Good afternoon, all. I would like to welcome you all to the Skillz Inc. 2023 fourth quarter results call. My name is Harry, and I'll be your moderator for today's call. I would now like to pass the conference over to your host, Jim Leahy, from JCIR to begin. Jim, please go ahead.
Good afternoon, and welcome to the Skillz 2023 fourth quarter and full year earnings conference call. On the call today are Andrew Paradise, Skillz Co-founder and CEO, Casey Chafkin, Co-founder and CSO, and Gaetano Franceschi, CFO. This afternoon, Skillz issued its earnings release reporting the preliminary unaudited fourth quarter and year-ended December 31, 2023 results, which is available on the company's investor relations website. The company is in the process of completing its financial statements and other disclosures for the fiscal year ended December 31, 2023. As a result, the company will file an extension for the filing of our annual report on Form 10-K for the year ended December 31, 2023. Accordingly, the company is announcing preliminary results for the year, which are based on currently available information and are subject to revision as management completes its internal review.
The company's independent registered public accounting firm has not finalized its review of these preliminary financial results or its audit of the financial statements for the year ended December 31, 2023. Actual results may differ from these preliminary financial results and other financial information due to the completion of our internal procedures, the audit of the company's financial statements, final adjustments, and other developments that may arise between now and the time the results are finalized. Further disclosure is included in the Form 12b-25 filed with the SEC. The company expects to file its annual report on Form 10-K for the year ended December 31, 2023, by March 29, 2024. 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 federal securities laws.
Forward-looking statements, which are usually identified by the 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 measures, which it believes 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 measure is available in the company's fourth quarter 2023 earnings release.
With that, I'll turn the call over to Andrew for some opening remarks, followed by Gaetano for a discussion of our financial performance before we open the call for questions. Andrew?
Thank you, and good afternoon to everyone. Throughout the fourth quarter, we made further progress on the four strategic pillars we laid out last year that we expect will position Skillz to return to generating consistent top-line growth and positive cash flow. These four pillars are, first, enhancing our platform to improve customer and developer engagement and retention. Second, upleveling our org. Third, improving our go-to-market efficiency. And fourth, demonstrating a clear path to profitability. But before I review the progress we've made on our four strategic pillars, I want to revisit a key topic that we've discussed in our most recent calls, our Fair Play initiative. We're bringing attention to the disruptive use of bots to defraud players of their hard-earned money. It's critical to ensure the long-term viability of our industry.
We're standing firm on our commitment to eradicate unfair bots, as companies who deploy them are attacking the very essence of fair competition while eroding player trust. With our proprietary platform, every player is ensured fair match-ups against real opponents of the same skill level. As part of our patent infringement lawsuit against AviaGames, we uncovered evidence indicating that AviaGames is committing consumer fraud through their deceptive use of bots, which means the games on their platform are rigged against the player. We know there are other companies acting in a similar manner and believe these companies' deceptive use of bots has defrauded consumers of more than $1 billion. Last week, we initiated a lawsuit against Papaya Gaming in regards to their fraudulent use of bots.
There's now a federal class action lawsuit brought by players against AviaGames related to its use of bots, and we anticipate more lawsuits like these being brought against our competitors who are using bots to engage in fraud. It's important to note that these are not small companies. They engage with millions of players in billions of tournaments, and their games are now top-ranked in the app stores. In highlighting this issue, we're not trying to reduce competition, but rather ensure that there's a level playing field where all industry players maintain the same level of commitment to fairness and to providing a transparent experience. Since we're the leading company that does not engage in bot fraud, we anticipate the elimination of this practice would dramatically benefit our CAC and LTV, which would greatly accelerate the turnaround of our business.
As pioneers and leaders, it's our responsibility to lead the charge for a fairer future while building trust with players at scale. I mentioned our patent infringement lawsuit against AviaGames, and in that case, there's been a very positive development for Skillz. Recently, a jury awarded $42.9 million after finding that AviaGames did, in fact, willfully infringe on our patent. As the jury found AviaGames acted willfully, our initial damages award may be enhanced to include treble damages and attorneys' fees. In addition, there's important evidence introduced in that patent lawsuit, which will be useful in the prosecution of our copyright infringement and false advertising claims against AviaGames. We remain dedicated to fostering fair play across our industry, and along those lines, we continue to enhance our trust and safety teams.
We also have an expanding portfolio of advertising content that promotes fair play, while at the same time educating consumers. It's important to note that our expectation for achieving positive Adjusted EBITDA by late this year is not contingent on the favorable outcome of the AviaGames lawsuit, or for that matter, on the eradication of bots by other industry players. Our path to achieving our goal of positive Adjusted EBITDA is determined by the continuing success of the turnaround initiatives. So with that, let me turn back to our fourth quarter and first quarter to-date progress and an update on our four pillars before turning over the call to our CFO, Gaetano, for a review of the financials. Improving retention and monetization, along with growing our audience, takes time, and while we're making progress, we continue to see an impact on our near-term operating results.
Our Q4 results reflect a continued lag in our traffic levels, including from our VIPs, as paying monthly active users were 137,000 in Q4, compared to 168,000 in Q3. Importantly, we've significantly slowed the audience decline in January and February and are attracting to a more stable audience in March. We believe we've reached a level from which we can grow our paying audience. We're also doing an increasingly better job on expense management, as reflected in the 25% decline in operating expenses compared to both the year-ago period and Q3, and the continued improvement in our adjusted EBITDA loss. Our focus has been to improve our unit economics, which we believe we have achieved now in the early part of Q1, and we're now transitioning to growing our audience.
We've been focusing on new feature launches to improve retention and engagement, proactively engaging our customers where they are on the platform, and reactivating lapsed users, as well as continuing to optimize customer acquisition costs to drive profitable growth. We're getting closer to this inflection point as we are approaching our goal of a six-month payback, and we're beginning to transition our efforts towards scaling in areas where we see positive returns. A key focus in this regard is our VIP engagement. Our retention and reactivation efforts for this segment account for a large part of our profits. We built a unique platform, and as we prioritize retention engagement improvements alongside healthy user economics, we believe we can generate significant returns for all of our shareholders. Turning to the highlights of our first pillar, our efforts to enhance our platform to improve customer and developer engagement retention.
Our product team is building out a new feature pipeline, and on our Q3 call, we highlighted the retention, engagement, virality, and monetization uplift generated by the introduction of Daily Challenges and Progressive Leagues. In Q4, we introduced the Instant Match feature, which offers players immediate results on tournaments as they play via the Instant Match pop-up, and we're seeing again, results in line with expectations. We also released Account Merge, which allows our players who inadvertently created multiple accounts on multiple apps in different games to now merge all of their experience. The purpose of this feature is really to offer a better player experience, but also to reduce the number of player support requests. As we look over the balance of 2024, we expect our feature release momentum will continue.
To date, in Q1, we've introduced several new features, and we expect to introduce several additional new features by the end of Q2. It's really exciting to see the platform launching meaningful new features for all of our players worldwide. An important part of our initiative to enhance our platform to improve customer engagement retention is our work to improve the experience of our best and most active players, our VIPs. The goal of this program is to increase VIP satisfaction and drive an increase in the number of weekly tournaments played by our VIPs. We're also focusing on reactivating prior VIPs by targeting those that have decreased their play on the platform. We continue to enhance our Live Ops capabilities, which allow us to look at trends on the platform in real time and initiate offers to drive retention and engagement.
This should be particularly beneficial to our efforts to improve the VIP experience. Turning to our second pillar, upleveling our org. In the past several months, we've brought on several new product development management hires. We've also continued to expand our marketing team, as well as our data and analytics resources. We've strengthened our finance team with the addition of Gaetano as our new CFO and the hiring of a new controller and head of FP&A. Our move into our new Las Vegas headquarters in late January has reduced our physical footprint and led to an improvement in collaboration, productivity, and accountability across the org. Moving on to our third pillar, our go-to-market. We reduced user acquisition in Q4 from Q3, and UA remains at its lowest level since 2018.
The payback period for UA in Q4 is sequentially better than prior quarters, and we exited February with a payback period that's approaching closer to our stated goal of six months. As such, we're looking to transition our focus to spending to drive profitable growth while maintaining financial discipline on UA spend. As part of this effort, we're now spending more through Aarki, which provides us with better pricing and better transparency and keeps the margin within Skillz. Moreover, in Q4, we launched our highest number of prize-enabled games since Q2 of last year, which is also the highest since we started turning around our business. As we discussed, in Q2 last year, we relaunched our developer revenue share agreement.
This means we now share revenue based on entry fees as opposed to a percentage of profits, which is much easier for our developer partners to understand and monitor in real time. With this change, we've seen developers, including several of our biggest, introduce new games for the first time in quite a while. We see developers reengaging and growing the platform. There are over a dozen new games launched on the platform in Q4, and we expect two to three times that number of games to launch between Q1 and Q2 this year. New game development typically takes six to 18 months to develop and scale, and so the return profile of these activities will be lagging, but it's necessary for the future of a healthy platform.
Finally, before turning over the call to Gaetano for a review of our Q4 results, I'll talk a little bit about our fourth pillar, which is demonstrating clear paths to profitability. Based on our Q4 performance and the trends today in Q1, I'm encouraged by the progress we've achieved to become profitable. We remain optimistic that we're on pace to achieve our goal of generating positive Adjusted EBITDA on a run rate basis by the end of this year. Our Adjusted EBITDA loss continued to improve in Q4 to -$12 million from -$18 million in Q3 on $7 million in lower revenue. Excluding legal fees for the AviaGames lawsuit, our Adjusted EBITDA loss in the quarter was $8 million. In Q4, we continued to improve our cash management as our operating cash burn was -$12 million, compared to -$18 million in Q3.
Given our net cash position of approximately $178 million and the quarter-over-quarter improvement of our operating cash flow, we have significant runway to return our business to sustainable and profitable growth. I also want to highlight that in our view, our current valuation gives no weight to either the progress we've made against our plan to improve the business, the trajectory we're on to generate a positive Adjusted EBITDA run rate by late this year, and the value of our operating platform. As such, in the second half of last year, we were active on our $65 million share repurchase authorization. We still have over $50 million remaining in our share purchase reauthorization program as of the end of December 31, 2023. In closing, while real progress is being made, I hope it's evident we still have a lot of work to do.
Skillz's board, management team, and the entire organization is firmly dedicated to successfully executing our four pillars and creating a strong foundation to create value for our shareholders. And with that, I'll turn it over to Gaetano.
Thank you, Andrew, and good afternoon, everyone. I'm pleased to be with you on the call today following my joining Skillz in early January, and I'm looking forward to speaking with you going forward. For the 2023 fourth quarter, revenue was $29 million, down 38% year over year and down 20% sequentially. Our paid user conversion rate, which is paying MAU, divided by MAU, was 15% in Q4, slightly down from 16% in Q3, due to our prioritizing the optimization of our platform over user acquisition in the prior quarter. As Andrew indicated, we are confident in our ability to continue to improve our payback period and begin to invest to grow sequentially. Turning to OpEx, research and development expense was $3 million, down 54% year over year. On a GAAP basis, R&D was 12% of Q4 revenue.
Sales and marketing expense was $23 million, down 28% year-over-year, including $2 million of stock-based compensation. On a GAAP basis, sales and marketing was 79% of Q4 revenue, compared to 74% in the year-ago quarter and 88% in the prior quarter. General and administrative expense was $22 million, down slightly year-over-year, inclusive of $8 million in stock-based compensation. On a GAAP basis, G&A was 75% of Q4 revenue. Net loss of $21 million, inclusive of a $3 million impairment charge on goodwill and long-lived assets, compares to a net loss of $144 million in Q4 2022, which included a $117 million impairment charge. Adjusted EBITDA loss in the fourth quarter was $12 million, a 34% improvement quarter-over-quarter. Adjusted EBITDA margin improved from -51% in Q3 to -42% in Q4.
For the 2023 full year period, Adjusted EBITDA loss of $70 million improved by $52 million from a loss of $122 million for 2022. Our cost structure will benefit this year from lower costs for items including legal, audit, and insurance fees, as well as continued prudent management of our cost base. Additionally, interest expense will continue to decline given the reduction in outstanding debt. We ended the fourth quarter with $312 million of cash, comprised of $302 million in cash and cash equivalents and $10 million in restricted cash. At the end of 2023, we had approximately $123 million of total outstanding debt. With our improving cash burn rate, we have the flexibility to deploy capital to enhance shareholder value. At this time, we'll turn the call to the operator for the Q&A session.
Thank you. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind and would like to remove yourself from the queue, please dial star followed by two. And finally, when preparing to ask your question, please ensure that your phone is unmuted locally. And for our first question today, we will go to the line of Clark Lampen of BTIG. Clark, your line is now open. Please go ahead.
Thanks for taking the questions. I've got two. Maybe first, Andrew, I'll ask for your help sort of bridging the gap on two fronts, and maybe Gaetano can chime in here. But as we think about, you know, about a $12 million EBITDA loss this quarter, tracking towards, you know, sort of a positive number a year from now, can you help us with, I guess, sort of the high-level guardrails? Is this gonna be mostly revenue-driven, or is there a sort of cost reduction component here? And then as part of the, you know, sort of revenue improvements, how much does sort of what's going on with the Fair Play initiative really play into this?
I understand that it's important, but, you know, as you're sort of working through things with the Avia right now, are these sort of monetary penalties? Are you seeing the elimination of sort of harmful practices? Just curious how much that's gonna sort of contribute here. Thank you.
Thanks, Clark. Great question. Anyways, I was saying thank you, Clark. Those are great questions. So maybe I'll just recap for everyone on the call. First question is thinking about our losses and what the guardrails are for improvements. And the second question is really thinking about how important is Fair Play overall to getting the cash flow positive. Gaetano, do you want to first hit the EBITDA losses, and then I can talk a little bit about Fair Play?
... Yeah, sure. Thanks, Clark, for the question. The way we're kind of thinking about this is that for us, the growth is going to come through sequential user growth, as well as continued retention and monetization improvements through launches in our platform. You know, we have a large slate of activities that we want to do to improve the platform, improve our unit economics now that we've kind of flattened it. We think we've kind of flattened on our audience. We don't have large plans for-
Yeah, maybe I can chime in on-
Go ahead, sorry. Go ahead, Andrew.
Sorry, we're not in the same room. Maybe I can chime in. And, you know, I think one of the things, Clark, that we're really, you know, we've been talking about for several quarters is getting our paybacks down to 6 months, which would be probably about 2-3x better than the industry average of 12-18 months. So we've been cutting user acquisition. We've been focusing on really getting very efficient in all of our digital marketing. And we're approaching that six-month level now in Q1. So regardless of whether or not we can change the botting practices throughout the industry, that's something we can control and something that we're working on.
So we don't need fair play to drive profitability, and we don't need to stop bots to get to, you know, our goal of cash flow positive this year and to grow our revenue from here out. It certainly would be a very helpful tailwind to the business overall. And, you know, I'd say even beyond that, the things that are going on with companies like Avia, it's not just business related, it's also potentially criminal. These are, you know, companies where they're marketing to players, that they're running a similar service to Skillz, a multiplayer competition system, where the people that are actually paying these companies when they go to play, they're, instead of playing real people, they're playing against bots.
Avia, for example, it's already been publicly announced that they've received a federal grand jury subpoena. They're also in a class action lawsuit now that's been filed. It's also, I think out there, we filed in the last two weeks against Papaya Gaming for their fraudulent use of bots. We are, you know, as the inventors of the space, it's one of these things that I really kind of think about almost every day, that we went out at our IPO and talked about all the data science we built to stop cheating, to stop fraud, to ensure fair play.
All of the work that went into building out systems so we can actually process not just withdrawals for players of real money funds, but also, as many may know, we ship a variety of real-world goods, ranging from, you know, everything from a T-shirt to a jet ski to a car, to players, depending on their winnings. One of the things I'd point out that it's a lot easier if the players aren't earning on a service. So if all the players are engaging against bots and the company and, you know, one of these companies in the industry is just capturing those payments, they really don't have any of the same cheating, fraud, payment, and fulfillment issues that, you know, that are important issues that...
things that we had to solve to build this platform. So, you know, I think to, I'm going a little long-winded here, but I do think it's really important to drive awareness of this. It's something that every investor or prospective investor on this call, just by letting them know about this happening in our industry, it's already helping change the future of the industry. And to give you an idea of how big this is, we estimate that bot-driven fraud is over $1 billion now in the U.S. So it's very, very sizable. And it doesn't just deprive, you know, our business from being able to acquire those players. It's driving up the customer acquisition costs across the industry because confusingly, some of our products are being marketed to the same audience.
It's obviously, it's creating trust issues for the players where they've been defrauded, and they're now potentially in a class action lawsuit against one of these companies. So, yeah, I, I can't say enough how much, how much it's impacting the industry and how important it is for us all to think about the now over $1 billion of fraud and growing.
Thank you.
Thank you. We have no further questions in the queue today, so I'd like to hand back to Andrew Paradise for any closing remarks.
Well, I just wanted to thank everyone for joining us today. I know we have historically been fielding just analyst questions. We're going to start to engage much more deeply with our investor audience in the next few quarters as we finish our turnaround. I look forward very much to providing you with an update on our progress as we return Skillz to sustained and profitable growth. We look forward to speaking with you again when we report our first quarter results. Until then, thank you.
This concludes today's call. Thank you all for joining. You may now disconnect your lines.