Skillz Inc. ($SKLZ)

Good afternoon, everyone. I'd like to welcome you to the Skillz Inc. First Quarter 2026 Results Call. At this time, I would like to turn the conference over to your host, Joe Jaffoni, from JCIR to begin.

Good afternoon, everyone. Skillz issued its 2026 first quarter earnings release on May 15 which is available on the company's Investor Relations website. Let me read the safe harbor language, and then we'll get right into the call. All statements and comments made by management during this conference call other than statements of historical fact, may be deemed forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Skillz cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those reflected by the forward-looking statements made during the call. For additional details on these and uncertainties, please see Skillz annual report on Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange Commission and Skillz subsequent public filings with the SEC. Skillz undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, we will reference various non-GAAP financial measures and KPIs during this call. Please refer to our earnings release for an explanation of these measures and how we use them and in the case of the non-GAAP financial measures, reconciliations to their nearest GAAP equivalents. It's now my pleasure to turn the call over to Skillz CEO, Andrew Paradise. Andrew, please go ahead.

Thank you, Joe, and good afternoon, everyone. I'll begin today's call with a review of our first quarter results. For the first quarter, GAAP revenue was $29 million, down 3% quarter-over-quarter and up 33% year-over-year. Adjusted EBITDA loss was $13 million compared to a loss of $10 million in the fourth quarter. The increase in adjusted EBITDA loss was driven by higher litigation-related expenses during the quarter. Importantly, excluding litigation-related expenses, adjusted EBITDA in Q1 2026 improved to a loss of $7 million representing a 15% improvement quarter-over-quarter on a normalized basis. At RZR, adjusted EBITDA was $2 million, marking a third consecutive quarter of profitability. We expect this improvement in underlying profitability across our portfolio as we continue to move into the second quarter. Paying MAU for the Skillz platform was 128,000, down 9% quarter-over-quarter and up 3% year-over-year. This quarterly sequential decline in PMAU was partly driven by a decrease in UA spend, resulting in fewer new user cohort additions. While top line PMAUs decreased, we're encouraged that retention across our more mature cohorts improved from the previous quarter. This reflects a healthier platform demonstrated by our 7% quarter-over-quarter increase in average revenue per paying user. Moving to our initiatives and an update on our litigation against the Papaya Gaming. In April, unanimous jury in the U.S. District Corp. for the Southern District of New York found Papaya liable for false advertising under the Lanham Act, and deceptive practices under New York law. Boarding Skillz $420 million in actual damages, the largest false advertising award in U.S. history under the Lanham amount. The jury also made advisory findings supporting disgorgement of either $719 million based on Papaya's profits or $652 million based on Papaya's cost savings. These alternative theories will not be added together. The court will determine whether to aboard disgorgement and if so, the final amount. It may accept, modify or decline in advisory finance entirely ensuring there is no due recovery where actual damages and disgorgement overlap. Under the Lanham Act, the court has the ability to enhance the actual damages award by up to 3x $120 million. For any disgorgement, the court chooses to award, there is no cap on enhancing. In simple terms, the total potential award ranges from $420 million to over $1.2 billion, depending on the court's determination on disgorgement enhancement. To understand what this verdict means for the category we pioneered, it helps to understand some of the why. Skillz founded the based competitive gaming category as a single premise. The players compete fairly against real human opponents for real prices. As the category grew, we saw competitors gaining market share in ways that defied explanation. This turn to what we believe to be taught. We had used the legal system to fight back on behalf of our players and our shareholders. While we allege against one of these competitors was confirmed by Papaya's own internal documents. Bots were being deployed at scale. Bot scores determined the outcomes, and none of it was disclosed to the players. I remind you, we've taken this path before. In 2024, a federal jury found AviaGames liable for patent infringement and awarded [ $42.9 million ] in damages. We subsequently pursued a separate false advertising cases against Avia and the 2 cases ultimately sell together for $80 million. We applied those learnings and brought Papaya to trial and false advertising rounds directly. The evidence of trial is clear, Papaya outnumber human players. Across tournaments advertising, approximately $6.7 billion in prices, only about $2 billion was actually paid to real users, moving roughly $4.7 billion in "imaginary money," a term used by Papaya's own defense counsel was never paid to human players. The jury's verdict confirms that these practices violate the Lanham Act false advertising standards. We founded this industry, and we remain committed to ensuring that fair compete is the standard every participant is held to. On collectibility, based on publicly available data, Papaya operates a substantial scale with leading titles ranking among the most downloaded in the U.S., generating significant revenue. Based on the independent analyst coverage notes, Papaya's annual net revenue is approximately $950 million to $1.1 billion. We believe this scale support Papaya's capacity to satisfy our judgment of this size. Looking ahead, we expect that the court will determine the final disgorgement award in June. The parties have been ordered to engage settlement discussions, which we're actively pursuing. We're also evaluating alternatives this year capital against the judgment. And are monitoring closely whether an appeal bond or other secured capital will be required. This verdict confirms the false advertised skill-based gaming category violate federal law. We believe the Papaya verdict supports the integrity of the category and may improve competitive dynamics over time. Our litigation against Voodoo Games continues to proceed on the same principles of fair play. The Papaya verdict is a significant milestone and our focus remains on operating and growing their business. As we move through 2026, we're organizing our execution around 3 core initiatives that build on the foundation established during our direct. First, strengthen demand and engagement; second, execute a more efficient and disciplined go-to-market; and third, improve our platform performance in infrastructure. Across each of these initiatives, we're leveraging the Skillz competition platform, RZR's performance beating engine and mobile, our newly acquired developer platform. Together, our businesses are building a connected ecosystem and designed to improve performance and drive efficiency. Turning to our first initiative, strengthening demand and engagement. On the sales platform, we remain focused on quality and long-term value. We saw continued strength in our core player base, particularly among longer-tenured coats. Retention across our 3-plus month cohorts improved quarter-over-quarter, driving higher engagement and monetization on a per user basis. This reflects the underlying health of the platform. Solitaire Skillz continues to scale as a top tile on the platform. We also strengthened our own content portfolio through the acquisitions of Blackout Bingo and Dominoes Gold, and are expanding the pipeline with new titles launching later this year. At RZR, engagements driven by precision targeting and performance marketing and scale. We added several new advertisers across gaming, consumer allocations, retail and entertainment. We grew revenue across both new and existing customers and launched our connected TV business, opening a new channel for advertiser spend. Turning to our second initiative, efficient and disciplined go-to-market. On the Skillz platform, we remain focused on executing an efficient and disciplined go-to-market strategy. In Q1, user acquisition spend and continue to focus on tracking profitable long-term players. Our approach reflects concentrating investment in channels with attractive returns. At RZR, we continue to scale our performance, expanding our advertiser base and keeping relationships with existing clients. During the quarter, we continued to optimize media margins through improved product mix. Our machine learning platform continues to drive stronger targeting efficiency and return on ad spend for advertisers. Additionally, the launch of connected TV has attracted initial advertiser commitments, broadening RZR's addressable market and opening a new channel for advertising spend. Turning to our third initiative, improving the platform performance and infrastructure. On the Skillz platform, we continue to invest in systems supporting player engagement. We're also advancing our [ Pro SDK ] development with several developers building new games or converting existing games using this technology. During the quarter, RZR continued migration to more advanced neural network models, improve training efficiency and prediction accuracy, expanded integrations with measurement partners and advanced next-generation machine learning infrastructure. In Q1, we completed the acquisition of [ Glu Mobile ], a developer platform providing the game services and back-end infrastructure that we believe will power Skillz over time. People join RZR and the Skillz competition platform is the third component of our connected ecosystem, bringing development into our own products and to the customer's RZR brings into the network. [ BMO ] also continues to serve the developer of studios that relied on the platform prior to the acquisition. Taken together, our businesses form a compounded flywheel. We believe the campaigns improve the model. Every impression strengthens targeting and every outcome improves future performance. In closing, the first quarter reflected disciplined execution across the organization. We think the Skillz platform, improved unit economics, continue to scale RZR as a profitable growth engine and began integrating [ Bemobi ] as the developer platform, powering our products and ecosystem over time. By combining competitive skill-based gaming with AI-driven performance marketing, we're building an ecosystem designed to scale engagement, data and monetization with discipline. We believe this integrated approach creates long-term optionality in gaming as well as in adjacent areas where content, identity, commerce and performance marketing converge. Our focus remains on executing against that opportunity while maintaining financial discipline and driving long-term shareholder value. And with that, I'll turn it over to Gaetano for a financial review.

Thank you, Andrew. Our first quarter results highlight the benefits of disciplined execution and structural improvements across both the Skillz and RZR businesses, producing stronger fundamentals and a trajectory toward profitability. Q1 2026 GAAP revenue was $29 million, down from $30 million in Q4 2025 and up from $22 million in Q1 2025, representing a 3% decline quarter-to-quarter and 33% growth year-over-year. Of note, Q4 2025 revenue included an indirect tax accrual release, normalizing for the indirect tax accrual release Q1 2026 revenue would be up 2% quarter-over-quarter. Q1 2026 research and development expenses of $5 million increased 5% year-over-year reflecting ongoing investment in our Skillz and RZR businesses. Q1 2026 sales and marketing expenses of $17 million, decreased 4% year-over-year. In the quarter, end-user marketing was $8 million and user acquisition was $3 million. Q1 '26, general and administrative expenses of $19 million increased 2% year-over-year. Q1 2026 net loss of $11 million improved 36% year-over-year. Q1 adjusted EBITDA loss was $13 million compared to a loss of $10 million in Q4 2025 and improved from a loss of $17 million in Q1 2025. Excluding litigation-related expenses, adjusted EBITDA in Q1 2026 improved to a loss of $7 million, representing a 15% improvement quarter-over-quarter on a normal. We believe our balance sheet remains healthy, and we continue to manage capital prudently as we progress towards sustained profitability. We ended Q1 2026 with $185 million in cash and cash equivalents and $130 million of debt outstanding due by the end of this year. As the debt approach as mature later this year, we continue to evaluate a range of strategic alternatives to optimize our capital structure. We are driving the business forward with focus and discipline to deliver meaningful, long-term value for our shareholders and look forward to updating you further on our progress in 2026. Operator, we're now ready to open the line for questions.

[Operator Instructions] We'll take the first question today from Ed Alter from Jefferies.

I wanted to ask a question on Paying MAU and GMV. I saw that actually GMV was actually up quarter-on-quarter despite kind of paying users down. So can you just talk about kind of the 2 drivers of that and why the spend per player is actually increasing and kind of some of the drivers there?

Thanks, Ed. Thanks for the question. Yes, I think as you know, what we focus on is really hyping users, long-term users. And so this is sort of a view of an outcome that we've been driving towards and trying to continue to retain and attract high paying users. So you see, even though our PMAU is slightly down, you can see our GMV continues to grow and our ARPU continues to grow.

And if I could also jump -- I was going to add that one of the reasons PMAU is slightly down is actually dialed back user acquisition in Q1, really continuing to raise their focus on profitable acquisition. So we continue to bring in tighter and tighter breakeven periods and better 1-year paybacks. We're -- I think we're kind of a maximum tight out as we ended the quarter, and we're thinking about how to thoughtfully expand on marketing.

Yes. Great. Great. And just to follow up on that because I noticed that the MAUs was also down a decent amount, but a lot of the nonpaying MAUs were down. Is that kind of like a new normal for kind of your marketing strategy? Or just how do we go from here is, I guess, kind of the main question.

Yes. I think it's -- with where we are on user acquisition and kind of cutting spend and optimizing. You can expect that we're stabilized and going to build forward. So you -- I would expect PMAU and traffic overall flat to up with improving economics. That's the way I think about the business. It's -- at the end of the day, if we can service a higher-value customer, it's a better business.

The next question comes from [ Bart Nagaraj ] from Cantor Fitzgerald.

Just the first one is around, are you seeing any reduction in user acquisition costs at all since the lawsuit went in your favor? And then the second one, just a follow-up on the previous answer that you provided to the previous question. What would you actually attribute the growth in Paying MAUs since Q1 2025, right? Like it's kind of been pretty good since then and up until Q1 2026. Is it because the mobile gaming environment is a lot better now? Or is this some kind of a changing category? And I note that the user acquisition costs have come down as well as you mentioned, hence -- help, wanted to understand that a bit better.

Yes. Thank you for the question. Maybe hit the first part on user acquisition cost in a lawsuit. I think it would be really difficult for us to directly link the 2 and create attribution there. In terms of user acquisition costs, we are at -- as of the end of Q1, the best UA prices we've seen in -- I don't know how many years, multiple years. So we're seeing attractive customer acquisition costs and thinking about how we can thoughtfully scale up where we're seeing these attractive prices. In terms of the second question, attributing to PMAU and how PMAUs been growing from Q1 '25 through this past quarter, perhaps Gaetano, you want jump in on that?

Yes. Thanks, Andrew. I think the way to think about it and how we've been describing for the past several quarters is really the focus around product-led growth. And so there's been a significant number of investments in our platform around retention and engagement and things that we've launched are really focused around attracting and retaining paying customers. And so I think you're seeing that as a result that our focus on paying MAU is paying off.

Okay. Okay. Can I ask 1 more, if that's all right? Or should I just jump back in the queue.

No, no, go ahead.

I know that -- I think a couple of your development partners, I think you have said account for like a significant portion of your revenue. And I think if I'm not wrong, correct me there if I'm wrong. Solitaire Cube and 21 Blitz little kind of drop off the platform in Jan 2027. So I'm just wondering what the strategy is there. I think you're trying to develop some of your own games, but is there -- how do we think about the trajectory of revenue post, I don't know, Q4 this year?

Yes. Thank you. So to kind of put it back, how are we thinking about the migration of one of our developers of platform. We now, as of the end of Q1, we acquired Blackout Bingo and Dominoes Gold. So we own and operate now, 3 of the top 5 titles in the platform. And this actually happened in Q3 of last year. But when that particularly developed left the platform, there were 34 titles, 2 of which we have contractual rights through March 2027. And then the other 32, which we had contractual exclusivity up through December. We migrated the first 32 titles in Q3 -- so in quarter. And so you can see kind of the result of that in our numbers. We are now looking at in particular, I think you mentioned Solitaire Cube, but looking at the migration to future state. And we have quite a number of Solitaire titles on platform as well as the ownded and operated title, Solitaire Skillz.

And we'll take a follow-up from Ed Alter from Jefferies.

I just wanted to follow-up on the last question. With you guys now making your own Solitaire game, Buying Blackout and Dominoes Gold, it seems like a decently large strategy shift to now you guys own most of the large games on the platform. Is this how to think about the business going forward? Or just kind of some of the rationale for doing that kind of that shift?

Yes. First of all, thank you for the question. But I would say, yes, owning and operating is a shift from the historic only third-party and second-party relationships with developers. You may be aware that we've been a second-party or investor in content for a number of years. I want to say over 5 years pre-IPO. We've owned a stake in content on the platform. Now owning and operating. So if you think about first-party, second-party, third-party now we're entering into first-party relationships with content, so on and operate. And the way we think about this is if there's a category 1 system and a piece of content like Solitaire, where there's relatively little development in the future, acquiring a developer or developer scheme or building a game in that category, it creates a stability for the platform and a consistent offering that we can have for the platform, which actually is a benefit to every developer in the forum, who is building new content and exploring themes. It's very much a strategy that I think we've seen with whether it's Epic at a much larger scale running Fortnite. Or it's [ valve ] with [ steam ], their platform running DOTA 2 and Counter Strike. I think this is a common thing in the gaming industry in terms of gaming platforms and something that we think makes a lot of sense for the future of the business.

And everyone, at this time, there are no further questions. This does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.