DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Next up, it's my pleasure to introduce DraftKings, and we are joined by Chief Executive Officer and Chairman and Founder, Jason Robins. Jason, thank you for being with us this afternoon.

Thank you for having me.

Absolutely. So it's been a little over a year since the company went public. You've launched in several new states. You had an Analyst Day. You made some strategic partnerships along the way. But perhaps to kick things off, walk us through how your view of the industry has evolved over the past year and where your strategic focus is now given that backdrop.

Well, in many ways, I think the industry's evolved. As we are hoping, there's been a lot of new states that have opened up. The market's been growing quickly. There's definitely been competition. We expected that. I think very similar to our experience in daily fantasy, there's a lot of competition in the early days and then consolidation and dropping out of some competitors. So I think you'll see a similar pattern here. So in many ways, it's been very similar to what we expected. I think the thing that's obviously been a big unexpected component has been the pandemic, which I think, on the whole, has accelerated the growth of the industry both because I think -- customer acquisition, in particular, has been so good as people have been staying home more and more of captive audience, but also I think more and more states are considering legislation, perhaps because of the budget gaps that have been created due to the economic effects of the pandemic. So that's definitely been an accelerant. And I think for that reason, we basically executed the playbook we thought but at a more aggressive pace. As the data that we've gotten, for example, from customer acquisition has been so strong, I think we've been able to invest more deeply than we otherwise thought we might have at this stage.

And I guess at your Analyst Day, you did increase the market sizing. Maybe if you can talk to us about the biggest changes that you made and how states are currently ramping versus those long-term expectations.

Absolutely. So I think the biggest change in terms of long-term outlook, in our view, has been the potential for the iGaming market, which we think is much larger than what we initially had projected. That's based on data we've gotten not just since the pandemic but really since the start of our entry into the iGaming market. And Michigan was a great example more recently of something, I think, just blew away everybody's expectations in terms of the size of the iGaming market. So that's been a big change. We did not change our outlook on the rate of ultimate legalization. We kept that the same as we had the previous year with 65% as the projected legalization -- or percentage of the population of legalized mobile Sportsbook and 30% for iGaming. We didn't change our market share assumptions. We tightened a little bit on the iGaming side as we've gotten more data points. So we narrowed that a bit, but we didn't really change the overall market share projections. We increased sports a little bit based on some of the data we've seen, but the biggest change was on the iGaming market size.

One of the other things that was part of the transaction to go public was the SBTech acquisition -- or I should say merger. Can you just remind us of where you are in the integration and how you're thinking about mitigating any risks that are out there and maybe frame what the long-term benefits from this will be?

Absolutely. So we are on track for exactly the time line we thought we'd be on the migration. We have pretty consistently, since we completed the acquisition, said end of Q3 of 2021, which we are on track to do. As far as risks, the way that we've managed those is by doing it at a pace. So instead of just a hard cut over on everything at once, we've initially launched in the single state, and we'll be rolling out other individual states along the way. So far, that's been going really well. The state that we launched in has been performing well. We've seen no negative effects. So that's given us confidence to continue proceeding and the confidence that we're still on track time-wise. As far as long-term benefits, I mean, really controlling the product is everything. We're a product and technology company at the core. We think the market will be one based on having the strongest product, both in terms of competitive differentiation but also in terms of being able to really monetize the customer through breadth of offerings, effective cross-sell and so on and so forth. So our own capabilities, I think, on the DFS side, on the product side, are what allowed us to win there. We had a more robust sports offering. We had more features, more social integration. So a lot of that is the same playbook we're following on sports betting. We're going to aim to have more options for betting, better and more effective use of things like live markets and prop betting that really, I think, will be the heart of the monetization within sports betting, particularly the in-game betting, the live betting. Ease of use is a big focus for us. And then I mentioned social connectivity. That's something that we're very excited about as well, and we started rolling out some more features on that, and we'll have a lot more work that we'll put there. We actually just started rolling out features, I should say, on that in the last couple of weeks. And we'll have more to talk about on the social side in the coming months.

That sounds good. Maybe backing up a little bit. One of your opening remarks, you said that the pandemic has perhaps brought forward some of the adoption. So as we sit here today and we start lapping over the period where there were no sports and people were engaging online and now you're able to see people go back into the casino, how is that impacting how you're thinking about the demand environment and the growth trajectory from here?

Well, it's really an interesting question. And the truth is no one knows the answer. Hard to say how much this has been a kind of permanent accelerant versus how much this simply pulled forward in the next couple of years, and it will regress to the mean. And really, it's impossible until we get that data to know. On the one hand, there's a tremendous amount of momentum in the industry. Definitely more -- anecdotally, I have more people in various parts of the country saying, "Oh, I heard you guys just launched Michigan," and things like that. We definitely didn't get that when we were launching some of those early states. There's a lot of momentum, a lot of acceleration that's happening just because of the industry itself. But of course, the pandemic, having a captive audience at home, having people with stimulus checks in their pocket with less options, forget even just going into casinos for all kinds of discretionary entertainment, I think you and I have talked in the early days of the pandemic. And you mentioned to me, Stephen, that Goldman was projecting hundreds of billions of dollars. That ended up probably coming down on the light side, given how much got shut down for how long. That hundreds of billions of dollars of entertainment spend was going to evaporate as people stayed at home. So it's hard to have all those things and not see some benefit to a company like DraftKings, so that's an online-dominated offering. Obviously, there were a few months where we had no sports. So that had the opposite effect. But once sports started to come back, we had unbelievably strong customer acquisition, just records for every single major tent pole, including start of NFL, Super Bowl, everything else last year. I guess Super Bowl was this year, but last season. And again, I know some of that's momentum in the industry, but there has to be an effect of COVID. So we're being cautious in our back-end-of-the-year guidance. I think you could argue either way. If I had to guess, what I would guess is that there's a bit of a slowdown back to more pre-pandemic levels on customer acquisition. I don't think you'll necessarily see it drop below because I think the industry momentum is enough that we'll get back to probably closer to pre-pandemic levels and maybe even a little higher. And I think on the retention side, at least from what we're seeing now, I think that will hold up quite nicely. Even though we're still in the early days of vaccinations, people are starting to get out and about again. The weather is getting warmer in the parts of the country where you and I live. And we're not seeing any evidence whatsoever in our cohorts of deterioration. Everything is still humming along. So we'll know for sure as we get through the remaining months of the year and as we get into NFL season. But my guess, based on what we're seeing, is we're going to see a very strong healthy cohort performance. But -- and I also guess is that -- simply because I just don't know how we can perform at the levels we did last year on customer acquisition, I think we're in a little bit of a retreat in that. I mean, last year, we were so far below our, meaning last season, our CAC target for NFL. And we were spending at levels that we couldn't spend and even hit our CAC target in the year before that. So again, some of that might be momentum in the industry, but I think some of that will start to come back down to earth.

That's interesting, especially given as the space has opened up a bit, we've seen competitors now start to outline 10%, 15% market share targets. And you start adding all these up and you say, "Wait a minute, that's over 100% market share." I guess from your seat, how has the competitive environment evolved? And you alluded to this a little bit in your opening remarks, but what do you think is going to continue to differentiate DraftKings going forward?

Well, definitely, each year, we've gone into NFL. It's been, "Wow, it's gotten so much more competitive than last year. What are you going to do?" And each year, the numbers have looked great. So far, we're still early. So I think in some ways, you could argue that the really strong customer acquisition performance we had was, in a weird way, driven by the competitive environment. Meaning I think when you have a lot of companies out there investing and growing the industry, it can actually grow the industry faster, which leads to everybody having some benefit. I think that, that is something that we probably also were seeing the effects of last year when we saw such strong performance beyond the other things we just discussed, general momentum and pandemic effects. From our standpoint, we're going to continue to follow the same philosophy, which is we're going to base what we're doing on the data we're seeing. We have our own thresholds for what we think is an appropriate CAC given the LTV of the customer that we're projecting, given the amount of data we have. Obviously, we're being more cautious given we're still early in the industry. And I don't think it's prudent to say we're counting on 5-year paybacks, and we're 3 years into an industry. So we're going to continue to be relatively cautious. But also from what we've seen, we don't need to trade off aggressiveness. We're able to be aggressive even with fairly conservative and cautious guardrails around what our CAC should be and what kind of LTVs we're projecting. So I would expect that, that will just continue to be the philosophical approach on a tactical level. We should get better every year, both because we know we have to, the competition is there and they're not going away, but also because we're getting smarter every year. Every year, we have another year of data under our belt, and more data means we can optimize better and scale better. So each year, we challenge the team to find pockets of spend that are no good that we want to cut out and to find new pockets of spend that are good that we didn't know about before that we've tested into. And we'll continue that approach. So in terms of differentiation, I think there's a few areas. First, from like the customer point of view, we believe product and customer experience is really the most important area to differentiate. And that's where we're making our bets, no pun intended. So we're going to continue, as we migrate, to invest heavily in ensuring we have a really strong product that we believe is best in class and both monetizes and retains the customer better than anyone else in market, which then, in turn, should give us the best LTVs, which is a clear advantage. We also think that on the internal-looking side, focusing on differentiating our capabilities is important. So notably, of course, to do the first part, we need great product engineering. But we also need great data science, great analytics, really strong marketing. So those are all areas that we think we are very competitively well off today, and we'll continue to focus on as differentiators. If I had to point to anything, it would be tech and analytics, analytics inclusive of data science, because those 2 things really are the engine that enables everything else we do. It enables better decisions on products, faster rollout of product, better decisions on marketing, faster infrastructure build on marketing. So analytics informs what we do, and the tech enables us to do it in a scalable and more efficient and faster way than our competition.

And maybe piggybacking off the competition front, obviously, as people are marketing, it also creates questions around the margin trajectory. Can you just remind us what the typical ramp in margins have been in each state as we think about the path to profitability? And what gives you confidence in your longer-term margin assumptions?

Well, there's a few things, I think, could give us confidence. First, one of the interesting things about this industry is there are other parts of the world, the U.K. being the best example, where there is a more mature industry in -- it's almost like having a little time capsule. You can kind of fast forward to what the more mature state of the market might look like. Obviously, there's always going to be differences given time, given geography. But I think a lot of the same things that you see there are going to be present here in terms of margin and makeup of the market. Obviously, less competition here will be present than in the U.K., where it's a very competitive market. But for that reason, I would expect, if anything, the margins to be a little better. But what we've targeted is in line with what we see amongst typical European companies in this space. Secondly is our own data on our state. So before we really were in earnest into many states when New Jersey was kind of on the basis of everything, we have predicted a 2- to 3-year time line to profitability in a given state. New Jersey was really at the earlier side of that. We were profitable last year in New Jersey for the first time despite the fact that we had several months of sports not happening during the earlier days of the pandemic shutdown. So that gives us a great degree of confidence that our time line makes sense and New Jersey will make substantially more contribution profit this year. We also have a few other states that are kind of coming up on that 2-year mark. So everything we're seeing, and we haven't announced anything yet, suggest that that's still a very fair average time line, that 2 to 3 years, for a state to get profitable. And it will vary depending on the state, but on average should be in that 2- to 3-year time frame. So that's also given us confidence that as we're moving down that path in some of our more tenured states and as we're looking at the projections for what we think we'll do this year versus what we thought we'd do when we initially laid those out 2, 3 years ago, we seem to be on track or better. So that also gives us confidence that our long-term margin projections are going to hold up.

Now you also gave us some interesting stats on customer retention at the Analyst Day. Can you just walk us through the typical path of a DraftKings customer from acquisition channel to then how their spending evolves over the kind of life of the consumer? I shouldn't say life. Even the first couple of years would be helpful.

Sure. So first, we start with the acquisition, which I think a couple of things I pointed to in the investor presentation. One is we are doing a really good job at scale and at or below the CAC target we set of being able to acquire. So we feel very good that the market size is there and the potential for us to efficiently acquire those customers is there. Secondly, we talked about promotional spend, and we laid out a graphic that showed that promotional spend as a percentage of revenue is much higher for a new customer than it is for a tenured customer. In other words, you have to spend more of that revenue, reinvesting that revenue you're going to make early in the customer life cycle on acquiring and getting that initial early life cycle in the right place than you do with a more tenured customer. And that's been consistent not just in sports but in DFS and other things that we have longer-term data and experience in. So what you're going to see is, as there is a shift simply by time of more repeat customers to new customers as more states mature and less states are opening up every few months, you're going to see a natural reduction in the percentage of revenue that is reinvested in promotions. And when we project that out, we're on track for our long-term target of low-20s percent for that. So that's something, I think, that we're very much paying attention to and seems again to be tracking to where we thought it would be. I think on the retention side, once you get out of that early life cycle, also seeing really healthy metrics. One of the ones that we shared in the Investor Day presentation is over 100%. I believe it was 108% year 2 to year 1 revenue retention in our most tenured cohorts. So also not the -- still very thin data. We're still only a few years into the industry but very encouraging to see that for our cohorts that do have a second year, we actually generated more revenue per original, not -- the whole cohort generated more revenue not on a per-active basis. So adjusting for any customer-level attrition, still are making more revenue per originally acquired customer in year 2 versus year 1. It was also very consistent with what we saw in DFS, where for the first few years, our cohorts were at least stable and mostly grew. So very much in line with what we've seen and also in line with what other gaming -- other areas of the world that have had more types of gaming like sports betting and iGaming for longer periods of time have seen.

Now you keep referencing that what you're seeing in DFS is a little bit of a road map for what you're seeing and expecting with sports betting. How similar or different is that customer as you're getting more data out there? And who really is the core sports betting customer for DraftKings?

They're actually quite similar for sports betting. It's a bigger market, for sure. The number of sports betters or potential sports betters is larger than the number of potential DFS players. But demographically, they're quite similar. Some differences with the iGaming customer, but demographically, the sports betting and DFS customer are quite similar. I think one of the key things that we are seeing that's different about the products is the seasonality. Certainly, there's still heavy seasonality due to sports calendar, but it was much, much more skewed towards NFL. And we saw bigger drop-offs afterwards than we do in sports betting. In sports betting, there's things like March Madness, which continue to have really robust customer activity post-NFL season. It just weren't nearly as big or haven't been nearly as big for DFS. March Madness just isn't the same type of event. It's much smaller than it is for betting. On the iGaming side, definitely some differences. So on the one hand, our biggest source of customers on iGaming is sports. So clearly, there's a lot of overlap. We have been able to cross-sell over 50% of our sports customers into iGaming. In our most recent state launch, Michigan has been almost 70% crossover. So really, really good crossover metrics. And obviously, those customers are very similar. But there's also a large casino-only, meaning not as interested in sports audience, that demographically is a bit different. Probably the most notable differences are they tend to be a bit older and definitely skew more 50-50 or 55-45 female versus sports, which is 80%, 90% male.

On that 50% that's not crossover, do you feel like you have to actively market to them? Or are they coming organically? And does that change how you think about the marketing program itself?

Well, to be clear, 50% is the crossover rate. We have way more percentage of our customers that are crossover. It's like over 90% that are crossover versus [indiscernible] otherwise. As far as the question you asked, I think it's a little bit of -- we need to do better at marketing to add audience. I think for pretty much the company's existence, I would expect our largest source of customers for a casino will be through cross-sell from sports. I don't expect that to change, but I think we can do a better job penetrating the casino-only audience by finding more ways to reach them. Most of it has been through either crossover or organic. And we're just starting to kind of ramp our marketing efforts more towards that part of the audience that we aren't reaching as well through crossover because they're not as into sports.

And what do you think will continue to sustain that level of crossover maximize the value there? Are there things that you're going to be doing differently to try to attract them on the product front? Or is it -- I mean you referenced the marketing, but are there other things that you can do to drive that cross-sell?

Well, first, another one where there's a benefit of having Europe being a little farther along, that rate of 50-ish percent plus is very consistent with what Europe sees decades into the market. So I think that's kind of a natural rate is -- even at maturity, if you're doing the things you should be, the crossover is at least 50% as more of these early cohorts are farther along and into newer customers that are more casual that are coming in. I still think they'll cross over at similar rates. As far as what we'll do, I think product, again, is a key focus, having things that are attractive to people, interesting to people retain well once you get them to try it. Because crossing over is no good if somebody tries something once and doesn't return. So I think that's a big area of focus and always will be for us is just having the strongest product and lots of different types of content that's interesting to people. Also, as time goes on, we get more and more data. That's both data from things like testing and learning but also data on the customer themselves. The customer profiles get richer. And a lot of the cross-sell is done by machines, by AI. And so those machines get smarter as more and more data enters the system. So I think that's also a big lever that will help us over time and continue to be very good at cross-sell.

So maybe moving on to legislation. What are some of the key milestones over the rest of the year that people should be watching out for both across sports betting and iGaming?

Well, I think a lot of the legislation occurs in the front part of the year. That's just the way most states are set up where they end their sessions in Q2 or early Q3. So definitely, most of the action is going to be kind of wrapping up in the next couple of months. There are still, however, a few big states that that's not the case for. Ohio is one that meets throughout the year that I think there could be some possible legislation for sports betting in. I'm keeping an eye on iGaming in Illinois. I think there's potential for some action there during the lame-duck session in Illinois on the iGaming front. So those are 2 meaningfully sized states that I think you could see some legislative action. Massachusetts, our home state, also kind of continues to meet through, I believe, end of July. This is part of the multiyear session, too. So that could continue through into next year. So those are some examples. And then finally, Canada, as you may know, is also an area that there's activity recently. And that's an interesting one because while the provinces themselves obviously have to legislate, there's also this pending effort around removing a federal ban on single-game wagering. Right now, you can only do online parlays in state -- in provinces, excuse me, that would have to be federally fixed. And the wrinkle there is Canada, at any point in time, can call for a special election -- can call for an election. Trudeau can call for an election, which would restart the whole process. So obviously, nothing to do with gaming legislation, but depending on what happens there, you could see it affecting whether they're able to remove that single-game prohibition this year.

And I guess how does the competition in Canada do you think will be similar or different to the U.S.? Or could you see it be a little bit of a different animal than what's been happening on a state-by-state basis here?

I think Canada will look more like the U.K. and Europe than the U.S. because there doesn't appear to be any limitations on licenses in the way that most states are limiting licenses shaping up. Also, Canada for years has allowed in a gray market for many large operators that are already present in Canada to operate there. And they've indicated in Ontario that they will just license those operators. They're not going to look to try to differentiate between those that were active before or after the legislation. So I think Canada is going to be a little bit of a more competitive market. For that reason, in our Investor Day, we are projecting lower market share in Canada than we are in the U.S. That said, we do have a database in Canada. Daily fantasy sports has been a popular product for us there for many years.

And I guess one more on the legislation. Obviously, there's been a proposed structure in New York, and there's been some news out in Florida. How do you think about pursuing those markets, the economics of those markets versus maybe your original expectations or even versus other states?

Well, I think every state's a little different, and we're seeing that play out in real time in those 2 states. New York, I think we'll have to see kind of how the RFP process goes. And I think, in general, in New York, we're excited that New York moved forward. Everybody's been waiting for a few years, and this was the year it finally happened, which is great to see. And we're excited and hopeful that we'll be able to put a very competitive bid for us and be selected as one of the handful of operators in New York. Florida is a little harder to tell. It was done through a compact that, I think, is going to go through court challenges. There's also the potential for a ballot initiative in Florida that we're exploring. So Florida is a little bit harder to tell exactly how it's going to play out. Florida is a complicated one because, as you know, the seminal have such a dominant presence in brick-and-mortar gaming there.

That's helpful. I'm hopeful -- hoping to stop taking the ferry over to [ misplaced ] bets in New Jersey on my Fridays. But last question as we have about a minute left, just given the recent acquisition of VSiN, where does content rank in your priorities? And will you continue to expand your content? Or is that something that you think more about driving through M&A?

Well, media content is an area that we, for a long time, I believe, is very complementary and synergistic to our gaming business. Simply put, most of where we acquire our customers is from buying advertising on media. So if we're able to produce our own content that we can then monetize in traditional ways as well as use as a means of acquiring and activating and driving cross-sell behavior in customers. For example, with VSiN, while we're not going to tell them which side of the bets to pick, we got to keep that pure. We can ask them to talk more about in-game betting. If that's something we want to do to really push, in-game betting is something that becomes more of a focus for them, and therefore, drives adoption in the market. So those are the types of things, I think, that we can do with ownership of content that we couldn't previously do or had a harder time doing when we're working through partnerships or [ at buys ]. As far as the path forward, while we've long had this belief in the synergy and strategic value of media content, until recently, we were not capitalized to really pursue it either through organic investment or M&A. Now we are. So it's become a much bigger area of focus. We recently hired Brian Angiolet as our Chief Media Officer. He was a senior executive at Verizon. We did a deal where we purchased not just VSiN but also bought the rights to the Dan Le Batard programming, with a partnership with Meadowlark Media. So those are some of the early moves we're making. But really, the idea is we can explore both organic and M&A as a means of growing our content footprint now that we're capitalized to do so.

Well, I think that's a great way to wrap things up. Jason, thanks so much for all the time. And thanks, everyone, for joining us today. Next up, we will have Red Rock Resorts at 3:05. Jason, thanks again.

Thanks for having me.