Skillz (SKLZ -0.28%) reported its fourth-quarter and full-year results after the market closed on Wednesday, and investors were disappointed with what they saw -- particularly with regard to its continued, aggressive investments in sales and marketing. The stock price crashed by 20% on the day following the earnings announcement.
Those high expenses are leading to massive losses on the bottom line. But shareholders can be mildly comforted that management is finally discussing a reduction in marketing spending.
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Skillz hints at reducing marketing spending
In the fourth quarter, Skillz spent $155 million on sales and marketing, but generated revenue of just $108.8 million. In other words, it spent 142% of its revenue on sales and marketing. That was an increase both in percentage and absolute value from the third quarter when it spent $114.5 million on sales and marketing -- or 112% of its $102 million in revenue.
The market would not react so poorly to this level of investment if the returns it generated were better. In Q4, Skillz boasted 610,000 paying monthly active users, up from 509,000 in Q3 and 391,000 in Q4 2020. Skillz's average revenue per paying user was $59.30 in the quarter. Investors would likely prefer to see Skillz spend far less to achieve these results. Here's what Chief Revenue Officer Casey Chafkin said on the matter during the Q4 conference call:
"Candidly, we spent more than we should have in both user acquisition and engagement marketing in Q4, and that's not to say that we didn't extract valuable learnings from the expenditures that we made. We did."
Skillz projects that it will reduce engagement marketing as a percentage of revenue by roughly 10 percentage points based on what it learned. Still, that is only one piece of Skillz's marketing budget. In Q4, it spent $56.7 million on engagement marketing -- which is meant to encourage existing players to play more frequently -- and $85.6 million on user acquisition marketing -- which is intended to attract new players.
Investors are fleeing Skillz as management stays on the same track
The mobile gaming market is forecast to be worth $160 billion by 2025. And in that arena, Skills offers its players the chance to wager real money on games played against each other, but because the games are skill-based, it is not regulated as a gambling business.
Management is spending aggressively to extend its first-mover advantage in this space and capture a meaningful piece of that gaming market. With $384 million in overall 2021 revenue, its share of the market remains small, and working to expand it isn't necessarily a bad idea, but investors are hoping for better execution, and perhaps that Skillz will adopt different, more effective methods of pursuing that goal.
Yet management says it's only planning on incrementally reducing its marketing spending in 2022, and investors are not reacting favorably. The stock is down 20% since Skillz announced its Q4 earnings, 61% in 2022 to date, and a whopping 90% in the past 12 months. Investors likely want to see bolder action by management before taking a position.
