DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Hi, good morning, everyone. Our next fireside chat for the BofA Global Gaming & Lodging Conference is going to be with DraftKings. DraftKings is the newest addition to our research coverage. I'm Shaun Kelley, the U.S. gaming and lodging analyst. And my co-moderator for this discussion will be Finn Barrett. Finn's been pretty instrumental on my team in tracking the developments in sports betting and iGaming, which have obviously been really dramatic over the last 12 to 18 months. So just 2 quick programming notes. First, if you do have a question you would like to ask, you can submit that through the conference portal tool, and we'll try and incorporate that in the conversation, but we've obviously got plenty of ground to cover. Second is our DraftKings initiation report came out just last Tuesday, but we think provides a pretty comprehensive overview to help get you up to speed on the story if you're trying to understand it better. So DraftKings sits at the intersection of the digitization of the U.S. gaming industry, a theme that in our mind is long overdue, but today has become much more of a reality and has likely accelerated in some key ways due to the pandemic. DraftKings was founded back in 2012 by Jason Robins, Matt Kalish and Paul Liberman, and has seen a rapid ascent from daily fantasy sports to going public via a special purpose acquisition company and merging with SBTech, a European B2B online provider. So now, today, it stands as one of the most formidable competitors in the U.S. sports betting and iGaming verticals. And it's a U.S.-listed pure-play on those themes with over $1 billion in cash and a $15 billion market capitalization to go out and win market share. So this morning, it's my pleasure to welcome Jason Robins, Co-Founder, Chief Executive Officer and Chairman of DraftKings. Jason, good morning, and thank you for joining us.

Thanks for having me.

Great. So Jason, I'd love to start with sort of a high level but market structure question, if that's okay. This is sort of the kind of the big picture question we get all the time from investors in this business. And I think when people look at a company like DraftKings and look at a business that's just beginning its journey to digitalizing, what we've seen in many past consumer tech verticals is that possibly 1 to 2 operators can garner and maintain a majority of market share. We do, however, then contrast that with our own experience as what we've seen in sports betting landscapes where market share has been a lot more fragmented in more developed markets like the U.K. and Australia. So I'd love to get your thoughts on this theme. Maybe we could just start here. What's your thought on market structure? And what's so critical to driving DraftKings' early success?

First, I think that every market is different. And while no one can necessarily predict, I do think that there are a few reasons, we believe, that the market structure here will look a lot less fragmented than the U.K. The first is regulatory. So the U.S., and it differs state by state, has a far more limited pool of licensees that they're allowing. The U.K., by contrast, you can get a license to operate throughout the entire country pre -- on an unlimited basis, they can award those licenses. And at this point in time, I think there's over 200 live operating online sports books, more if you consider brick-and-mortar. So that's in a country whose population -- or sorry, excuse me, whose GDP is slightly smaller than the state of California. So just to put it in perspective, it would be like over 200 licensed operators in California. And that just doesn't seem like it's going to happen in any state. And then I think there's a second order effect of that dynamic, which is when you get a license in the U.K., You get a license to operate throughout the whole country, whereas in the U.S., it's going state by state. And initially, because it's a small percentage of the population that's covered, most of the customer acquisition and marketing efforts that are being undertaken by operators are localized. But the U.S. is a national media market, just like the U.K. So as we get more penetration, you start to -- an operator should start to advertise nationally. And a simple way to explain that is to buy the same, for example, advertisement on a SportsCenter ad. For example, on ESPN, would cost about 3x as much to buy it and say, on a per impression basis, just show it in the New Jersey, New York or New Jersey, Philadelphia DMA versus showing it nationally. So as we get to a point where roughly 33% or more of the U.S. population is covered by sports betting, you should see much better returns from a company like DraftKings advertising nationally, and that should increase more and more -- the return should get better, I should say, as more and more population penetration occurs. And then coming back to sort of how that affects market structure, well, if each company that's operating has to go state by state, then it becomes a fundamental advantage when it moves to more of a national media model to be in more states with more population because you could run the same ad on sports center, I mentioned. And if DraftKings were in states that represented 60% of the population and a competitor where in states that represented 30% of the population, we would have twice as much addressable audience we'd be reaching with the same exact marketing dollar spent. So I think that for companies, and there haven't been many that are able to get up and running in a fairly timely basis in each state, that is going to provide a huge advantage from a customer acquisition standpoint as more penetration happens, which simply doesn't exist in the U.K. where both the licensing framework and the media market are national. There's no one who just operates in Scotland, for example, in the U.K. So I think those are the 2 most important dynamics. Some other things I'd point to. In the U.K., the real initial sports betting market, and it was a very different market for this reason, was built up through brick-and-mortar shops. If you've ever been to London or anywhere else, you'll see a sports betting shop on virtually every corner. And those companies were a lot of who entered into the online space. So because physical retail is always going to be more fragmented than online will, the starting point was a more fragmented sports book market. And you could argue similar setup here, it's just such a smaller part of what we do. In the U.S., it's been in 1 state, Nevada. And even in Nevada, sports betting is a tiny fraction of the overall casino's revenues, and most of them are not that focused on it. So very different than a footprint in the U.K. that have been established throughout the whole country on virtually every corner. And I think through waves of consolidation, you are starting to, in the U.K., move closer and closer towards that dynamic where that market structure, where it's a handful. I think it's probably 4 or 5 now that have 80-plus percent of the market versus 1 or 2 or 3. And it's been a little bit different because there had to have been a lot more M&A activity, for example, to get there. But I do think that's just the natural point to which digital markets ultimately gravitate towards. There's too much advantage and too much scale, economy of scale, that you get on the digital side, which is very different than a physical-based, retail-based industry, where each new property is its own physical thing. You have to spend money to open a new casino or a new shop or whatever the case may be. Digital, that's not the case. So the economies of scale are just so much more significant. And when you combine that with what will be a fairly restrictive regulatory framework, maybe not in terms of the product, but in terms of the number of licensees relative to the U.K., I think that, that -- and also one that's state by state, but ultimately in a national media market, I think it's going to look pretty different than what the U.K. looks like, and it will look a lot more like established Internet industries.

It's really kind of a really helpful place and compare and contrast to start. The other side of this is, once, of course, you get these customers into your funnel, what you can do on the retention side. And I know last we spoke, we talked a little bit about sort of network effects. But if you could just kind of put that in the context of driving customer retention and kind of the key features or things that are differentiated about your approach thus far that you think will keep the customers retained or in the DraftKings kind of universe, that would be really helpful.

So I think the first thing is our product. We believe that product and customer experience is a huge differentiator, not just in terms of people saying, "Hey, I like this better. Therefore, I'm going to use it," but also in terms of monetization. If you have deeper live betting markets, deeper prop market, a broader set of coverage on sports, more iGaming products, all those things, that should lead to better LTVs. And then I think on top of that, the second part is a significant investment we've made in data science, which allows us to have really strong cross-sell rates, really good optimization around even things like geography base. So we'll account for different tax rates in different states with our models and how we choose to surface content to customers. For example, in New Jersey, there is a higher tax rate on Blackjack to Pennsylvania, but in New Jersey, the tax rate on sports is lower. So you might, if you're exactly the same customer profile, get pushed content on Blackjack in Pennsylvania. And then as soon as you step over the border into New Jersey, you might start to see sports betting content get pushed to you if the net sort of model output said that's what to do. So we're pretty sophisticated on that front, which I think gives us both really high rates of cross-sell, but also highly optimized LTVs based on knowing exactly what type of content to push and balancing both the demand and the likelihood of click as well as the profitability of that content once we do get a click on it. And I think, ultimately, having the best LTV is the most important thing. If you have the best LTV, you can be more aggressive on the marketing side versus your competition, and that creates a flywheel, which is very hard to match. So we've really made our bets kind of on those 2 dimensions, on having the best product powered by the strongest technology and a significant investment in data science, which we've do AI and other automated platforms, implemented a lot of our cross-sell across products. And also, we feel we've been able to use that to optimize our customer acquisition engine pretty effectively as well.

I'm going to jump around a little bit. But you referred back in a couple of different examples to the customer acquisition side and specifically -- and I'm guessing it wasn't a coincidence that you used a few examples on ESPN and SportsCenter. So the big recent development over the last couple of weeks has been the large media partnership, the co-exclusive you signed with ESPN. Can you just talk a little bit about that? And maybe to be a little bit more precise, we've seen these media deals with other kind of some big announcements with NBC and CBS as well. What do these really bring? Like so what are you able to mine out of these in terms of, be it customer data or referrals? What's going to be really powerful about this relationship going forward for DraftKings?

Well, I think the biggest thing for us is we think it's a great deal. What we were able to get in return versus what we've committed to. It's the perfect example we think of a win-win, where the types of integrations and the deeper kind of content that ESPN is going to work with us on should lead to better returns, better response on the marketing that we do through them, which then in turn allows us to spend more with them. So it's a true win-win, where we should be able to get better efficiency and also spend more with the partner. So that's really what we seek in those types of deals and very excited to be doing that with ESPN, not just because it's a great deal, but also ESPN is the 800-pound gorilla in the space. They're, at least in the U.S., by far, the largest network for sports, and they continue to be. Even in the days of cord-cutting, I know there's been talk of subs and things, but they're still way larger in terms of their sports presence than anyone else. And I think for most people, at least, I don't know, maybe my age and above, the ESPN brand is fairly synonymous with sports, too. So very excited to be partnering with them. I think the types of things we'll do with them will be unique and will work better than traditional advertising will. And that's the kind of thing that we look at with these deals. We say, if we could have spent this money on the open market, what will we have gotten for it, and it has to be at least as good, ideally better, than what we think we could have gotten for it on the open market for us to feel like it makes sense to do these deals. And if you look at our past couple of years, we've been pretty disciplined here. We haven't been out there throwing dollars at everything. There have been some deals. I don't want to call any specific ones out that we took a look at, and it may never be known because by the time it gets announced is with someone else, but we took a look at, and we didn't think were a good deal. And so we passed on a lot of things over the last few years. And I think this one, in particular, we felt, based on both the partner and the quality of the deal were really attractive to us. And the other thing I would say with ESPN is Disney, of course, is ESPN's parent, also owns a very significant stake. I think something anywhere like $1 billion stake in the company. So it's also really great to have that kind of equity alignment with a key partner.

And Jason, there's a variety of backgrounds that are on this call today. Can you just go a little higher level in terms of what is the commitment for DraftKings to gain a partnership like this? Is it effectively a forward media buy? Or -- we appreciate you can't get into specifics, but just sort of what's the nature of these types of contracts, a multiyear commitment for some amount of media purchase? Does it scale? Just a couple of -- some basic backdrop of how these things -- these types of agreements tend to work.

Yes, they're all pretty different. But in general, if you're talking about a deal with a media company, it does, as you noted, center around a media commitment. And then there's commitments that the partner will make back on what they're going to do for us with those dollars. So usually, in order for it to make sense for us to do a deal versus just saying, "Hey, we'll just buy the ads as we want them in the open market," they have to be willing to do things that wouldn't be viable on the open market or at least maybe would be, but we're getting at a better cost because we're making a commitment. So depending on the deal, it can fall into either of those buckets. But those types of things, in the case of the ESPN deal, include things like links directly from their digital properties to our sports book and also include integrations into the broadcast and into radio and the other aspects of the ESPN network. So we're very excited that we're going to be able to do those things with them. And we've tested a lot of this stuff out over the years. So when we model it out, we have a high degree of confidence in what we're going to get for it. That wasn't always the case. I think we gained a lot of knowledge by doing a lot of these deals do. The earlier daily fantasy sports days in 2014/'15 time frame and beyond. So at this point, we have years and years of marketing that we've done with a partner like ESPN or, for example, like the New York Giants, who's been our partner for many years, we just announced yesterday. And we have a pretty good picture of how these things are going to perform. So when we model them out, we have a high degree of confidence in whatever the output suggests we do. But we won't do a deal unless it's economically there. To be clear, we don't look at this as there's any particular deal we must have or we have to get something if a particular competitor gets something else. We don't look at things at all that way. We're perfectly comfortable doing no deals if there's no good deals out there, and we've been pretty patient and pretty disciplined over the last few years and have passed on a number of things. Our continued focus is on making sure we get great returns on whatever investment dollars we put to work, and that's not going to change regardless who the partner might be.

It's really helpful. So maybe just kind of switch to the current sports environment, something that you know very well. Obviously, live sports came to a near stop with kind of the COVID pandemic outbreak, but we've seen -- I mean virtually all of the professional sports leagues come up with different structures and begin their reopening processes. We obviously had NFL week 1 just this past weekend. So kind of would love to get your view on the current -- kind of the current trajectory of sports and any kind of changes that you've seen on the customer behavior side as sports have returned, be it pent-up demand or kind of other types of things that have surprised you as sports have come back online.

I'd start by saying, this seems like, and I certainly hope it continues, but I think there's enough anecdotal evidence to say it's a moment in time. But the numbers [indiscernible] the returns, the response we're getting on the product and on our marketing efforts are just at, by far, all-time highs right now. We started to see that pretty significantly as some of the sports like PGA in June and then basketball, baseball, hockey in July started to return. And so we felt pretty good going into the NFL season. And the NFL season has started the same way. The opening weekend was absolutely massive for us. New Jersey, which was our most mature sports betting state, more than doubled year-over-year. So still really strong growth in that market. And then obviously, there are a number of new places we were live with sports betting for the first weekend for the first time in that state. Really everywhere besides New Jersey and West Virginia, we did not start last NFL season live in. So a lot of new places that had their first NFL weekend with us, and the results did not disappoint. So certainly, we're hopeful that this kind of exponential increase in response continues. But I do think it might be a moment in time where there's a lot of pent-up demand, people are staying home, maybe they're not spending on entertainment and other areas like taking vacations or going after dinner as much as they used to, so they have a few extra entertainment dollars to spend. I mean I think there's a variety of reasons. But we're very data-driven, so we fish when the fish are biting. And right now, they're biting. So we're going to keep doing that. And I think we're hopeful that we'll continue to see great response. And even before any of this, they're, just due to where the market was, there was a strong growth in response. But it sure feels right now and over the last few months, like, it's at an all-time high that might never be matched again.

So Jason, maybe you can elaborate. What kind of KPIs when you say all-time high? Is that -- basically, we're talking ARPU or [indiscernible]. Like are we talking the -- is it just the amount of spend per customer? Or are we also seeing new sign-ups, new customers, different demographics? Anything that kind of -- look, I know it's all theoretical, but anything that kind of pushes you in one direction as you're just watching the numbers roll in that strikes you?

Well, it's really everything. I mean it's hard to -- I mean it really is everything. Across the board, everything is up. I mean if you want to kind of point to where the biggest leap is, it's in the number of actives, particularly in the number of new sign-ups we're seeing right now. But every metric across the board is up for us. So it's not one thing that's jumping and others aren't. It's virtually everything right now.