Skillz Inc. (SKLZ, Financial) is an American company that provides a platform for mobile game developers and players to create and compete in casual esports tournaments. The company was founded in 2012 and has over 14,000 game developers who have launched a game integration on the platform. It hosts billions of tournaments for millions of players worldwide, distributing over $60 million in prizes each month.
The company became the first publicly traded mobile esports platform in 2020 and has partnered with the NFL to develop a new NFL-themed mobile game. Skillz has been recognized as one of the most innovative and fastest-growing companies by various media outlets.
The increasing mobile usage is powering the esports market
The number of global mobile users has been steadily increasing, leading to a notable expansion in the gaming industry. According to the GSMA Mobile Economy 2023 report, by the end of 2022, over 5.4 billion individuals worldwide had registered to a mobile service, including 4.4 billion who additionally utilized mobile internet. The number of unique mobile users is expected to exceed 5 billion by 2025.
As per data provided by Mordor Intelligence, 2022 witnessed a remarkable surge in mobile gamers, with the number of gamers reaching an impressive 2.7 billion worldwide. This surge in mobile gaming interest translated to 90 billion mobile game downloads last year.
Interestingly, mobile applications have also been significantly influenced by this gaming trend. A substantial portion of downloaded apps on both Android and iOS platforms, approximately 21% and 25% respectively, consisted of mobile games last year. Moreover, a demographic breakdown of mobile gamers highlights that 55% of gamers were female, showcasing a diverse and inclusive engagement within the gaming community.
In line with these developments, the field of esports has been making substantial strides as well. According to insights from Statista, the esports market is poised to generate revenue of $4 billion in 2023. This growth trajectory is expected to persist, with the industry expected to grow at a compounded annual rate of 8.21% through 2027. This data underscores the economic potential of the gaming and esports domains in the foreseeable future.
Skillz’s strategic path toward positive Ebitda
Skillz stands out as a prominent player in the growing gaming sector. The company is not yet profitable, but expects to generate positive adjusted Ebitda by the end of 2024. To achieve this goal, Skillz is constantly improving its business strategy. The company’s recent focus has centered on elevating its platform to foster heightened engagement and loyalty among both customers and developers.
Product development and user engagement
This effort is reflected in a rich pipeline of new products that are expected to improve client retention, interaction and monetization. According to management, these improvements are projected to have several positive outcomes, including increased customer lifetime values and shorter user acquisition payback periods. Looking ahead, Skillz has mapped out an extensive new product pipeline that spans the next 18 months.
Building upon a period of operational efficiency achieved in the past, the company's development efforts are in full swing. The second quarter saw the introduction of daily challenges and limited-time challenges, seamlessly integrated across games that contributed to nearly half of the company's total revenue. Initial signs indicate an upswing in LTV attributed to improved retention and engagement. Skillz remains committed to releasing new products, with plans to release numerous new player engagement features before the end of 2023.
Developer support and fair play
For developers, Skillz's strategic shift to revenue share agreements based on entry fees rather than net revenue has garnered positive responses. The company's approach to prioritizing beneficial partnerships and investing in user acquisition further strengthens its appeal as a viable option for developers to scale their games. A notable collaboration with Exit Games underscores Skillz's dedication to supporting its developer community. By simplifying the integration of Exit's Photon multiplayer engine into Skillz-powered games, the company is empowering developers to create sophisticated multiplayer experiences with ease.
Addressing concerns about fair play and integrity, Skillz recently reaffirmed its commitment to authenticity by rejecting the use of bots on its platform. The increasing prevalence of chatbots in the gaming industry is challenging, particularly in terms of player interaction and game cybersecurity. However, Skillz is taking a proactive stance against bot usage and aims to provide customers with transparency regarding competitors who employ such practices.
Financial management
Financially, Skillz has displayed prudent management, exemplified by reduced operating cash burn and effective user acquisition cost management. With a solid foundation, the company is strategically positioned to launch new games, broaden its content offering, and head toward profitability.
The financial performance is trending in the right direction
With a net debt cash position of approximately $230 million, management believes they have a runway of approximately six years to steer Skillz's operations to a state of robust and accelerated profitable expansion. However, Skillz's proactive measures and ongoing progress suggest a potentially shorter timeline to profitability with the company focused on achieving positive adjusted Ebitda by the end of 2024. One of the significant moves that shows Skillz’s confidence in its financials is the recent authorization of a $65 million buyback program.
Skillz, through effective balance sheet management, reduced its outstanding debt by $159.8 million in the last quarter, bringing total long-term debt to around $123 million, which highlights its focus on reducing interest expenses. While this approach is commendable, the company still needs to find a way to enhance profit margins for sustained growth in the long run.
Takeaway
As a leading facilitator of the mobile esports market growth, Skillz is well-positioned to capitalize on the growth opportunities available in this sector. However, the company is currently going through a rough patch after reporting double-digit year-over-year revenue declines in each of the last five quarters. The company has lost almost 70% of its market value in the last 12 months due to these revenue declines, which has pushed its valuation into fairly valued territory. At a time when the company seems to be getting its house in order by focusing on debt reduction and new growth opportunities, contrarian investors may find Skillz attractively valued at a price-sales multiple of 1.05.
