Skillz - Earnings Call - Q4 2024

Executive Summary

• Q4 revenue was $20.4M, down 17% q/q and 35% y/y, with diluted EPS of $(1.50); PMAU fell to 110k, though management emphasized a sequential monthly rebound in PMAU from November through February and plans to scale UA while preserving payback discipline.
• Adjusted EBITDA loss widened to $(18.5)M from $(13.9)M in Q3; cash, cash equivalents and restricted cash ended at $281.9M and total debt at $129.7M, supporting continued investment in the turnaround.
• Management launched a $75M Skillz Developer Accelerator to seed new content (targeting at least 25 games) and reiterated the four-pillar plan (product/content, org scale, GTM with disciplined UA, path to profitability).
• No explicit numerical forward guidance; company filed preliminary FY24 results and indicated a potential 10-K extension. Near-term stock catalysts include execution proof-points (PMAU/MAU stabilization and UA scaling), accelerator deal flow, and receipt of a $7.5M AviaGames settlement installment in March.

What Went Well and What Went Wrong

• What Went Well

  • Strategic content pipeline push: Announced a $75M developer accelerator to fund and support new skill-based games; management reports strong developer interest so far.
  • Sequential PMAU momentum into early 2025 despite Q4 drop: “paying monthly active users improving sequentially each month from November 2024 through February 2025”.
  • Balance sheet strength to fund turnaround: “We ended 2024 with cash, cash equivalents and restricted cash of $282 million,” providing flexibility to invest in key initiatives.

• What Went Wrong

  • Top-line and engagement compression: Q4 revenue $20.4M (−17% q/q; −35% y/y) and PMAU 110k (down from 121k in Q3), with CFO noting both PMAU and MAU were lower q/q.
  • Profitability deterioration q/q: Adjusted EBITDA loss widened to $(18.5)M in Q4 vs $(13.9)M in Q3; G&A ex-SBC ran high vs revenue (75% of Q4 revenue) as the company invests in the turnaround.
  • Reporting uncertainty: FY24 results are preliminary and the company may file a 10-K extension; internal control weaknesses remain an area of focus per forward-looking and risk disclosures.

Transcript

Operator (participant)

I'd like to pass the conference over to our host, Richard Land from JCIR, to begin. Please go ahead.

Richard Land (Head of Investor Relations)

Good afternoon and welcome to the Skillz Fourth 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 2024 fourth quarter and full-year results release, which is available on the company's investor relations website. 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 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 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 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 Fourth Quarter 2024 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, please go ahead.

Andrew Paradise (CEO)

Thank you, Rich, and good afternoon. Before turning to an update on the operational progress made against our four pillars, including the recently announced $75 million Developer Accelerator program, I want to review the strides we're making in our Fair Play initiative and key litigation matters. We remain active with our efforts to sound the alarm of the deception we believe some other companies are deploying to cheat players out of a fair gaming experience. We continue to work to ensure that all gaming companies in this space provide consumers with certainty that they're being matched with real players of similar skill. This is to ensure fair competition and is critical so this industry can survive and thrive as real money is on the line. Our proprietary platform delivers on this promise of fairness to players.

We do not believe that's true for some of the biggest players in our space. We believe international companies, including AviaGames, Papaya Gaming, and Voodoo, use bots to deceive players in the United States and international markets into believing they're competing against real human opponents when, in fact, they face predetermined gameplay or bots. The manipulation perpetrated by these companies alters match results to their advantage, defrauding American players of billions of hard-earned dollars. We continue to pursue aggressive actions to safeguard fairness within the industry we pioneered. We've filed lawsuits to protect our business interests as the use of bots by these companies has harmed our company as well as the interests of our stakeholders. The lawsuits we filed against Papaya and Voodoo are ongoing in the Southern District of New York. As these lawsuits progress, these international companies will have to answer to U.S.

law and the U.S. consumers they've potentially defrauded. Of note, class action lawsuits have also been filed by consumers against both AviaGames and Papaya Gaming. Beyond the lawsuits that have been filed, we continue to take steps to bring this matter to the attention of the legal and regulatory authorities. The level of money being defrauded from individuals is in the billions. We need to continue to bring this fraud to light. We will continue to do our part as we advocate for enhanced policies and legislation to strengthen the regulatory oversight of our space. This includes having regulatory authorities take the necessary actions to stop the billions of dollars of fraud stealing the hard-earned savings of American consumers. As the true pioneers and innovators in skilled gaming, I'm highly confident that Skillz is capable of competing against any true skill-based gaming provider.

That is, any provider that wants to compete on a fair playing field without the deceptive use of bot fraud. As a U.S.-based public company, it's our conviction we should do this for the safety of all players, which will ultimately benefit Skillz, our shareholders, and more broadly, our industry. 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 Q4. In the quarter, we continue to work within our four key pillars for returning 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 and retention.

We've discussed on recent calls our focus on a new product and content pipeline. In line with this initiative, we've recently announced our Accelerator program to drive and deliver the best game innovation and expand the offerings on our platform. Our balance sheet provides the flexibility to deploy up to $75 million over the next three years for the Accelerator program. This program will offer developers working capital, marketing, and operational support to create the next generation of games for online and mobile gaming competition. Our goal is to support at least 25 high-potential games with flexibility for more and other opportunities that meet this vision. Since we announced the Accelerator program, we've had a strong response from the developer community. For our second pillar, up-leveling the organization. In Q4, we further scaled 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, data, and analytics efforts. Moving on to our third pillar, our go-to-market. Paying users for the quarter had some variance with Paying MAU of 110,000 in Q4 compared to $121,000 in Q3. However, we exited February with Paying MAU of $123,000, and Paying MAU has grown sequentially for three months in a row from November through February. Our focus remains on optimizing CAC and growing LTV. UA spend in Q4 was consistent with recent quarters and continues to be at our lowest level since 2018 as we remain focused on scaling traffic strategically. In Q4, we continue to trend in line with recent system-wide payback periods achieved through our focus on spending in the best channels.

As we scale traffic, we'll do so in a manner that strives to keep our system-wide payback periods near the timelines we achieved throughout most of 2024. I'll conclude my comments with a review of the progress on our fourth pillar, demonstrating a clear path to profitability. Throughout 2024, we made steady strides to achieve our goal of ultimately generating adjusted EBITDA positive. Our full-year adjusted EBITDA loss, excluding litigation expenses, improved 9% compared to 2023. We remain focused on our expense management initiatives while continuing to invest in our business to generate top-line growth. We've consistently been achieving gradual improvements in our operating cash burn, which, combined with our strong balance sheet, provides us with a runway to return our business to sustainable and profitable growth.

Finally, I'll reiterate that our current valuation gives no weight to the combined value of our operating platform and the progress we've made towards achieving our goals or our net cash position, for that matter. 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.

Gaetano Franceschi (CFO)

Thank you, Andrew, and good afternoon, everyone. Turning to the fourth quarter financial results, revenue was $20 million, down 17% sequentially, and down 35% year over year. Our paid user conversion rate, which is Paying MAU divided by MAU, was 14.6% in Q4, up from 14.3% in Q3, with both Paying MAU and MAU lower quarter over quarter. As Andrew indicated, we are seeing a rebound as Paying MAU has grown sequentially for three months from November through February. Excluding all litigation expenses, operating expense was $60 million, a $3 million improvement versus the prior quarter. Research and development expense was $4 million, up 5% year over year, and excluding the impact of stock-based compensation was 16% of Q4 revenue. Sales and marketing expense was $19 million, down 18% year over year, and excluding the impact of stock-based compensation was 86% of Q4 revenue.

Q4, UA marketing was $5 million, while Q4 engagement marketing was $10 million. General and administrative expense was $21 million, up 11% year over year, and excluding the impact of stock-based compensation was 75% of Q4 revenue. Net loss of $26 million compares to a net loss of $60 million in Q4 2023. Adjusted EBITDA loss in the fourth quarter was $19 million. Adjusted EBITDA loss for the full year was $63 million compared to the adjusted EBITDA loss of $69 million in 2023. We ended the year with $282 million of cash, comprised of $272 million in cash and cash equivalents, and $10 million in restricted cash. I'll remind everyone that as part of last year's settlement of our patent infringement case with AviaGames, we expect to receive $7.5 million from them before the end of this month.

This is the first of the four annual payments we will receive from AviaGames, which is in addition to the $50 million payment we received last April. At the end of Q4, 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, we'll turn the call back to the operator for the Q&A session.

Operator (participant)

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, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. There are currently no questions registered, so that will conclude the conference call. Thank you for your participation. You may now disconnect your line.