DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Shaun Kelley, the U.S. gaming and lodging analyst, and welcome to [Audio Gap] [Operator Instructions] We've been talking to people about the NFL league, so happy NFL league, Justin. And -- sorry, Jason, thank you, and thank you for joining us.

So Jason, let's get started [Audio Gap] the acquisition, if we could. We're obviously able to kind of see and analyze this deal a little bit. But I think we can look at it. We'd love to maybe start with your position given all you are up to and everything you're doing. You certainly saw something I'd love to hear kind of in your own words, what made this makes sense, and then we'll take it from there.

Yes, absolutely. And thanks again, Shaun, for posting us behind GNOG. It's pretty simple, which is we know that the iGaming TAM has at least 2 broad subsegments of customers call it the sports first, call it the iGaming TAM. And we knew that we were doing really well with that sports first customer, that motion of cross-selling from DFS into OSB and OSB into iGaming in the States where that is available. And -- but we knew that we could do a lot more with that iGaming-first customer. And you saw that in Q2 of 2020, when we launched our standalone iGaming app and put a little bit of marketing behind some motions around attacking that iGaming-first customer. The traction was pretty good. But we probably came up for air and, call it, Q4 2020 and said, look, there's more to be had in that iGaming first -- the iGaming TAM. We went through a process of thinking about where are the gaps, we felt very good about our product. And we said, well, look, I think it's really about a brand that resonates with that iGaming-first customer. We thought about -- then thought about building a brand, buying a brand, renting a brand. And we were sort of looking at all those options in parallel when we thought about sort of doing research on what resonates. Golden Nugget really rose to the top of the list pretty quickly, especially when you marry that list with some type of actionability quotient and bada-bing bada-boom, we're off to the races on hunting that down. So that really is the thesis, which is to go after that other part of the iGaming TAM. In terms of your question around it's a variety of things. First of all, they've got a great team, they're operators. They have been in market in New Jersey from the beginning, strong market share, so they know how to operate. I think on a product side, but in differential on that live dealer capability. They figured out some things on live dealer early days, and we're excited about that part of this acquisition. And I think, look, back to that -- so it's team, product, brand and database, which go hand in hand. Look, I think they've got -- Golden Nugget is an iconic American casino brand. It might not -- like a multitude of databases, the Golden Nugget databases, all of the databases within the broader Landry's, Fertitta complex. So I think all of those things were contributing to their success over the last few years. We're really excited.

Yes. So maybe we can just talk about the actual go-to-market strategy or vision here. Dual brand, and it seems like having that second brand resonance with that core gaming customer makes a lot of sense to keep. So just walk us through the product road map of how this works. Is it effectively 1 technology and 2 skins that we see out there? What does that integration require and/or kind of -- and how do you market or put marketing dollars or allocate marketing dollars between now carrying 2 brands as opposed to 1?

Yes, that's right. I mean -- So today, depending on the state, you've got the core legacy DraftKings, DFS an app, which, again, where applicable you've got to engage the in-app iGaming functionality. And then you have the stand-alone iGaming, DraftKings casino app. In the future, we will just add a Golden Nugget branded app. And then the -- in terms of the product road map behind that golden nugget app, we will bring that on to -- we will attach our iGaming aggregator into the Golden Nugget front end. And then in terms of marketing dollars, yes, we'll be deploying marketing spend behind the Golden Nugget brand. I think part of the synergy rationale is the efficacy of those dollars utilizing more of our pattern reconnoiter to make those marketing dollars work harder behind that Golden Nugget brand.

Perfect segue into the kind of cost savings potential here and you threw out or laid out some relatively large numbers as it relates to marketing and overhead. One key piece that we looked at was obviously maybe just the foundation of gaming, which is market access. So maybe walk us through in terms of market access, how important is that piece of the savings in your kind of overall margin profile? Because I would assume it doesn't just apply obviously to gaming, it's also going to carry over to what you can do on sports. And then what does that mean for the future? Is there additional opportunity for Golden Nugget to go out now expand in the land-based business and of course, they can contribute that market access to drafting.

The retail rev share savings, whatever you want to call it, is an important part of it. No doubt the other parts around marketing and top line are going to be there. The COGS synergies are very real run into our iGaming back end. They're also within COGS is the ability to utilize the DraftKings homegrown games that have no rev share attached to it is very, very important to the economic synergies there. But for sure, to your point, around the retail rev share, the skin savings, that's very exciting state legalization and to what extent will the -- will that even be required in future states. But for sure, we've had great rates agreed to as part of this -- the commercial agreement with them.

And obviously, Golden Nugget was a leader in -- on the product side was a leader in live dealer, which has proved to be a bit of a killer app as it relates to the iGaming or online casino business. Evolution is sort of the market leader on the sort of product provider side. Can you just talk about the interplay with -- is Golden Nugget able to do something in a proprietary fashion? Or is it really reliant on their technology with something that GN is doing slightly different on the front end? Could you just break that product portfolio down a little bit and help clarify for people?

Yes, absolutely. Well, first off, live dealer is super important statistically. We've proven it over and over again, the incrementality of live dealer and the consumer product within the iGaming product offering is very real. So we're excited about it. Evo is a fantastic partner of ours today. And I think the best way to think about it is when you break that live dealer capability down, you've got a couple of components, right? You've got the physical studio which, depending on the jurisdiction, may require to be co-located within a [ model ] around that. You've got some sort of close technology around the table, and then you've got some software functionality. What this transaction brings to us is some strength across all parts of that, certainly on the front end parts, that ability to have a studio with know-how around staffing with some of that close to the table technology. And I'm just excited that we've got some capabilities across those 4 broad pieces of live dealer that we can begin to build from.

Got it. That's helpful. And we -- the other area where we've had a lot of questions recently is obviously, this gives you a co-brand strategy as it relates to 2 slightly different verticals. But there's been a lot of discussion in the industry about the possibility of ESPN, which has been a big partner of yours and brand partner for somebody in a more cohesive fashion or a much larger fashion going forward, too. Could you help us think through pros, cons around a larger scope and of an agreement with ESPN? Is that something that is in the cards could be attractive to draft games from here?

Yes. I read the Wall Street Journal article just like you did and like everybody else did. What I'd tell you, Shaun, is we're going to in an opportunity like that, like we always do, which is a highly analytic NPV-based methodology, and we're going to look at the incremental LTVs and from the customers layering on any difference in demographics that, that brand might bring, offset by the economics of the transaction and that article has some big numbers in it. So that's how -- that's what I'd say is we'd evaluate it. If we felt like it was a good NPV deal, then we might pursue it. I think there is an x factor here just on auditing in America. We know what's happening there. So I think that, that would need to be incorporated into the MPV model.

Before we get into a few other subjects, one sort of last one on strategy and M&A, which is kind of how does DraftKings approach sort of future customer brand acquisitions? We've seen sort of a multibrand approach permeate in Europe, and these have been quite successful. But also you have a lot of market or sort of market-by-market diversification, right? A lot of local preferences to may be different between countries where the back-end technology might be better to leverage right, different languages. A little bit more homogenous than the United States theoretically, but you would know better than us. So how do you kind of balance your scale with a lot of your marketing dollars where I think we're just starting to get to the tipping point what you can maybe do nationally there behind the DraftKings brand versus maybe more tactical approaches, well, look, you do have this back-end technology engine, you guys can leverage to segment that customer in lots of different ways?

So right now, we're really excited about adding this brand to the family and certainly for the iGaming TAM. That's where we're focused right now is getting to close and integrating it beautifully and reaping those synergies that we underwrote. Broadly speaking, I think you're right, multi-brand, especially in iGaming, I should have mentioned this as part of the thesis earlier that iGaming world is a little bit, for lack of a better word, superstitious where people might say, "Oh, I play DraftKings Blackjack on Tuesdays, but I never play DraftKings Blackjack on Wednesday because I always lose. So having another brand gives you a better chance of capturing their Wednesday Blackjack market share, wallet share. But I think it's a big step for us, and we're going to hit and take it from there.

Yes, it's a good point. It's something we've noticed for years in the casino industry. Everybody has got a favorite slot machine somewhere, right? So let's start at the top, total addressable market, I think everybody's favorite subject or at least it was 18 months ago. One thing I've noticed as we've been watching the data really closely is out of Virginia. They're just putting up some pretty exceptional initial productivity levels when we think about I think the chosen metric, which is sort of a win per adult type numbers. In some cases, these are probably hitting levels that we thought you might not hit for a couple of years, and we're hitting out of the gates levels that are probably already in line with the U.K. And yes, it's not New Jersey, but really, really productive out of the gate. So I would love to get your own sense of how these -- some of these states are debuting relative to DraftKings own expectation. You've obviously raised guidance I think, twice so far this year. So maybe 3x. So much of it is that versus your share, your products, et cetera?

Yes. There's a lot in there. And let's stick with the win per adult or GGR per adult or gross revenue per adult. I think that's a fairly normalizing way to look at it. There's a -- there's quite a few things going on. So first off, I think the ramp is just accelerating. So if just the general American awareness of the category has changed dramatically over the last year. So if -- in 2018, we sort of thought we'd get to this type of participation rate, you're just going to get there a little bit faster. But in addition to that, just the growth from existing units continues to be impressive, which is a combination of additional people joining the category as well as people engaging more frequently across products, across sports. And so I think you're seeing the behavior people enjoy it, Americans love betting on sports. So I think I ramp point, Shaun, is an important one. I just think that broad awareness of the category is driving some of the more rapid early adoption when the state goes live.

And let's break down that same state function because I think that's really important. Obviously, this kind of gets into your cohort analysis a little bit, which is pretty critical to, I think, how you're analyzing your own business. But what is that balance a little bit between what you're seeing on the sort of monthly unique players so that just new people entering the system? And let's think same state to same state versus what are you seeing on those people spending more gambling with you more because I'm sure your own algorithms, your own product capabilities are growing. You're able to offer them more options at the right time to bet on and you probably were 3, 6, 9 months ago.

Yes. Yes. I think it's certainly both right now. The number of people participating in the category continues to grow, and that's, call it, more of a macro function. But the ARPMUP element, the engagement, the monetization part is much more in our control, where we can, through data science, utilize some techniques that introduce a new sport, an MLB better might be very inclined to start betting on the PGA. And I could think of an MMA or UFC better who wasn't actually that big of an NFL thing. On the ARPMUP side, I think the ARPMUP, the impact of declining promotional intensity in a more mature state impacts ARPMUP as well. So right now, it's a combination of both for sure. But I think we can control ARPMUP and the levers that we pull. We're excited about the engagement and the monetization elements, the cross-sell -- the cross product offerings and then the cross-sell like sport cross-sell within the OSB and then even within iGaming getting that Blackjack player to place his hands on perhaps Baccarat too.

And for those investors that are a little newer to the space, we get this question occasionally, but -- Is there any risk that when we see these really elevated levels of marketing spend and you talked about the awareness in the CAS, some of that starts normalize and even possibly pull back on a dollars basis. Just how confident can investors be that you're not sort of overearning because of the amount of promotional dollars that are in there and really talking about on a revenue basis rather than a profitability basis, but just sort of overstimulating the market. What are you kind of looking at in your own cohort analysis that gives you confidence that, you know what, as we dial these figures back, that customer stays with us. These LTVs are real.

Yes. Well, I think it's a few things going on there. I think that it is an inherently sticky product category. It's big picture. It's part of the entertainment budget of American family or an American unit. And I think it's like a very high return source of entertainment spend. So it is highly sticky. And I think for us, we've disclosed some of those customer and revenue retention rates that have been early proof points that people enjoy staying with DraftKings. And yes, there might be some crazy promotions from other -- our players come home. They come home to DraftKings, which is the product, the app that they love because of real genuine product differentiation. And that could be, when I say product differentiation, that could be breadth of products, that could be wagering opportunities that could be the data science that I referred to, which is it's very personalized and customized. It could be deposits and withdrawals and overall customer experience, which in our mind is all part of product and tech. So what we're seeing is that this is something that people enjoy. It's part of their entertainment budget. And because of what we do in product and tech, they stick with us.

So sort of the perfect segue into product and tech. So let's go there. I wanted to ask around, I think if there's one thing that's synonymous with product at the moment, it's all the discussion around Same Game Parlay. So can we talk a little bit about the ability of a single product like that to have a meaningful impact? And maybe you can just give the flash commercial, obviously, DraftKings signed an important agreement with Genius Sports to be able to offer this for the upcoming NFL season? So a, kind of how does that agreement work or what can you kind of help us understand a little bit better about that? And then b, how important can that be? I mean, can that make up a material -- can one product like that make up a material portion of revenue coming into the NFL season?

Yes, yes. It's a great question. So maybe what I'll say is, like, first off, completing this vertical integration was such a big milestone for DraftKings in 2021. On the earnings call, I had to use the term substantially complete because we still had one state and were lingering out there, but that is over the goal line. So we are complete now. And one question I get a lot is, well, if you're vertically integrated why do you need Genius. And the answer is, no, no, we couldn't have even rented if we were not vertically integrated. So being vertically integrated really allows you to bring that -- those innovative products to our customers. And to be clear, Same Game Parlay was a catch up to the other 2 folks who are vertically integrated here. And so I think the right way to think about it is, okay, we're done with the vertical integration. They're listening to the customers about what the customers want and making a decision on whether to rent or build it, you're looking at e-coms, you're looking at speed to market, we decided to rent it for now. We'll watch it, and we'll make a decision on build by rent periodically. But now sort of the worlds are [indiscernible] on innovation and what we can now bring to customers, things that they tell us that they want and bring to them, things that they get, but we'll bring it to them because we're pretty sure they're going to like it when we get it. And that really speaks to the test and control sort of mindset at DraftKings, which is we're going to test things that we think customers like constantly. And when we see the pickup in the activity, then we know that it's ready for rollout. So I'm not sure I answered all your questions on [ pros and cons ], but what I can tell you is we made a very informed economic decision and speed to market matter. We had to catch up to our competition on Same Game Parlay, but now that we're catching up, we're ready to leapfrog.

Sounds great. And I imagine how quickly -- and let's kind of convert over to the SBTech piece then. How quickly can you be in market launching, testing and iterating? Did you have things already sort of lined up in the funnel that you wanted to do but you needed to have this conversion on first? Or is that something more that's going to be beyond, let's call it, this NFL season to really kind of, let's say, maybe have a hit product or try something really aggressive and new?

We've got our product road map, our product management team has got a long list of things that we plan to bring and I think you're right. One approach is to think of product, but there's also a variety of back-end things that matter to the customer a lot in terms of their overall app experience, so we're going to be bringing those live if we haven't already. We are doing -- we're just constantly improving on the products and tech. What was I -- what was the second part of your question?

I mean, really just trying to kind of understand the -- but the ability to bring new products to market quickly and like either is that something -- do you think we can see an impact from that on the front end -- maybe on the top line this year? Or is that more of a 2020 kind of, let's call it, post NFL season impact?

Yes, I think it's going to start with some of the things that we brought that we -- it's still early since we launched Same Game Parlay. So we got to continue to look at the data and look at the financial impact and how much of that was incremental versus spreading existing play across different products with new product offerings, and we're still evaluating that. But I think the most important thing is we're just set up. We're just set up for a lifetime of staying ahead of competition and giving our customers what they want.

And obviously, the material gross margin savings here and 3Q is kind of the magic point, I think, for that to actually kick in. So can you remind everyone what kind of incremental savings this can mean for you when you think about the actual dollars that you need to spend effectively it can be for the product and services that now is ...

It's so meaningful, if you go to our Investor Day materials from Q1 of 2020 and 2021, where we talk about our long-term EBITDA, we specifically call out an element of the waterfall that's the synergy at maturity. So it really gets to be a big, big number over the years. In the very short term, the way to think about it, I think we've disclosed a third-party rented bet engine is roughly 10% of NGR, net revenue. I would remind people of 2 things. One, that's only relevant, that savings is only relevant to the OSB portion of our total revenues. So we do have iGaming, we do have DFS. So do not apply that to all the revenues, only apply that to the OSB portion of the gap pretty much immediately in Q4 since we pay [ CAM ] through Q3, even though we've fully migrated already. And then the other thing I'd remind people is that under -- when you get under the covers, the gross margin rate is not only the sum product of our different product offerings but of every state. So to the extent that new states are launching, where the gross margin rate is suppressed due to the promotional intensity when a new state launches and certainly exacerbated by an NFL, but the commencement of an NFL season, you got to sort of pick apart all of that, too. But purely clinically, it's, call it, 10% of NGR for OSB is the benefit.

Great. Let's -- so if we kind of hit on product and COGS, let's go a layer deeper on to the marketing and customer. One concern, I think, has had its moment and maybe we've already passed that given sort of the way that the stocks are looking forward to, I think, the start of the sports season here is the coming competition in the vertical, right? We heard from Caesars earlier today. It's a dramatic amount that they're looking to spend. We know Wynn is lined up here to spend substantial amount, Rush Street, Betway, the list is going to go on and on. And help us think about, first of all, just with maybe a basic timing question because we get this a lot. When you've got these bigger broadcast deals you're starting to reach international or maybe cross regional marketing, when is the actual just dollar numbers go out the door. So is that all perfectly aligned with when the customer is seeing the commercial? Or are you spending that in advance, i.e., let's say, Q3 is more loaded. Q4 balances are allocated -- actually already spent the dollars in advance for media buys. Just help us understand kind of like the timing. We can talk about like the magnitude.

Yes. Well, the spend is going to depend on the channel, whether that's digital, out-of-home broadcast. It's going to be a wide variety Shaun, of stuff that we're booking well in advance for stuff that's not happening until November. Stuff that we're buying on the spot sort of today for some of the more digital things buying today for today. So it really does run the sort of different lead times of what -- of spend that's committed spend that will be expensed in period depending on the type of the ...

Can you just say the committed spend for like, let's say, a big advertising, a big national media buy. Does that -- is that as expenses incurred? Or is that expensed when you actually like run the commercial?

It will be expensed when the expense -- when it's matched with the actual activity that was...

Okay. So it's not done in event. It does match with the timing of when you're in market with whatever that advertisement might be.

Yes. Right.

Okay. Got it. And then the other area here would be helping us kind of get a sense of competitive environment, right? So you, I think, run very disciplined, pretty numerical kind of formulaic approach. You're going to allocate dollars across channels, you're going to test and learn and figure out which channel is the best for allocating that spend. But I guess the question is like if everybody is out competing and presumably, they're using many of the similar acquisition cost. And if that happens, then how do you adjust your model? How does your spend react to an environment or like, say, everybody is betting on a set of keywords or everybody is trying to hit the gold rush for NFL this fall.

Yes. There's a lot in there. And what I'd tell you, I mean, probably the most pertinent thing is our marketing team is not feeling the impact of competitive spend today nor has it over the last few months. I think there could be a few things going on there. One, which is when you take a big step back and you think about this category of spend as a percentage of the entire universe, it's still pretty small. I think it could be attributed to just the sophistication and the pattern over the decade of targeting this demographic and knowing what works and what doesn't work. And there's a level of pattern recognition and sophistication that I think we have on that front. So we're not feeling it. And I would remind people that, yes, I mean, I hear the same things you hear. We have a plan. We had a plan, call it, fourth of July, pretty darn our NFL launch and then we heard this. We didn't really change, right? We -- to your point, we're super quantitative and disciplined. We have a CAC allowance, a ceiling that we're continuing to be able to be at or below that. And so we're not feeling it. And this isn't the first NFL season where we've seen lots of new competition in Q3 2019. I want to say we went from 6 or 7 online sports betting operators in New Jersey to somewhere in the mid- to high teens. And we gained market share in September, October that year. So it's not new to us, and it doesn't really impact how we think about our ...

So then kind of the other piece of this is we do seem like we're rapidly approaching with some of the new state legalizations, that 30% threshold for national marketing. So can you help us understand that priority? Are we going to see a meaningful effort there this fall? Or does that really kick in, in '22 and beyond as these states actually kind of because right like I said, we're right on the edge of a problem.

You're exactly right. We're right at the edge. We do have a good number of states in that bucket that I call legalized pending launch. And boy, is that hard to know exactly what they were going to go live, Arizona today. So we're right at the cusp, and that means that you'll begin to see some national advertising this NFL season from DraftKings. But it will not be sort of a full shift. It will be just a mix -- a gradual mix shift as a percentage of the U.S. population increases.

So as aggressive as DFS back in the day where every other commercial was -- DraftKings are we going to paint the town like that or maybe not the same.

No, I don't think -- I don't it'll be quite like that. I wasn't here back then.

Very last question for you. Just name a new state, one that either you're going into, you just launched? What's most exciting to you that you think is a market that might be underappreciated by investors out there every month? What are we going to be looking back saying, man, we should have known that?

That's a great one, Shaun. Wyoming and Arizona are 2 most recent. We've got a whole bunch in the Hopper, Connecticut, Louisiana, Maryland, Ontario, sure I'm forgetting a few. So I think we're excited about all of them. It's -- we'll spend accordingly. We'll just apply that same playbook of LTV to CAC and adjust the dollar amounts accordingly. I think to me is the consistency in how we launch in a new state that we have -- we get better. We learn every time we launch a new state, but the core of what we do in the weeks leading up to the day that it goes live in the 24, 48, 72 hours after we go getting reps and getting better and stronger every time we launch a new state. I think that's what's most exciting to me.

I think it's a perfect way to end it. And on a day where you launched the state this morning and hopefully, you'll be watching the game tonight. So thank you, Jason. Really appreciate this. We know it's a very busy time for DraftKings. I think there's an announcement virtually next ones will be and a great dialogue and hopefully, a very productive season this fall.

Well, great to see you, Shaun. Thanks for the good questions.

Thanks, everyone.