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Operator: Good afternoon. Thank you for attending today’s Skillz Fourth Quarter 2022 Earnings Call. My name is Francis, and I’ll be your moderator today. I would now like to pass the conference over to our host, Taylor Giles.

Unidentified Company Representative: Good afternoon, and welcome to the Skillz fourth quarter and fiscal year 2022 earnings conference call. With me today are Andrew Paradise, Skillz’ CEO; Casey Chafkin, CRO; Jason Roswig, President; and Alvin Lobo, CFO. 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 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 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 figures, 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. The reconciliation of these measures to the most directly comparable GAAP measures is available in our fourth quarter and fiscal year 2022 earnings release. With that, I’ll turn the call over to Andrew for some brief opening remarks before opening for questions.

Andrew?

Andrew Paradise : Good afternoon, and thank you for joining. Let me turn now to giving you an update on the four pillars we laid out last quarter to return Skillz to growth and, in 2024, to profitability. Our first pillar is enhancing our platform to improve customer and developer engagement and retention. We’re focused on the core strengths that helped us grow the platform since Skillz first begin. In the fourth quarter, we made solid progress on our product initiatives, including the following features for consumers and developers. For consumers, first, we added features designed to reduce player friction and increase deposits. Second, we released a new SDK to drive additional UA efficiency. And third, we released features for paying players to reduce player friction and generate an increase in ARPPU or average revenue per paying user.

For our developers, first, we shipped Skillz Brick Breaker to teach new developers how to use the Skillz SDK and an in-Unity API simulator, reducing 90% of the development time spend waiting for . Second, we also launched Skillz Unity SIDEkick to shorten iteration time for developers. Let me now turn to our second pillar, which is up-leveling our organization. Since August, when we finished the organizational restructuring, we’ve made significant progress in staffing the right people with the right backgrounds into the right roles. We’re not yet fully staffed. However, we have strong conviction that we’ll continue to hire talented and motivated individuals across the company. We’re thankful to all of our Skillz employees for last year for their perseverance and enthusiasm to take our company forward in the middle of a challenging restructuring.

Having covered all of that, I’d like to welcome Alvin Lobo, who joined us as CFO just last month. Alvin comes with a broad and deep experience in the gaming space with prior roles in public companies, including, most recently, as CFO of Score Media and Gaming through their successful sale to Penn Entertainment. He also held senior finance roles with Boyd Gaming and Wynn Resorts. Alvin will be partnering with Jason Roswig, who is now serving as Skillz President, as well as with myself, to drive the strategic initiatives that we believe are necessary to move the company forward. We’re very excited to welcome him. Moreover, as I told you last quarter, our CTO, Vassily Filippov, has made a big impact in a short time. He’s now joined by Brendan Vanous, our new Head of Customer Success, who joined us in January from Microsoft, where Brendan was the Head of Customer Success for PlayFab, which is a-white label gaming infrastructure product at Microsoft.

Brendan has joined us to work with our developer customer community to provide a direct pipeline of feedback, ensuring our R&D efforts are in lockstep with our customers’ needs. Combined with the rest of the executive team, we are continuing the work we began last summer of returning Skillz to being a high-performance product development culture. Next is our third pillar, which is improving our go-to-market. We’re pleased that this quarter, we improved our payback period, compounding on top of last quarter’s improvement. We expect to scale marketing if we’re able to continue to drive down payback periods. Additionally, we’re enhancing the efficiency of our engagement marketing through higher frequency, lower cost engagement marketing efforts.

Our new of SDK is expected to reduce user acquisition costs further. We’re improving customer retention through product and content acquisition improvements. All this combined, these wins are giving us confidence that we can deliver attractive returns for our developers. Our fourth pillar is straightforward, demonstrating a clear path to profitability. I will let Jason talk more about our numbers, but we’ll share that we continue to make progress here and intend to continue to progress through 2023, as we thoughtfully consider each and every investment with the goal of positive adjusted EBITDA by the end of 2024. Before I turn the call to Jason, I want to acknowledge that 2022 was an incredibly challenging year as we scaled to meet investor expectations.

We recognize that we have to demonstrate our progress through the numbers, which we expect will take four to six quarters to fully turn. The new team is up to the challenge, and we’ll continue to update on the milestones achieved as we move through the year while being mindful not to overpromise. In the meantime, we have a strong balance sheet to support thoughtful investment as we work to return our business to growth. Jason?

Jason Roswig: Thank you, Andrew. We are in the early stages of our turnaround plan, and while I’m confident we will be able to seize the enormous market opportunity before us, I know there is a huge amount of work ahead of us. I’m pleased that Alvin will be joining the team to help in this endeavor. While not simple or quick, we are making slow and steady progress. Before I dive into the financials, as disclosed in our filings, we have had a restatement. The primary drivers of the restatement stemmed from two issues. One issue relates to a treatment of indirect taxes, which is a result of our growth over the past few years, into more and more jurisdictions, coupled with the evolving tax laws and regulations that, together, have increased the company’s exposure over time to indirect taxes.

The other issue relates to an error in our end-user liability balance, which is included in other current liabilities on the balance sheet. This error was a result of a design deficiency and a reconciliation process for the end-user liability balance. We are addressing both of these issues and evaluating our overall reporting process to prevent future issues. Although the errors that resulted in restatement were deemed material, we note that the resulting adjustments to our revenues for the period affected by the restatement ranged from less than 1% to less than 3%. Our 10-K will provide greater detail on these facts. With that said, let me turn to the numbers. Revenue in the fourth quarter was $46.9 million, down 57% year-over-year and down 21% sequentially.

Full year revenue was $269.7 million, down 29% from 2021, driven by declines in paying MAU as a result of planned pullbacks in advertising and incentives. Our payer conversion rate, which is our paying MAU divided by our MAU, was 18% in the quarter and 18% for the year. Fourth quarter UA marketing was $9.4 million, a decrease of 89% year-over-year and down 49% sequentially. Fourth quarter UA marketing was $9.4 million, a decrease of 89% year-over-year and down 49% sequentially. Full year UA marketing was $117.3 million, down 51% relative to the previous year. Q4 engagement marketing was $19.7 million, down 66% year-over-year and down 17% quarter-over-quarter and hit $117.4 million for the year, down 38% year-over-year. Research and development was $7.4 million in the quarter, down 53% year-over-year and $52.3 million for the year.

On a non-GAAP basis, R&D was 12% of quarterly revenue and 17% of yearly revenue. Q4 sales and marketing was $34.5 million, down 78% year-over-year, and $277 million for the year. This includes $2 million of . On a non-GAAP basis, sales and marketing was 69% of Q4 revenue, down 72 percentage points year-over-year and down 14 percentage points quarter-over-quarter. Q4 general and administrative expense was $22.5 million, down 34% year-over-year, and $163 million for the year. This includes $7.2 million in stock-based compensation. On a non-GAAP basis, Q4 G&A was 33% of revenue, up 16 percentage points year-over-year, primarily driven by the organizational restructuring. On a sequential basis, G&A was up 10 percentage points as a percentage of revenue.

For the full year, G&A was 25% of revenue. Net loss of $143.5 million increased $43.1 million year-over-year and increased $60.3 million or 72% sequentially for the fourth quarter, while full year net loss was $438.9 million, which was an increase of $251 million year-over-year. Q4 2022 adjusted EBITDA was negative $9.5 million, up 88% year-over-year and up 42% sequentially. Full year adjusted EBITDA was negative $122.4 million, up 35% from the year prior. This was primarily driven by decreases in UA and engagement marketing spend as well as the restructuring. Q4 adjusted EBITDA margin of negative 20% was up 53 percentage points year-over-year. On a sequential basis, adjusted EBITDA margin increased by 8 percentage points. Fiscal year ’22 adjusted EBITDA margin of negative 45% was up 4 percentage points year-over-year.

As I said last quarter, we have a strong liquidity position, and we do not expect to raise additional capital to reach breakeven. We ended the year with $547 million of cash, cash equivalents and marketable securities and $273 million of debt outstanding as we continue to execute across the initiatives Andrew discussed prior. Because of the uncertainty in the market and the steps we are taking to rebuild the financial infrastructure and our team, we will be suspending guidance. Again, we are confident we are taking the right steps to return to growth, but the short term is difficult to forecast. Thank you for joining today, and let me reiterate our belief in the Skillz platform customers and employees. With that, we’ll take your questions. Operator?

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Operator: Our first question comes from the line of Jason Tilchen with Canaccord Genuity.

Jason Tilchen : I have two. The first one is just on the marketing reduction. It’s opening day, so I guess, we’ll go to a baseball analogy. What sort of inning do you feel like you’re in, in terms of that process? You mentioned the improving payback periods and that you will get — you’re gaining confidence that you’ll scale that marketing, but how far away are we are seeing that sort of force you back into increases in spend? And then the second question is, is just any update that you could give on the cloud-based gaming initiative that was highlighted at the Investor Day last year.

Andrew Paradise : Great. Thanks, Jason, for the question. This is Andrew. I think Jason Roswig is probably the best person to talk about our financial investment to use our acquisition. Jason Roswig, would you like to answer?

Jason Roswig: Absolutely. Thank you for the question, Jason. I think that to answer your question on where we are on our overall marketing and user acquisition spend, we feel as though last year, we had a very successful effort in gradually reducing our user acquisition spend to a level that we believe will prepare us for profitable growth going forward. We believe that fourth quarter was the market which we believe we’ve now reached a stabilized point. Now going into the first quarter of this year, we believe we are now effectively deploying our strategy of targeting an ROI approach to a user investment, such that our target is a 3x ROI in three years. I would say a little bit of a lot of work on products this year to optimize or use the aviation cost will go in LTV.

I would say, similarly, we expect our engagement marketing to decline as a percentage of revenue over time, and we achieved a significant reduction in engagement marketing as a percentage of revenue by eliminating lower-term programs. We intend to continue that trajectory throughout the course of this year.

Andrew Paradise : Great. Thank you, Jason Rowsig. I think the second question was about cloud-based gaming. Happy to give an update there. We are in beta as expected. We are testing a handful of games right now, primarily in running web-based games that were actually originally built for mobile. And the — I think the benefit there is that we can take advantage of much lower CPM advertising that was built around web-based games and overall web-based products versus buying mobile advertising. But we really can’t give any guidance right now on what that will look like and how it will impact your P&L as it’s still early days.

Operator: There are no questions waiting at this time. So I’ll now pass the conference back over to Andrew Paradise for any additional remarks.

Andrew Paradise : Thank you all for taking the time to join us today. We look forward to providing an update on our continued progress when we report our first quarter results. Till then, have a great day. Thank you, everyone.

Operator: That concludes the Skillz Fourth Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.