Skillz (SKLZ -3.10%) is scheduled to report first-quarter fiscal 2022 earnings after the markets close on Wednesday, May 4. The gaming company is struggling to find its footing amid economic reopening.
To spur growth, management is investing aggressively in sales and marketing. The spending has led to massive losses on the bottom line, which concerns investors. To assuage those worries, management has promised to decrease marketing in 2022. When Skillz reports Q1 earnings, shareholders will see if the company follows through on that commitment.
Skillz is investing in marketing to spur customer and revenue growth
In its most recently completed fiscal year, which ended Dec. 31, Skillz reported revenue of $384 million. That was a 67% increase from the $230 million in the prior year. On the surface, the growth looks impressive. However, if you consider that the company spent $465.4 million on sales and marketing in 2021, the revenue figure is not fantastic.
Notably, the company distinguishes its marketing spending into two categories: User acquisition and engagement. The former is what it sounds like, spending on advertising to attract new customers to the platform. The latter are investments made to induce existing customers to play more frequently. For instance, an example of user engagement marketing could be a deposit bonus of 20% up to $100. That will result in a player getting a $100 bonus if they deposit $500 into their Skillz account.
In Q4 2021, Skillz spent $155 million on sales and marketing, and that was on revenue of $109 million. The marketing was split between the two categories -- $56.7 million for engagement and $85.6 million for user acquisition. That represents an increase of 74% and 112%, respectively, from the same quarter the prior year. You can start to see why shareholders are concerned with the aggressive strategy. Overall, Skillz reported a net loss of $99 million in Q4.
For 2022, management has indicated it will reduce marketing investments. On the user acquisition side, it will decrease spending in absolute dollars. On user engagement, it aims to reduce spending as a percentage of revenue. Investors will be watching these metrics closely when the company reports Q1 results on May 4.
What this could mean for Skillz investors
Analysts on Wall Street expect Skillz to report revenue of $91.08 million and a loss in earnings per share (EPS) of $0.18. If the company meets those projections, it will represent an increase of 15.9% and a decrease of 20%, respectively, from the same period the year before.
The stock has gotten hammered, falling over 95% off its high. Still, it's too early for investors to buy shares of the gaming company. Management needs to prove it can operate the business on a more sustainable footing. There is no telling how revenue and customer trends will evolve as it transitions away from its aggressive marketing spending.