Thank you for joining us today for Skillz Third Quarter 2022 Earnings Call. I will now turn the call over to [indiscernible] to cover the safe harbor.

Taylor?.

Good afternoon, and welcome to the Skillz third quarter 2022 earnings conference call. With me today are Andrew Paradise, Skillz Chief Executive Officer; Casey Chafkin, Chief Revenue Officer; and Jason Roswig, President and Chief Financial Officer.

Note, our full financial results were published earlier today and are available on our Investor Relations website. Before I turn the call over to Andrew, please note that some of our management's comments today will include forward-looking statements within the meaning of the federal securities laws.

Forward-looking statements, which are usually identified by the use of such words 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 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 we believe 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. A reconciliation of these measures to the most directly comparable GAAP measures is available in our third quarter 2022 earnings release. With that, I'll turn the call over to Andrew for some brief opening remarks.

Andrew?.

Good afternoon and thank you for joining us. Today, I'll touch upon the quarter and update you on our initiatives to reaccelerate growth and improve the bottom line. Then I'll turn the call over to Jason Roswig, our new President and CFO, to quickly touch on the numbers, before we open up the call for Q&A.

Clearly, Skillz is in the time of transition as we right size the organization. During the quarter, revenue continued to be impacted by both the macro environment for mobile gaming as well as some of the internal product and organizational challenges that I referenced last quarter. Conversely, we made good progress in our march to profitability.

We reduced adjusted EBITDA by 51% quarter-over-quarter, while improving our payback period through better platform engagement and retention. We also made many difficult strategic changes within the organization to better align talent with our desired business outcomes. So there's no quick fix.

The path to reaccelerating growth is now well defined across the company. We've identified the things we can and cannot control and have a plan in place to address those that we can control. We are focused on four key pillars to enable us to return to durable growth and long-term profitability.

Our first pillar is enhancing our platform to improve customer and developer engagement and retention. I've taken back the helm of the product organization, and I'm working closely with our new CTO, Vassily Filippov, most recently, a Director of Engineering at Meta, who has already dug in to make crucial contributions to the platform.

We're rolling back at some product changes that were unsuccessfully introduced over the course of the prior 18 months and are returning to our foundation of rigorous split testing and disciplined product rollouts. From a product perspective, cloud gaming is on target.

Our present concept shows we can offer our game-streaming technology that will provide an experience comparable to a native iOS or Android game. We're currently AB testing to ensure we have the right onboarding experiences for new cloud players as we look forward to a full launch.

Our core user and live streaming experiences are proceeding on or are ahead of plan, with favorable results from redesigns to Cube and our limited time live ops launches, including Sweepstakes, Chase Trophies and Blitz Mobile.

We're always looking for ways to better help our developers scale their content as we bring on new developers and brand partners of all sizes, including the NFL and UFC, who while very early days can leverage our platform to market their games.

In the quarter, we launched new tools to support more successful launches and improve developer support infrastructure and processes. Clearly, the success of our partners is our success, and we will continue to improve the tools we provide to these key constituents. Our second pillar is up-leveling our organization.

During this time of transition, it's crucial that each and every employee embraces the Skillz vision and commits to reigniting our potential. During the quarter, we performance managed the organization and further reduced headcount to ensure this alignment.

Our headcount now stands at a little more than half of what it was a year ago through thoughtful and deliberate decisions on structure. So these changes were difficult. The existing team is fully capable of and focused on returning value to our players, developers and shareholders. In the quarter, we also began our return to office.

It's essential to our success as a team to be in lockstep, which, given the magnitude and the complexity of the path ahead, can really only happen in person. The new talent that we're carefully adding understands that we must work swiftly and efficiently to fix the challenges that we've identified.

To this end, we've added some key hires across the company during the quarter, including Vassily, who I just mentioned, to restore the culture of innovation that Skillz was built upon. We are also restructuring the RT team and expect to announce some important and compelling hires there in the next quarter.

Additionally, we've added two new Board members, Henry Hoffman, an experienced Portfolio Manager at SL Advisers; and Seth Schorr, a seasoned gaming executive. These strong experienced operators and advisers will be key as we make the tough decisions that we're building the company requires.

Our third pillar is our go-to-market, where we're focused on improving customer engagement and monetization through efficient spend.

By reducing end-user discounts that were not driving profitable growth, becoming more granular in our UA spend and increasing organic traffic through owned communication channels, we believe we can return our user acquisition payback period to the six months that we discussed on our IPO roadshow.

Though it's early days, we've already reduced the payback period, which had grown unacceptably long, by over 25% this quarter alone. The most exciting part of improving the ratio of LTV to CAC is their improvements this past quarter were from improving LTV as opposed to purely saving on acquisition costs.

We are seeing early signs that the new cohorts are performing much better than in recent quarters, and we are working hard to reengage the prior cohorts where we've seen churn. Our fourth pillar is straightforward, demonstrating a clear path to profitability.

I'll let Jason cover the details, but you can see in the numbers that we are focused on reducing expenses while steering toward a return to growth. We're looking at every single line item of spend to justify its potential return, and we'll continue to do so with an eye towards efficiency and productivity.

In the meantime, we have over $0.5 billion in our war chest as we navigate a return to growth. Our mission of bringing out the best in everyone through fair competition and the patents that differentiate our gains of skill versus those of chance hold us true today as they did when we first went public.

We are reinvigorated with the potential of our mission and the opportunity to enable developers to monetize their games while allowing our players to improve their skills and to compete in a thriving ecosystem. We have lots of work ahead, but a much clearer vision and the united team. We are energized to tackle these challenges ahead.

We look forward to updating you on our progress going forward. And with that, I’ll turn the call over to Jason to summarize the financials.

Jason?.

Thank you, Andrew. As many of you know, this is my first earnings call with Skillz. I joined the team in early August from Blackstone, well aware of the many hurdles we face. Now, only three months in, the team and I are focused on implementing a restructuring of people and processes.

What I’ve seen in my first quarter with Skillz validates the reasons I joined. The opportunity ahead is enormous and untapped and we are all rolling up our sleeves to make it happen. It will take some time to address the four pillars and to lay it out.

So this quarter we opted not to do a shareholder letter as we reconsider how we communicate with investors. Instead, I’ll quickly cover the numbers and we’ll open the call for your questions.

Revenue was $60.3 million, down 41% year-over-year and down 18% sequentially, driven by declines in paying MAU as a result of planned pullbacks and advertising and incentives. Our payer conversion rate, which is our paying MAU, divided by our MAU was 19%, two percentage points higher than prior year period, and consistent with a prior quarter.

UA marketing was $18.6 million, a decrease of 66% year-over-year and down 39% sequentially. Engagement marketing was $23.8 million, down 52% year-over-year and down 22% quarter-over-quarter. Research and development was $8.4 million, down 37% year-over-year.

This includes $1.1 million in restructuring charges offset by $2 million credit of stock-based compensation due to employee departures. On a non-GAAP basis, R&D was 15% of revenue, up four percentage points year-over-year and down four percentage points quarter-over-quarter. Sales and marketing was $51.8 million, down 55% year-over-year.

This includes $2.1 million of stock-based compensation and $0.2 million in restructuring charges. On a non-GAAP basis, sales and marketing was 82% of revenue, down 28 percentage points year-over-year and down 14 percentage points quarter-over-quarter. General and administrative was $20.3 million, down 58% year-over-year.

This includes $5.6 million in stock-based compensation and $0.7 million of restructuring charges. On a non-GAAP basis, G&A was 23% of revenue, up six percentage of points year-over-year, primarily driven by the organizational restructure. On a sequential basis, G&A as a percent of revenue was flat.

Net income of negative $78.5 million, was down $129.3 million year-over-year and down $18.4 million or 30% sequentially due to the impairment of intangible asset impairment charges related to our developed technology and customer relationships. In Q3 2022, adjusted EBITDA was negative $15.4 million, up 63% year-over-year and 51% sequentially.

This was primarily driven by decreases in UA and engage in marketing spend, as well as the restructuring.

Adjusted EBITDA for Q3 2022 excludes the impact of $63.1 million of adjustments of which $47.6 million were from impairment of intangible assets, $13.7 million from other non-cash or non-recurring items, and $1.9 million from restructuring charges. Adjusted EBITDA margin of negative 26%, was up 15 percentage points year-over-year.

On a sequential basis, adjusted EBITDA margin increased by 18 percentage points. We do not expect to raise additional capital before bringing the business to break even. Our strategy is to use our capital to get to break even and then run an EBITDA break even as we invest aggressively to capture the 100 billion plus market opportunity in front of us.

We ended the third quarter with $558 million of cash, cash equivalents and marketable securities and $289.5 million of debt outstanding providing us with a long runway to execute against the initiatives Andrew discussed above. Turning now to guidance, we are maintaining full year 2022 revenue guidance of $275 million.

Our revised guidance assumes engage of marketing as a percentage of revenue of approximately 41%. For UA marketing, we expect to spend in the range of $12 million to $16 million next quarter. We expect to achieve a full 2022 adjusted EBITDA margin of approximately negative 56%. I’m excited to be part of the Skillz team during this watershed time.

And as Andrew said, look forward to updating you in our progress going forward as you look to once again return shareholder value. With that, we’ll take your questions.

Operator?.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Jason Tilchen with Canaccord Genuity. Your line is now open..

Thanks for taking the question. In the press release, you talked about rehauling the go-to-market strategy. And I was just wondering if you could maybe spend a minute expanding on that.

And how much of that is simply reducing some of the inefficient spend that you've talked about, the strategy that's been in progress versus the using different marketing messaging, you see different channels. Maybe just if you could touch on that that would be great. Thanks..

Thanks, Jason. That's a great question. This is Andrew. So, overall, we've been dialing back these acquisitions. We've reduced it pretty substantially quarter-over-quarter as we're really accelerating on migrating more of our spend over to Aarki.

In terms of new channels, I'm not sure Casey, do you want to add anything in commentary that we want to share at this time..

Jason, this is Casey. Thank you for the question. The big focus for us is just improving the efficiency of our operations overall. And so we think there's both opportunity to increase our customer lifetime value and continue decreasing our customer acquisition costs.

And that is in a radical shift in what we're doing versus continued progress on the things that we talked about last quarter..

Okay, great and then just one quick follow-up. The last two quarters, revenue after engagement marketing was the big part of the messaging that you guys had put out on the earnings calls and in the shareholder letters.

And I'm just wondering if the absence of that from the press release this time around was anything in particular? And does that signal a potential shift away from that metric? Or anything you could share on that would be greatly appreciated..

Yes. That's a great question, Jason. And I'm only struggling a little bit because we were specifically instructed to discontinue that metric by the SEC. So, we are not using – we're not going to be reporting that metric. You can still pretty much calculate it and look at it yourself.

But we still think considering revenue in the context of engagement marketing is the right way to think about the profitable growth of the business. When you think about the changes in our revenue quarter-over-quarter, revenue declined $13 million, while adjusted EBITDA actually improved by over $16 million.

And so any time we can trade $1 in revenue for $1.23 of EBITDA, we want to make that trade. And it's really the changes in our top line revenue and the overall structure of our P&L are really focused around building profitable revenue as opposed to just growing revenue at all costs, as we talked about earlier in the year..

Great, thank you..

Thank you for your question. Our next line of questions comes from the line of one Clark Lampen with BTIG. Your line is now open..

Hi, thanks for taking the question. I've got one for Andrew and I've got one for Jason. Andrew, I wanted to see if you could talk a little bit more about the engagement pillar of the floor that you mentioned earlier. You talked about improvements in LTV relative to CAC.

Could you maybe drill down a little bit more on what you guys are doing now to build on that? Or what drove some of that improvement that you saw in 3Q? And then, Jason, very quickly.

I just wanted to make sure I understand you guys reiterated guidance for the year, which, I think based upon what you've reported year-to-date, would imply heavier EBITDA losses in the fourth quarter.

What, I guess, are we seeing there that's sort of driving a bigger maybe sequential step up? Is there a measure of conservatism? Or is there some planned spend that's more seasonal in nature or maybe something else? Thank you..

Awesome. Thanks for the question, Clark. This is Andrew, and maybe I'll just go first and talk a little bit about how we're driving up retention and engagement. So the – there are quite a number of things that we're working on, whether it's features around chat, leagues, redesign.

So really thinking about how the Meta game around computing can better engage players as we continue to scale our games or doing limited time live ops events that we've been launching and seeing really strong results.

I think one of the things I'd just say holistically, we really believe that having our team collaborate in person is a big part of returning to great results in our business. I think we're really excited about the potential for product leaded initiatives to continue to improve LTV quarter-over-quarter in the double-digit percentage range.

We are also looking at initiatives like card gaming that we announced in Q1, we think that's going to play an important role in helping us connect even more players with great teams in the future. And we announced that back in Q1 we actually are on or ahead of plan.

We advanced our cloud gaming initiative by releasing cloud versions, Solitaire Cube, 21 Blitz, and actually other games as well as A/B testing, so that you can really understand how to modify the onboarding experience, moving from an app environment, installed app environment to a cloud-based extreme, so web, mobile web, also distributing to devices for the first time like computer, like personal computers.

But it's a little hard to develop each of the different product changes and so I can't give you exactly which numbers compounded to drive the improvements in engagement and retention that improve LTV for the quarter, because it's a lot of little ideas that are kind of compounding everything from introducing like an example a new sweepstakes event that you can win an entry into certain types of push notifications triggered by on-system player behavior.

But it's just a lot of little ideas compounding. And I just – one of the things I'd say in returning to product one quarter in, it's the first quarter where we've grown LTV and actually in quite a number of quarters. And I just, I look around and I see so many opportunities to improve the system. It’s a very exciting time for me.

Let me hand over to Jason to talk a little bit about your second question..

Great. Thanks, Andrew. Clark, thanks for the question. I would say that, first of all, we fully expect to meet our expectations for full year guidance as we previously reiterated.

I would say that we are very confident as we are now going the fourth quarter of the year, but we also want to be conservative to ensure that we have a strong position to hit it. And as part of that we want to maintain optionality to ensure that we will hit it. So I would simply say that we’re fully on track and we’re fully intend to hit it..

Great. That’s helpful. If I could just, I guess, weave in one more maybe sort of bigger picture around the operating environment right now.

I think there’s been sort of some discussion that’s been a persistent team throughout earnings so far around whether or not we’re seeing sort of sequential degradation throughout the year in terms of engagement spending and sort of player activity in the mobile ecosystem.

Is that something that you guys have seen? Is that reflected in guidance and is there a chance you think that sort of persists into 2023?.

That’s a great question, Clark. From a player retention engagement monetization standpoint no, that isn’t something that we’re seeing at a cohort level.

We definitely, when we scaled really aggressively on building cohorts between advertising as well as a lot of engagement marketing experiments kind of last 18 months up until this quarter and those cohorts are definitely overall just weaker as a business.

And I think – but I think that’s built into our forecasts, our cohorts prior to that period and post that period. I think unarguably showing very similar characteristics to what they’ve always shown.

Jason, do you want to add to that?.

Yes, Clark, I would just say that, I think a lot we’re seeing is the impact of Andrew stepping back into the product. And it’s very exciting for us. So I think that as we go into the first quarter next year, we are very optimistic we’re to continue to see positive business improvement sort of by our product enhancements..

Thanks a lot..

Thanks for the questions..

Thank you for your questions, sir. Our next line of questions comes from line of Brian Fitzgerald with Wells Fargo. Your line is now open..

Yes, this is Michael [indiscernible]. Just curious what you guys are seeing in terms of utilization of Aarki data. Our customers leaning on it more or less as ATT plays out.

Has there been any attrition or pullback of spend post-integration? And then also curious to what extent you’re seeing cost savings as you integrate Aarki and leverage that internally. Thanks..

Thanks for the question, Michael. That’s – I think that’s very near and dear to our heart, especially with the impairment we had to report this quarter. So a bit painful considering, I think the revenue multiple we paid on acquiring Aarki is frankly superior to the revenue multiples that many acquisitions were close in the space.

In terms of the integration between Aarki and Skillz competition business it’s still early days.

We are certainly looking at a situation where buying a DSP and integrating the data flow from the auction level where Aarki is participating approximately 5 trillion live auctions a month and integrating that all the way through end user LTV on games that, as you know, Skillz doesn’t own, but operates as a platform.

It gives us a very unique view on understanding from the auction level all the way to final user payment how are users behaving? Having said that, we’re being careful in terms of integrating the two businesses and moving very slowly. And I think a lot of that, Michael, the answer is because of all the operational issues we had in the last 18 months.

We are really taking an approach of ensuring that we protect the core business and then build very carefully on top of it while we clean up all of our operational issues. Jason or Casey, maybe Casey might like to comment a bit more as he’s been most recently managing the Aarki business for us..

Sure, Michael., Thanks for the question. I think Andrew hit it spot on that, our first order of business is making sure that the advertising platform that we acquired recognizes its true potential.

And I think that there are challenges in the ad tech industry as a whole that you can see in the stock prices of publicly traded companies which are down typically 70% to 80%. And on that basis, the impairment that we took on Aarki is comparatively modest, which I think speaks to the underlying strength of the business and the asset itself.

The synergies that we went into the acquisition with are absolutely still there. But the – in terms of an integrated data pipeline it’s very, very early for that for us still..

Awesome. Thank you guys..

Thank you for your questions, sir. [Operator Instructions] There are no more questions registered. So I would like to pass the conference back over to the management team for any closing remarks..

This is Andrew. I just want to thank the analyst today for the coverage and for engaging. We’re really excited about where we are as a business despite the macro and despite all the breakage in these last 18 months. I have to say as the CEO, I feel more invigorated than ever seeing the opportunity ahead of us.

We’ll look forward to meeting with all of you in the New Year to discuss our Q4 and full year 2022 results. Until then thanks to everyone for participating..

And with that, we will conclude today’s call. Thank you for your participation. You may now disconnect your lines..