Skillz - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $22.4M, up 10% q/q from Q4 and down 11% y/y, and beat S&P Global consensus of $20.8M by ~8%; GAAP diluted EPS was $(0.92), better than the prior year’s $(1.45) and improved vs Q4’s $(1.50). Revenue consensus: $20.75M*; EPS consensus: $(1.10)* — a revenue beat and EPS better than prior periods (see Estimates Context).
• Paying monthly active users (PMAU) rose sequentially to 124k (vs 110k in Q4), with conversion improving to ~16% (PMAU/MAU) as the company re-engaged lapsed users; ARPPU moderated to $62.2.
• Adjusted EBITDA loss narrowed y/y to $(15.1)M, aided by lower G&A and sales & marketing, and excluding a $7.5M litigation settlement gain received from AviaGames (first of four annual payments).
• Key near-term catalysts: continued PMAU growth and monetization features, progress on the $75M Accelerator program, and litigation/fair play initiatives; risks include late 10-K and 10-Q timing (NYSE notice) and ongoing litigation, which management is actively addressing.

What Went Well and What Went Wrong

What Went Well

• Sequential demand recovery: PMAU increased to 124k and conversion improved to ~16% (16.2% cited on the call) as lapsed-user marketing drove re-engagement.
• Operating discipline: Sales & marketing fell to $19.1M and G&A to $16.3M, supporting improved y/y adjusted EBITDA loss of $(15.1)M; non-GAAP G&A was $12.2M, reflecting reduced SBC.
• Strategic initiatives: Management highlighted the $75M Accelerator program targeting at least 25 games over three years to broaden the portfolio and increase engagement and monetization.

Selected management quote:

• “Our $75 million accelerator program is helping us identify the next generation of skill-based mobile games… [and] broaden the scope of our offerings.” — Andrew Paradise, CEO.

What Went Wrong

• Top-line still below prior year: Revenue declined 11% y/y to $22.4M despite sequential improvement; ARPPU softened to $62.2 vs $69.8 y/y, and GMV fell to $126.5M (from $161.3M).
• Filings delay risk: The company is still completing FY 2024 financials and expects to file the 10-K within the NYSE’s six-month window; Q1 results are preliminary and may be revised.
• Litigation and market integrity overhang: Ongoing suits (Papaya, Voodoo) and industry fair-play concerns continue; while Skillz received $7.5M from AviaGames, legal processes may add uncertainty.

Transcript

Operator (participant)

Good afternoon. I'd like to welcome you all to the Skillz 2025 First Quarter Results Call. My name is Lauren, and I'll be moderating your call today. There'll be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please press star followed by one on your telephone keypad. I would now like to pass the conference call over to our host, Richard Lance from JCIR, to begin. Please go ahead.

Richard Land (Head of Investor Relations)

Good afternoon and welcome to the Skillz First Quarter Earnings Conference Call. On the call today are Andrew Paradise, Skillz' co-founder and CEO, and Gaetano Franceschi, CFO. This afternoon, Skillz issued its 2025 First Quarter release, 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 31st, 2025. Accordingly, we are announcing preliminary results for the first quarter, which are based on currently available information and are subject to revision. Actual results may differ from these preliminary financial results and other financial information, as final adjustments and developments may arise between now and the time the results are finalized.

In the event the company determines it will not file its quarterly report on Form 10Q by the prescribed deadline, it will file with the SEC an extension on Form 12B-25, which may include further disclosure. The company is also completing the financial statements and other disclosures for the year ended December 31, 2024. We were unable to file the Form 10K during the requisite extension period. We previously announced we received a notice from the NYSE that the company was not in compliance with its listing standards. The company is working diligently to complete the necessary work to file the Form 10K as soon as practicable and currently expects to file the Form 10K within the six-month period granted by the NYSE notice and intends to take all necessary steps to achieve compliance with applicable NYSE listing standards as soon as practicable.

Before I turn the call over to Andrew, please note that management's comments today may 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. Therefore, you should exercise caution in interpreting and relying on them. We refer you to the company's SEC filings for more detailed discussion of the risks that could impact future operating results and financial condition. During the call, management will discuss non-GAAP financial 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 our financial results prepared in accordance with GAAP.

The reconciliation of these measures to the most directly comparable GAAP measure is available in the company's First Quarter 2025 earnings release. With that, I'll turn the call over to Andrew for some opening remarks, followed by Gaetano for a discussion of our financial performance before we open the call for questions. Andrew?

Andrew Paradise (Co-Founder and CEO)

Thank you, Richard, and good afternoon. Before turning to an update on the operational progress made against our four pillars, I want to first update you on our Fair Play Initiative and related litigation. As we've discussed on previous calls, these matters are central to protecting consumers and the integrity of our industry. We remain active with our efforts to sound the alarm that all companies in this space must provide consumers with certainty that they're being matched with real players. As we've highlighted for over a year, this is an industry-wide issue. Our proprietary platform strives to deliver on this promise of fairness to players. Billions of dollars are at stake, and the long-term health of our industry depends on building trust. We believe international companies such as ABA Games, Papaya Gaming, and Voodoo Games have used or are using bots to deceive players around the world.

As a result, we believe players are being tricked into playing against bots or engaging in predetermined gameplay. We also believe our business has been harmed by these actions. To protect our business interests as well as the interests of our stakeholders, we filed lawsuits against Papaya and Voodoo. These lawsuits are ongoing in the Southern District Court of New York, and as these cases progress, these international companies will have to answer under U.S. law. Regarding our litigation with Papaya, the discovery is ongoing and continues to be subject to a protective order. However, the following fact is public, which comes from a recent unsealed ruling.

The presiding judge in this case noted, as she documented in her ruling, and I quote, "In recent depositions, none of Papaya's individual deposition witnesses denied the historic use of bots, as they all asserted their Fifth Amendment rights against self-incrimination rather than testifying to any potentially disputed facts." I also remind you that the class action lawsuits have been filed by consumers against both ABA and Papaya. In light of the allegations and information revealed in our litigations thus far, we encourage authorities to take all necessary actions to stop what we believe amounts to billions of dollars of fraud targeting U.S. consumers. As a U.S.-based public company and the pioneer of the space, we're committed to leveling the playing field. We're confident in our ability to compete against any legitimate skill-based gaming provider that operates fairly and transparently.

Our goal is to protect players, support a healthy industry, and stem the tide of what we view as billions of dollars being stolen by bad actors in this industry, which we believe will benefit our shareholders. Now turning to the Q1 performance. In the quarter, we continue to work within our four key pillars to return Skillz to consistent top-line growth and positive adjusted EBITDA. Our efforts to achieve these goals are supported by our strong balance sheet and financial position. For our first pillar, enhancing our platform to improve consumer and developer engagement retention. We've discussed our recent calls that are focused on a new product and content pipeline. In February, we had launched our Accelerator Program to drive innovation so Skillz can access the best games and expand our offerings. The Accelerator Program is focused on identifying the next generation of skill-based mobile games.

By expanding beyond casual skill games and pushing into new genres, we're attempting to broaden the scope of competitive gaming. Our balance sheet provides the flexibility to deploy up to $75 million over the next three years to support at least 25 high-potential games. We've had a strong response from developers to date with many compelling partners in the pipeline. As we continue to evaluate games through our Accelerator Program, we're prioritizing both new genres as well as fresh takes on established genres for skill-based gaming. What's become very clear to us is there's a tremendous level of creativity in the industry. Momentum around this initiative helped make the recent Game Developer Conference one of our most successful to date in terms of developer engagement. For our second pillar, up-leveling the organization. In Q1, we continue to scale and optimize our Las Vegas and Bangalore-based teams.

With stronger in-house teams, we're better positioned to continue making consistent strides in optimizing our product development, marketing, and analytics efforts. Moving on to our third pillar, our go-to-market. We had positive improvement in paying users for the quarter. Paying MAU, our monthly active users, for Q1 was 123,000 compared to 110,000 in Q4 2024. The growth in PMAU was primarily driven by marketing to our lapsed users, which is cost-effective to re-engage. However, we anticipate their spend to ramp over time, and we continue to prioritize increasing player spend through new features and new offerings. We also continue to prioritize optimizing CAC and growing LTV. UA spend in Q1 was consistent with recent quarters, and we remained focused on scaling traffic strategically. Lastly, on the progress on the fourth pillar, demonstrating a clear path to profitability.

In Q1, we continue to make steady strides needed to achieve our goal of ultimately generating positive adjusted EBITDA. We remain focused on managing expenses while continuing to invest in our business to generate top-line growth. We have achieved gradual improvements in our operating cash burn, which, combined with our strong balance sheet, provides us with the runway to return our business to sustainable and profitable growth. I will conclude my comments and reiterate that our current valuation gives no weight to the combined value of our operating platform and the progress we have made towards achieving our goals or our net cash position. As we execute on our turnaround initiatives, we continue to believe our unique platform can generate significant returns for our shareholders. With that, I will turn it over to Gaetano.

Gaetano Franceschi (CFO)

Thank you, Andrew, and good afternoon, everyone. Turning to the first quarter financial results, revenue was $22 million, up 21% sequentially, and down 11% year over year. Excluding a $1.6 million life-to-date incentive adjustment in Q4, revenue grew 12% sequentially. Our paid user conversion rate, which is paying MAU divided by MAU, was 16.2% in Q1, up from 14.6% in Q4 2024, with both PMAU and MAU higher quarter over quarter. Research and development expense was $5 million, up 4% year over year. Sales and marketing expense was $19 million, down 9% year over year. Q1 UA marketing was $4 million, while Q1 engagement marketing was $9 million. General and administrative expense was $16 million, down 29% year over year, and excluding the impact of stock-based compensation, was $12 million. Net loss of $15 million compares to a net loss of $27 million in prior year.

Adjusted EBITDA loss in the first quarter was $15 million compared to an adjusted EBITDA loss of $90 million in Q4 2024. We ended the first quarter with $264 million of cash, comprised of $254 million in cash and cash equivalents, and $10 million in restricted cash. Our cash position, as of March 31st, includes the $7.5 million payment we received from Avia Games as part of last year's settlement of our patent infringement case with them. This was the first of the four annual payments we will receive from Avia, which is in addition to the $50 million payment we received last April. At the end of Q1, we had $129.7 million of total principal due on our outstanding debt. With our improving cash burn, we have the flexibility to deploy capital to enhance shareholder value.

At this time, I'll turn the call back to the operator for the Q&A session.

Operator (participant)

Thank you. We will now begin the Q&A session. If you would like to ask a question, then please press Star + 1 on your telephone keypad. To withdraw your question, please press Star + 2. Please also ensure that your phone is muted locally. As a reminder, that is Star + 1 to ask a question. We will pause for a moment to allow questions to be registered. Okay, we have no questions registered, so that is now the end of the Q&A session, and this also concludes today's call. Thank you for joining, everyone. You may now disconnect your lines.