engagement. We're also advancing our pro SDK development with several developers building new games or converting existing games using this technology. During the quarter, Razer continued migration to more advanced neural network models, improved training efficiency and prediction accuracy, expanded integrations with measurement partners, and advanced next generation machine learning infrastructure. In Q1, we completed the acquisition of Beamable, a developer platform providing the game services and backend infrastructure that we believe will power skills over time. Beamable joins Razer, and the skills competition platform is the third component of our connected ecosystem, bringing developer tooling to our own products and to the customers Razer brings into the network. Beamable also continues to serve the developers and studios that relied on the platform prior to the acquisition. Taken together, our businesses form a compounding flywheel. We believe the campaigns improve the model, every impression strengthens targeting, and every outcome improves future performance. In closing, the first quarter reflected discipline execution across the organization. We strengthened the skills platform, improved unit economics, continued to scale Razor as a profitable growth engine, and began integrating Beamable as the developer platform, powering our products and ecosystem over time. By combining competitive skill-based gaming with AI-driven performance marketing, we're building an ecosystem designed to scale engagement, data, and monetization with discipline. We believe this integrated approach creates long-term optionality in gaming as well as in adjacent areas where content, identity, commerce, and performance marketing converge. Our focus remains on executing against that opportunity while maintaining potential discipline and driving long-term shareholder value. And with that, I'll turn it over to Gaetano for the financial review.

Thank you, Andrew. Our first quarter results highlight the benefits of disciplined execution and structural improvements across both the skills and razor businesses, producing stronger fundamentals and a trajectory toward profitability. Q1 2026 gap revenue was $29 million, down from $30 million in Q4 2025 and up from $22 million in Q1 2025. representing a 3% decline quarter-over-quarter and 33% growth year-over-year. Of note, Q4 2025 revenue included an indirect tax accrual release. Normalizing for the indirect tax accrual release, Q1 2026 revenue would be up 2% quarter-over-quarter. Q1, 2026 research and development expenses of $5 million increased 5% year over year, reflecting ongoing investment in our skills and razor businesses. Q1, 2026 sales and marketing expenses of $17 million decreased 4% year over year. In the quarter, end user marketing was $8 million and user acquisition was $3 million. Q1, 2026 general and administrative expenses of $19 million increased 2% year over year. Q1 2026 net loss of $11 million improved 36% year over year. Q1 adjusted EBITDA loss was $13 million compared to a loss of $10 million in Q4 2025 and improved from a loss of $17 million in Q1 2025. Excluding litigation related expenses, Adjusted EBITDA in Q1 2026 improved to a loss of $7 million, representing a 15% improvement quarter-over-quarter on a normalized basis. We believe our balance sheet remains healthy, and we continue to manage capital prudently as we progress towards sustained profitability. We ended Q1 2026 with $185 million in cash and cash equivalents and $130 million of debt outstanding due by the end of this year. As the debt approaches maturity later this year, we continue to evaluate a range of strategic alternatives to optimize our capital structure. We are driving the business forward with focus and discipline to deliver meaningful, long-term value for our shareholders and look forward to updating you further on our progress in 2026. Operator, we're now ready to open the line for questions.

Thank you. Everyone, if you would like to ask a question, please press star 1 on your telephone keypad. We'll take the first question today from Ed Alter from Jefferies.

Hi. Good afternoon. I want to ask a question on paying MEU and GMV. I saw that GMV was actually up quarter on quarter despite kind of paying users down. So can you just talk about kind of the two drivers of that and, you know, why the spend per player is actually increasing and kind of some of the drivers there?

Thanks, thanks Ed. Thanks for the question. Yeah, I think as you know, what we focus on is really high paying users, long term users, and so this is sort of a view of an outcome that we've been driving towards and trying to continue to retain and attract high paying users. So you see, even though our PMO is slightly down, you can see our GMV continues to grow in our continues to grow.

And if I could also jump in. Please do. Oh, sorry. I was going to add that one of the reasons PMOW is slightly down is we actually dialed back user acquisition in Q1, really continuing to raise their focus on profitable acquisition. So continuing to bring in tighter and tighter break-even periods and better one-year paybacks. I think we're kind of at maximum tight now. as we ended the quarter. And, you know, we're thinking about how to thoughtfully expand on marketing.

Yeah. Great. Great. And just to follow up on that, because I, you know, notice that the, you know, the MAUs was also down a decent amount, but a lot of the, you know, non-paying MAUs were down. Is that kind of like a new normal or for kind of your marketing strategy or just how to, how do we go from here is I guess kind of the main question.

Yeah, I think it's, uh, With where we are on user acquisition and kind of cutting spend and optimizing, you can expect that we're stabilized and going to build forward. So I would expect PMAU and traffic overall flat up with improving economics. That's the way I think about the business. At the end of the day, if we can service a higher value customer, it's a better business.

Great. Thanks, I can circle back in the queue.

Yep. The next question is from, the next question comes from Bharath Nagaraj from Cantor Fitzgerald.

Hi, thank you for taking my questions. Just the first one is around, are you seeing any reduction in user acquisition costs at all since the lawsuit went in your favor? And then the second one, just to follow up on the previous answer that you provided, the previous question uh what would you actually attribute the growth in being and may use uh since q1 2025 right like it's kind of been pretty good since then and up until q1 2026 is it is it because the mobile gaming environment is a lot better now or is it is it some kind of a changing strategy um and i know that the user acquisition costs have come down as well as you mentioned so hence wanting to understand that a bit better thank you

Yeah, thank you for the question. Let me hit the first part on user acquisition costs and lawsuits. You know, I think it'd be really difficult for us to directly link the two and create attribution there. In terms of user acquisition costs, we are at, you know, as of uh the end of q1 the best uh ua prices we've seen in i i don't know how many years multiple years um so we are you know we're seeing uh attractive customer acquisition costs and thinking about how we can thoughtfully scale up uh where we're seeing the you know these uh these attractive prices. In terms of the second question, attributing growth to PMAO and how PMAO has been growing from Q125 through this past quarter, perhaps Gaetano, do you want to jump in on that or?

Yeah, thanks, Andrew. I think the way to think about it and what we've been describing for the past several quarters is really the focus around product-led growth. And so there's been a significant number of investments in our platform around retention and engagement and things that we've launched are really focused around attracting and retaining paying customers. And so I think you're seeing that as a result. that our focus on paying mal is paying off.

Okay, okay, thank you. Can I ask one more, if that's all right, or should I just jump back in the queue?

No, no, go ahead.

I know that I think a couple of your developing partners, I think you've said, account for a significant portion of your revenue. And I think, if I'm not wrong, correct me there if I'm wrong, Solitaire Cube and 21blitz will kind of drop off the platform in Jan 2027. So I'm just wondering what the future strategy is there. I think you're trying to develop some of your own games, but is there, how do we think about the trajectory of revenue post, I don't know, Q4 this year?

Yeah. Thank you for the question on that. So to kind of part it back, how are we thinking about the migration of one of our developers off platform? We now, as of the end of Q1, we acquired Blackout Bingo and Domino's Gold. So we own and operate now three of the top five titles in the platform. This actually happened in Q3 of last year, but when that particular developer left the platform, there were 34 titles, two of which we have contractual rights through March of 2027. And then the other 32, which we had contractual exclusivity up through December. We migrated the first 32 titles in Q3, so in quarters. And so you can see kind of the result of that in our numbers. We are now looking at, I think you mentioned SolitaireQ, but looking at the migration to future state. And we have, you know, quite a number of Solitaire titles on platform as well as the owned and operated title, Solitaire Skills.

Understood. Thank you very much.

And we'll take a follow-up from Ed Alter from Jefferies.

Great, thanks for letting me back in. I just wanted to follow up on the last question. With you guys now making your own Solitaire game, buying Blackout and Domino's Gold, it seems like a decently large strategy shift to now you guys own most of the large games on the platform. Is this how to think about the business going forward, or just some of the rationale for doing that shift?

Yeah, first of all, thank you for the question. But, you know, I would say, yes, owning and operating is a shift from the historic only third party and second party relationships with developers. You may be aware that we've been, you know, second party or investor in content for a number of years. I want to say, you know, Over five years pre-IPO, we've owned a stake in content on the platform. Now owning and operating. So if you think about first party, second party, third party, now we're entering into first party relationships with content. So owned and operated. And the way we think about this is if there's a category on system and a piece of content like Solitaire, where there's relatively little development in the future, acquiring a developer or developer's game or building a game in that category, it creates a stability for the platform and a consistent offering that we can have for the platform, which actually is a benefit to every developer on the platform who's building new content and exploring new genres. It's very much a strategy that I think we've seen with Epic at a much larger scale running Fortnite or it's Valve with Steam, their platform, running Dota 2 and Counter-Strike. I think this is a common thing in the gaming industry in terms of gaming platforms and something that we think makes a lot of sense for the future of the business.

Great, thanks.

And everyone at this time, there are no further questions. This does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.