Mobile-gaming platform Skillz (SKLZ -2.99%) recently reported financial results for the first quarter of 2021, exceeding guidance and expectations. Just a few weeks ago, the company said it expected Q1 revenue to come in at $80 million. However, it reported revenue of almost $84 million. Additionally, it had previously guided for full-year revenue of $366 million. But with its Q1 beat, management raised full-year guidance to $375 million.
More than just beating guidance, Q1 revenue was up a whopping 92% year over year. This is significant because many investors were worried about slowing user growth and a lack of new downloads. But during the company's Q1 conference call, management said these things aren't what shareholders should be focused on.
The metric that matters
Skillz provides two different metrics when it comes to users. There's monthly active users (MAUs), which are people who enter a competitive game at least once a month on average. It ended Q1 with 2.7 million MAUs. But a subset of total MAUs are paying MAUs, which are people who make a cash deposit onto the platform and also enter a paid competition at least once per month on average. The company ended Q1 with 467,000 paying MAUs -- up 81% year over year.
On the conference call, Skillz CEO Andrew Paradise said paying MAUs "is perhaps the most important metric to our business."
Paradise's statement about paying MAUs is strong but it shouldn't be surprising. After all, users pay entry fees to compete in games and Skillz generates revenue by taking a cut. Therefore, if everyone was playing without depositing money onto the platform, the company wouldn't get anywhere. This is why deposits are so important to the business.
Going into the earnings report, there had been concerns about how paying MAUs were counted. This is because Skillz provides an incentive called bonus cash that can be used to pay entry fees. But management was clear with how it counts paying MAUs: These users have all made a real-money deposit at some point.
For the record, some analysts doubted Skillz's ability to grow revenue in Q1 because of perceived weaknesses in other metrics. For example, research from short-seller Wolfpack Research suggests that downloads for Skillz's games had slowed significantly, contributing to its belief that Q1 revenue would fall short.
Ironically, Wolfpack Research (among others) might have been 100% correct about downloads -- Skillz management didn't explicitly confirm or deny it. However, if more users are becoming paying users, it doesn't matter. Revenue can still climb with weak downloads.
The same thing applies to concerns about overall user growth. As already mentioned, there's currently 2.7 million MAUs on Skillz. For perspective, that's how many there were at the end of the third quarter of 2020 -- six months of flat MAU growth. Nevertheless, quarterly revenue is up 40% from Q3 2020 to Q1 2021.
As Chief Revenue Officer Casey Chafkin pointed out, downloads and MAU metrics aren't directly correlated with revenue growth.
But let's not kid ourselves
It's true that the paying-user base for Skillz is the most important. However, investors shouldn't take this to an extreme and conclude that the non-paying-user base is irrelevant -- it's not. Management claims that there's 2.7 billion potential gamers. Therefore, with just 1% of the market, you'd expect the company to grow MAUs at some point.
There's something else that underscores the importance of overall MAU growth. Skillz management has commissioned a few studies on the mobile-gaming market. One study showed that around 40% of total users might be willing to pay. The rest won't.
On the one hand, this is an opportunity for Skillz. Right now, only 17% of its users are paying users -- up from just 10% last year. This suggests that the company could triple its paying MAUs just from its current 2.7 million user base. That's huge. However, considering paying users are currently growing at a 92% year-over-year pace, this doesn't provide a lot of time before the platform is approaching a ceiling.
Therefore, Skillz shareholders should be excited with accelerating growth in its paying MAU base. This is what will allow the company to win long term. Furthermore, management says that its sales and marketing (S&M) spend is focused on converting MAUs into payers. Growth here suggests S&M expenses are justified.
So be excited and give Skillz management credit for a good quarterly report in Q1. However, don't turn a blind eye to overall user growth. It might not be the most important thing right now. But at some point, it will be a more pressing matter.