Skillz, Inc. (SKLZ) CEO Andrew Paradise on Q2 2022 Results – Earnings Call Transcript


Killz, Inc. (NYSE SKLZ Q2 2022 Earnings conference call August 3, 2022 at 5:00 PM ET




Charlotte Edelman – General Counsel & Corporate Secretary


Andrew Paradise – Co-Founder, CEO, President & Chairman


Casey Chafkin, Co-founder, Chief Revenue Officer and Treasurer, & Director


Ian Lee – Chief Financial Officer




Jason Bazinet – Citigroup


Andrew Crum – Stifel, Nicolaus & Company


Bradley Erickson – RBC Capital Markets


Jason Tilchen – Canaccord Genuity


William Lampen – BTIG


Edward Alter – Jefferies



Charlotte Edelman


Good morning, and welcome to the Skillz Earnings Conference Call for the Second Quarter 2022. We will soon be reading forward-looking statements, non-GAAP measures. Then we will have a brief introduction and then a question-and-answer session. Today’s question-and-answer sessions will be hosted by Andrew Paradise (Chairman Executive Officer), Casey Chafkin (Ceiling Revenue Officer) and Ian Lee (Ceiling Financial Officer).


We hope that you have had the opportunity to review our press release which was published earlier today. It is also available on our Investor Relations site. Some comments made today by management will contain forward-looking statements as defined under the federal securities laws. Forward-looking statements are often identified with words like “will, expect, should” or similar phrases. However, there are many risks and uncertainties that could cause actual results not to be as expected.


You should be cautious when reading and relying upon them. For a deeper discussion on the risks that could affect future financial results and operating results, we recommend you refer to the SEC filings of the company. Management will talk about non-GAAP measures that we believe are useful in evaluating company’s operating performance during the conference call.


These measures should not be taken in isolation and should not be used as a substitute to GAAP-compliant financial results. In our earnings release for the second quarter 2022, you will find a reconciliation of these measures with the most closely comparable GAAP measures.


Andrew will now take the call. Andrew?


Andrew Paradise


Charlotte, thank you. Good morning, everyone. Thank you for joining us to discuss the second quarter 2022 results. Before we start taking your questions, let me share some thoughts. With a new strategy in place, we entered 2022 with the goal of focusing on profitable growth, efficiency improvement, and maximizing our impact on player and developer experiences through product-led initiatives. Let me share my thoughts about what has been going well, what isn’t and what we are going to do. Let’s start with the good.


We made progress towards profitability in Q2. Our net loss was reduced by nearly $90 million, while RAEM revenue after engagement market marketing decreased by just $8 million. We lowered our used acquisition marketing spend by 49% quarter-over-quarter, and we also made progress in improving the efficiency of our user acquisition. This was a company that had 6-month payback periods during our IPO. We plan to gradually return our paybacks to those levels.


We continued to reduce low-return marketing initiatives for engagement marketing in Q2. In addition, we restructured our workforce to better align resources with strategic priorities. We saw a decrease in net loss and an increase in the adjusted EBITDA burn rate. Our revenue quality was improved by increasing our revenue after engagement marketing, which is a ratio to revenue.


We didn’t see the product development progress we desired over the last three months. However, there were some wins. I mention these here for balance rather than to say that we are happy with the quarter’s progress. As we had discussed in Q1, we launched a beta version of our cloud gaming technology project. We also launched a beta version of the updated core user experience. Okay.


Let me tell you what didn’t work. The company’s strategy to position it for profitability came at a significant cost. Revenue after engagement marketing, paying monthly active users, all fell sequentially quarter-over-quarter. There are also areas that we can improve upon and will. Here are a few examples. Our H1 product initiatives have not achieved the desired results.


We have had a slower pace of product development than we expected or wanted. Too many product features have been added that aren’t driving LTV growth and, sometimes, are even harmful. Too many experiments were split-tested and didn’t produce LTV growth. Sometimes, they were even detrimental.


We still have a lot to do in marketing on the side of user acquisition efficiency. We also need to reduce low-return marketing initiatives. We are raising the bar on all marketing and product experiments to help grow our business. This is a pattern of declining quality work, which I will personally address in product design. Lower retention rates for certain mature users were the primary cause of the decline in revenue.


We believe we have now contributed to this. This is due to a combination of user cheating on our platform, and past product modifications that should not have been rolled from our testing phase to full rollout. Let me give you an example of cheating when I talk about cheating. There have been instances where people used the platform to cheat, such as using system discounts or incentives in other countries, like the Philippines. In these cases, users are using our friend referral program to receive financial incentives, but not delivering any user referrals.


Here’s what we will do next, and why. We are confident in the potential of product-led initiatives to improve player and developer experiences. It is frustrating, especially considering the recent progress in product. There are many opportunities to improve developer and consumer experiences on our platform.


As I said earlier, the 6-month payback was a condition of our approach to the IPO. I intend to get us there again. To fix our paybacks, I will return to product development. This will allow me to improve our products and build superior paybacks. This work is already underway.


As we repair and right Skillz, there will be much more to come in the coming days. It is not difficult to reposition the company for profitability, compared to where we ended last year. We need to reduce our 2022 full-year revenue guidance to $275 millions.


In our Q2 stockholder letter (to be published tonight), we’ll share more details about all the happenings in our business. We wish we could have done more with the ambitions and driver team, but they are far too large. This quarter, we made some progress in achieving our long-term goals by rationalizing the cost structure.


There is still much to be done, but I am more determined than ever to succeed. We will continue to focus on sustainable growth and efficiency for the next few years. We will continue to lower costs. We will continue to improve marketing efficiency and increase the speed of product development.


It is exciting to consider the long-term potential for this business to transform the $92 billion mobile gaming industry through competition. This is a tremendous opportunity and we are steadfast in our belief, that competition can help everyone achieve their highest potential, the developer and the player.


I wish I had better news to deliver today. We are working very hard to implement the transition strategy we outlined last quarter and will again this quarter. As we move forward on this journey, I want to thank you for your patience and understanding.


Let me now open my mouth for more questions.


Question and Answer Session

Jason Tilchen


You clearly identified some reasons the results were not as expected. Just thinking back to quarter past, you reaffirmed the revenue guide at $400 million, and then, just three months later, it was reduced by almost 1/3. I was wondering if you could give some more insight on the possible differences between now and 3 months ago. What gives you confidence that users will resume growth next year after the declines in the first 2 quarters, as you stated in your press release? I was wondering if you could also touch on this.


Andrew Paradise


Absolutely. Jason, first, thank you for your question. We’re lowering the guidance because of the user retention trends we’ve seen on the system and the slower-than-anticipated velocity of new product development and the delay in achieving the expected results from the recent product launches. We also assume that the macroeconomic environment will be difficult throughout the remainder of the year.


Jason Tilchen


Going back to next year, I expect a resumption in growth with a lower marketing budget. I was just curious to know if you could name something in your product pipeline that might give you more confidence that you will be able achieve that resumption growth going into fiscal ’23.


Andrew Paradise


Yes. Lower retention is due to mature cohorts. The first part is that we didn’t anticipate the amount of attention that the company would receive by going public. We’ve also seen more bad behavior and worse actors enter the ecosystem.


Users are cheating on the platform. I believe I mentioned one in my overview. However, our friend referral program is seeing a lot more abuse from countries outside of the U.S. trying to smoothen and/or execute in their home country to steal money out the system.


In countries such as the Philippines, we have remediated the problem. We are continuing to investigate and address any other cases of fraud and cheating. Second, I believe I mentioned product changes in the past 18 months that have not achieved the level of LTV we expect.


There are many initiatives that we are modifying. This gives us confidence in our ability to get back on track with retention, engagement, and monetization. Skillz is a platform that trusts its users. Trust and safety are essential to the operation of any type of marketplace business.


You must see the fraudulent and cheating as damaging, not just because it doesn’t generate any real revenue. It’s also affecting their engagement and retention on the platform, as well as the people being defrauded. To sum it all, I believe that we must immediately address this issue.




Drew Crum, Stifel is our next question.


Andrew Crum


Your outlook commentary assumes that there will be further declines in the amount of money paid through the remainder of the year. Which type of decline do you anticipate? Is it similar to 2Q, or something else? Andrew, do you have a catalyst in mind to help this metric accelerate next year? Then, I will follow up.


Andrew Paradise


Okay. Drew, thank you for your question. I will pass it to Casey so we can talk Marketing growth.


Casey Chafkin


Thanks, Andrew. Jason, sorry Drew, this is how we think about it: As we extract some discounts from the system we are — there are a smaller number who deposit low amounts of money or play with system incentives that have been deposited previously. As we remove those incentives, it becomes the biggest contributor to the decrease in monthly active users. And we’re not quite done reducing our engagement marketing spend. So, we are supposedly making the business more profitable user-by-user.


So, after the incentives are removed completely, the retention profile for our cohort is maintained. Each cohort never dies. They don’t stop playing on the platform at all, but they do decline and then level off. We are removing low- or no-value users from the platform, who still get MAU calculation and are being counted. The back half of the year is going to see the user base continue to fall at a decreasing rate. The future will see user growth as new cohorts are added, even if those incentives are removed completely.


Andrew Crum


It was very helpful. It was very helpful. The adjusted EBITDA margin is what I want to follow up on. It appears to be the same as in the first half. With the reduction in engagement marketing spending and possibly some savings from your restructuring, what is stopping you from improving margins in the second part?


Andrew Paradise


Ian, would it be possible to answer that question?


Ian Lee


Yes. Thanks, Drew. As Drew mentioned, the main focus is on optimizing marketing spend. The restructuring actions we took this quarter were focused on the overall reduction of operating expenses in the second half. I expect that trend to continue.


With the declines in top line revenue and revenue after engagement marketing, it is going to be, I believe, where that nets out. We’ll be watching the second half to see how that plays out, especially with the reduction of operating expenses that is clearly focused on. That may also be offset by the declines in top line. Drew, I believe that’s where Drew got the guidance.




Jason Bazinet, Citi, asks us our next question.


Jason Bazinet


Just a quick question about the 6-month paybacks. This was something you mentioned at the time of the IPO. It seems that it is easier to get a 6-month paymentback if your business has $50 million in revenue, $100 million revenue, and $400 million revenue. Even if the initiatives fail, can there be a natural increase in your paybacks as revenue decreases?


Andrew Paradise


That could be true in many businesses. I’m sorry, but I don’t mean to be rude. Thank you for your question. I appreciate it. It was a pleasure to be involved. That could be true in some of our smaller markets. That question leads me to believe that the TAM is being dried up and that’s why we’re seeing worse paybacks. We had, I believe, $230 millions of revenue — net revenue.


But not all scale. We don’t believe that this is what we have been experiencing as we scale up, essentially tapping out the market which drives our prices. We have been failing to scale human capital in COVID, I believe. It has led to underperformance in many roles throughout the company. We are now working hard to get the right people in the right positions and an understanding of the system so they can add value against LTV rather than detriment it.


I wish there were a better way. The one good thing about this is that there’s no reason to believe that TAM has been consumed. Casey, would you like to speak a bit about marketing and the future of TAM?


Casey Chafkin


Yes, absolutely. Jason, I believe that this behavior is common in many businesses. However, in our case and especially when Andrew was running product and leading up to our initial public listing, we noticed that our cohorts were becoming more and more valuable. This is contrary to what you might see in many other businesses and is evidence that there are real network effects in this space. This is the problem we have not seen in the past year or 1.5 years. We don’t believe it, it’s an endemic weakness within the system.


Andrew mentioned that there are many operational opportunities we can and will fix. But the loss we called it was the tripping over ourselves. However, I believe that getting people together to collaborate in person is a great way to improve the analytical rigor behind new products and future rollouts. These become operational opportunities for us. So I believe it was Jason who asked about our confidence in the future. We can see that the data is secure for some of our new cohorts as we make these changes. This gives us confidence.


Andrew Paradise


Jason’s business was a completely in-person culture. We were more than 9-5, and had an in-office culture when COVID came. We grew from 190 to 750 people in the last two years to support revenue growth. Our goal was to increase revenue from $384 million to $1 billion last year. We’ve seen the difficulties of scaling culture 5x-4x.


We’ve supervised a lot of people remotely and it hasn’t been easy scaling COVID. To that end, we have taken immediate action to implement an RTO plan. This will allow us to get all our employees back into the office 5 days per week. I wish I could say that everyone on our team agreed with this.


There has been a lot of turnover, and we have had to struggle to get people back into work. It has been difficult. It’s been challenging. I spoke to many other CEOs of companies and heard similar statements about the transition from a work environment at home to an office environment.


However, I believe that if we want to be creative and have the type of company that generated our IPO, then we must get people together. It is too difficult to explain to people a new system or a new business area we are creating remotely. It’s impossible to achieve it quickly enough, or at a level that is beneficial for our business. We have taken the dramatic step of immediately going to RTO, 5 days per week, in our office.




Clark Lampen, BTIG, asks us our next question.


William Lampen


I had some questions. Andrew, first, I want to return to the cheating issue. You said that you wanted to address the issue and instill confidence amongst, if I may say so, the cleaner players on the platform. I was curious to know how you would be able to accomplish this.


The release also included a comment about growing profitably in 23. I was curious if you could clarify if that means that we should expect a quarter of profitability. Maybe improving incremental margins.


Also, when Skillz is returning to a position where you are growing at a rate you want and seeing the payback time, you would like to know what capital investments will be required in the short term. As you mentioned in prepared remarks, product development was one of the short-term hiccups. It was a lack of efficiency and quality products coming out of the team. What can you guys do?


Andrew Paradise


Sure. Let me think that we should first try to recap it a bit for everyone listening. Let’s start with cheating. Can you elaborate on this and explain what we are doing to reduce it? Profitability is the second. What can we expect for 2023 and beyond? Third, capital investment is necessary to create the products we need to succeed. So let me hit cheating first.


There are many ways to make it more difficult for someone to create duplicate accounts or defraud the system.


This is one of our top priorities, so we have an identity team that implements a variety of things. However, everything is industry-standard like 2-factor SMS authentication. It’s important that the phone number is real and not just a fake one on a laptop. There are many ways we can force identity down to one person, rather than someone being able more easily to pretend to be several people.


This is just one way we enforce and change the system’s fraud and cheating capabilities. There are many more, and I would be happy to talk with you offline about the things that we’re doing. If I can achieve profitability, then what should we expect quarter-to-quarter? Ian, I’d love to discuss the numbers and where we are looking for 2023/2024.


Ian Lee


Yes. Thanks, Andrew. The key to my opinion is that we will continue to focus on improving efficiency and reducing costs for all of our clients past 2022 and beyond. Unfortunately, we haven’t yet provided a guideline. As we have discussed, the goal is to breakeven by 2024. This means that there will be continued improvements over the next year. We haven’t yet provided any details on the margins in 2023.


Andrew Paradise


The third is capital investment, which we will need to make in the short term. This was already included in our financials. We are determined to make our business meter beat in terms of financials. This is the worst thing for us.


It has been moving away from that and the missing revenue forecast. Let me mention that we exceeded our expectations in the first half of this year when it comes to cost. We spent more than we claimed for the first six months. We can control our costs, and that is what we are focusing on. It is impossible to control the results of our product development and experimentation investments.


I can assure you that I am going back to overseas with a greater level of investment than we have made in product development. We’ll be revealing more details in the coming days. With the amount of investment that we are making in product development, and my experience in building new products for clients, it is definitely one of the most beneficial uses of my abilities. Casey, do you have any other ideas?


Casey Chafkin


Clark, just a quick question on cheating. Andrew has made a good point. I think cheating is often equated with hacking or hacking the games to gain an unfair advantage. However, friendly fraud is what we consider to be much more controllable in payments. This includes people who use discount codes and incentive marketing programs such as the friend referral program.


This creates geographic restrictions for these programs. allowing these programs to be more targeted. These are all things we already do to reduce expenditure on unprofitable revenue streams. The most common type of cheating we are referring to is the one that tries to get more player matching system or identity. They then ensure that there’s only 1 account per device. We can control how many accounts are created for each person. This will increase both the quality and quantity of our income as well as the quality of the cohorts we have going forward.


Andrew Paradise


And just to add to Casey’s comment, which was that I do — I would like to point out that per-account fraud and cheating technologies that I built work quite well. Multi-account and Spoofing are a different kind of attack. Our defenses are clearly not strong enough. We’re working immediately to fix this.




Brad Erickson, RBC Capital Markets, asks us our next question.


Bradley Erickson


First, I think it is about profitability. Maybe we can forget about the cheating commentary. You could talk about the new products and/or characteristics, even if they aren’t new products that you are working on. This will help you drive better retention over time.


Andrew Paradise


Sure. Brad, thank you for your question. In terms of retention, how are we changing? Actually, I believe that one of the first things we do is to revert and remove product features and experiments that don’t support a wider rollout.


It’s not about creating new products. It’s the product features and experiments that were introduced that were not supported by deep data analysis. These features and experiments are already improving LTV by being rolled back.


Although it pains me to admit that we are paying for undue work we didn’t do, that’s the reality of where we are now and what we did first. We haven’t been able invest our dollars in product development as efficiently since I quit a direct engagement on product design to focus more on the company’s public listing as CEO. We’ve been working on new features, such social technology, improving our lease technology, and refreshing our product experience core loop. Execution of each of these tasks is just as important to improve LTV as actually building them.


It’s — I don’t like to say that it’s so detail-oriented, but it’s an issue with product development. I believe we are missing key product requirements in each of these features. They need to be carefully revised to generate the LTV we expect from these features.


And I’m there, doing it with the team. We are solving problems that go back to basic product development, which is what we need right now in our company. The best way to look at this is that our current plan is to bring our cohort strength back to the level it was before our March 2020 IPO.


And that’s what I’m moving us towards — pre-pandemic, prior-IPO cohort strength. That’s a reasonable goal, but it’s a significant step up from the current product.


Bradley Erickson


Yes. It’s there. Ian may have a question. Ian, although I don’t think the filing has been completed yet, I believe you guys have a balance sheet of customer funds that contains $4 million to $5 million each quarter. Then, I believe that around 80% of the GMV is generated from customer accounts. This would imply that customer turnover is 100 times or more per quarter. Could you please explain the math, how it works and any mistakes we might have made?


Ian Lee


Yes, that’s not — I think you appreciate the question. We discussed it a bit before, that people are using new funds to play. They are using funds from the system that they already have and previous winnings.


As you can see, the funds are quite limited. It’s between $4 million and $5 million. This is because people deposit money, but then use it to play games.


They’re now using their previous winnings from the platform to continue and enter games. Andrew and Casey will be able to talk to you if you need more.


Casey Chafkin


Yes. Brad, it’s not about the multiple turnovers of funds. It is more about the fact that Skillz is no longer used as a long-term storage account. Players aren’t spending a lot of money in their Skillz accounts and leaving it there for long periods of time. Players are adding money to their Skillz account and then eating that money through the competitions they participate in.


It’s something people have highlighted, and it’s one we believe is a long-term opportunity for the business. We recommend that people keep a higher account balance in their accounts. Then, we could make money from that money the same way as insurance companies. The reality is that people deposit money with credit cards and then play through it in real-time.


Bradley Erickson


It’s there. That’s helpful. Then maybe one follow-up. I am sorry I missed the call. Andrew’s opening remarks were missed by me, but I was curious if we could use any portion of the guidance reduction to indicate how much of the business it represented. Maybe percentage-wise? It’s a way to see how far we have come.


Andrew Paradise


We are far from done cleaning. We have a good understanding of the problem’s size and the best way to solve it. The first thing we do is understand the problem and then size it. As such, I believe that the revised guidance is accounting for reducing everything to a normal level of — there are always bad actors in any business.


You just have to keep it under a threshold, which is too high. If a retail store’s shrinkage exceeds 1%, it could bankrupt the business. We are seeing a lot of bad actors in our business. They’re also disrupting the experience for the good customers, the ones who are paying good money.


You can remove unprofitable revenue and solve the duplicate account problem. You can also increase the engagement and retention of customers who come to your store just to buy and use analogy.


It would have been fantastic if we could have caught it earlier. The next step after solving the problem is to improve our systems for faster detection of such issues as we scale up and continue cleaning.




[Operator Instructions]. Next question is from Ed Alter and Jefferies.


Edward Alter


I wanted to dig a little deeper into the payback period, so I can see where that’s coming. I also want to look at the CPI side. I know it’s been difficult in the past year. Is it more about moving spending back to the [indiscernible] quicker?


Andrew Paradise


Ed, thank you for your question. Although I believe I understood you, it was a bit difficult to hear you. However, I believe you stated — you asked — that your questions were about the payback period, and where is the opportunity. If I understand it correctly, is it lowering CAC? Or improving LTV?


Edward Alter




Andrew Paradise


We think both. We have been reducing inefficient user acquisition programs. Now, we have the highest CAC in years. We will only get better.


LTV decay is primarily due to disruptions in retention. We’ve also talked about cheating. Also, we’ve been discussing product features that unfortunately have led to lower LTV than higher LTV where data integrity was maintained around the testing of product features that were used to roll out a test feature.


So what we are doing is that we’re reviewing any feature or program that was rolled-out as we see the decay in LTV. We’re basically running the data again and verifying if it’s a valid good modification to our products. This allows us to quickly return our LTV to the levels we were proud of, as we approach our IPO.


Both sides have potential. That’s a great question Ed. Casey, would you be willing to comment specifically on CAC?


Casey Chafkin


Ed, I actually meant to say that this is what’s most exciting about us right now is that our CAC is at our local low point — something we haven’t seen since the beginning COVID. We still believe there’s an opportunity to drive it lower through optimization of app stores through investment in organic channel development and continued media optimizing. We think we can bring down our customer acquisition CAC even further.


On the LTV side of things, although we believe in the development and expansion of leagues and other features, continuing investment in social media is something Andrew believes in. We can increase LTV by simply returning to the user programs we ran 12 months ago. This will allow us to move that return-on-investment calculation and payback in.




No further questions are being asked at the moment. For closing remarks, I will pass the call to the management team.


Andrew Paradise


We are grateful to everyone who participated in our Q2 2022 earnings conference. Your support is greatly appreciated. As always, we will continue to work towards the future of competitiveness. We will speak to you at the Q3 earnings call. Until then, we thank you.