Skillz (NYSE:SKLZ) Reports Sales Below Analyst Estimates In Q1 Earnings

Full Report / May 09, 2023
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Mobile game developer Skillz (NYSE:SKLZ) fell short of analyst expectations in Q1 FY2023 quarter, with revenue down 52.5% year on year to $44.4 million. Skillz made a GAAP loss of $35.6 million, improving on its loss of $148.1 million, in the same quarter last year.

Skillz (SKLZ) Q1 FY2023 Highlights:

  • Revenue: $44.4 million vs analyst estimates of $44.6 million (0.59% miss)
  • EPS: -$0.09 vs analyst expectations of -$0.07 (32.4% miss)
  • Free cash flow was negative $26.3 million, compared to negative free cash flow of $12.7 million in previous quarter
  • Gross Margin (GAAP): 89.7%, in line with same quarter last year
  • Paying Monthly Active Users (PMAU): 214 thousand, down 356 thousand year on year

Taking a new twist at video gaming, Skillz (NYSE:SKLZ) offers developers a platform to create and distribute mobile games where players can pay fees to compete for cash prizes.

Having gone public via SPAC in December 2020, Skillz provides a mobile gaming platform for developers to create and distribute games where users can pay fees to compete for real cash prizes. The company maintains that because winning is based on skill and not on chance, its games are not traditional casino gambling. However, some argue there is potential legal risk as the lines can sometimes be blurred.

Developers can use Skillz's software development kit (SDK) to add competitive multiplayer functionality and cash prize tournaments to their games, while players can compete against each other for real money. Skillz generates revenue by taking a percentage of the entry fees and cash prizes of each tournament. Game developers themselves can monetize their games through advertisements and in-app purchases. As a result of this dynamic, Skillz and game developers are incentivized to make games addictive to keep player engagement–which drives revenue–high.

Solitaire Cube is an example of a popular game on the Skillz platform. This game resembles the classic solitaire card game, but players can compete head-to-head or in tournaments against others for real money.

Since videogames were invented in the 1970s, they have gradually taken more share of entertainment time. Cheap, powerful computing and graphics chips have made ever more realistic versions of classic sports, driving and shooting games while also introducing immersive metaverse-like gaming. Ubiquitous mobile devices have powered a surge in “snackable” games that can be played on the go. Over time, games have developed more social engagement features where friends can play games together over the internet. The business models of games publishers have become less volatile due to digitization of distribution, in game monetization, and like Hollywood, an increasing dependence on surefire hit franchises. Covid driven lockdowns accelerated adoption and usage of videogames – a trend that has not slowed.

Competitors offering casual digital games that may feature casino-like activities include Skillz (NYSE:SKLZ), PLAYSTUDIOS (NASDAQ:MYPS), and Huuuge (WSE:HUG).

Sales Growth

Skillz's revenue growth over the last three years has been very strong, averaging 34.6% annually. This quarter, Skillz reported a rather lacklustre 52.5% year on year revenue decline, missing analyst expectations.

Skillz Total Revenue

Before the earnings results were announced, Wall St analysts covering the company were estimating revenues to decline 20.1% over the next twelve months.

Usage Growth

As a video gaming company, Skillz generates revenue growth by growing both the number of players playing its games, as well as how much each of those players spends on (or in) their games.

Skillz has been struggling over the last two years as the number of monthly active users, a key usage metric for the company, declined 29.6% annually to 214 thousand. This is a pretty significant decline for a consumer internet company.

Skillz Paying Monthly Active Users (PMAU)

In the number of monthly active users decreased by 356 thousand, a 62.5% drop year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Skillz it measures how much revenue each user generates, which is a function of how much paying users spend.Skillz ARPU

While its monthly active users shrunk over the last two years, the ability to increase price shows the value of Skillz’s platform for its existing users. This quarter, ARPU grew 26.5% year on year, reaching $207.40 for each of the monthly active users.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Skillz grow by a combination of product virality, paid advertisement or incentives.

It is very expensive for Skillz to acquire new users, with the company spending 97.8% of its gross profit on marketing over the last year. This low level of sales and marketing efficiency indicates a highly competitive environment, with little differentiation between Skillz and its peers.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Skillz reported negative EBITDA of $20.9 million this quarter, which was a -47.1% margin. The company is one of the least profitable consumer internet business and over the last twelve months Skillz has EBITDA margins of -34.5%.

Skillz Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Skillz burned through $26.3 million in Q1,

Skillz Free Cash Flow

Skillz has burned through $124.2 million in cash over the last twelve months, a weak -56.3% free cash flow margin. This extremely low FCF margin is a result of Skillz's capital intensive business model.

Key Takeaways from Skillz's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Skillz’s balance sheet, but we note that with a market capitalization of $257.5 million and more than $504.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We struggled to find many strong positives in these results. On the other hand, there was a decline in number of users and the revenue growth was quite weak. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $0.58 per share.

Is Now The Time?

When considering Skillz, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Skillz we will be cheering from the sidelines. Unfortunately, its sales and marketing spend is very high compared to other consumer internet businesses, and its user growth has been lackluster.

Skillz's price/gross profit ratio based on the next twelve months is 2.1x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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