DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thank you so much for joining us today. My name is Michael Graham. I'm an Internet analyst here at Canaccord. We're super excited for our Digital Gaming Summit today. We're going to be going through the whole landscape, including online sports betting, iGaming, eSports. We've got a bunch of great companies from the U.S., but also around the world, and we've got my analyst colleagues, they're going to be moderating sessions from the U.S., Canada, the U.K. and Australia. So it's going to be a great day. Thanks for joining us. We're super excited to kick off the day with our keynote, Jason Robins, who's the founder and I guess, Co-Founder and CEO of DraftKings. Jason's been with us a few times before, and we're just really grateful to have him here. And Jason, when we initiated coverage at DraftKings in May of last year, our revenue estimate for this year was $680 million, and you were only live with OSB in 8 states. Now here we are, you just reported Q3 results, our revenue estimate for this year has more than doubled to $1.3 billion, which is just awesome. And you're live in 15 states, you got almost $2.5 billion of cash on the balance sheet. So just an amazing year or so.

Reflecting on the Q3 results, in your mind, can you just talk us through the 1 or 2 most important developments or progress points that DraftKings had during the quarter? And thank you again for joining us.

Thank you for having me. I think there were a bunch of things, so hard to nail it down to one or 2. I may cheat and throw 3 out there. So first was, we saw an amazing start to the NFL season from an activation and customer acquisition standpoint. We launched a couple of new states right around the start of the season in Wyoming and Arizona. Arizona had its first 100,000 active users in 17 days. It took hundreds of days in some of the earlier states like New Jersey, Pennsylvania, for example. And that was despite the fact that Arizona was one of the handful of states in the U.S. where we did not have a Daily Fantasy product that actually got legalized along with sports betting, and we launched it about 12 days before. So didn't have the years and years of building the database that allowed us to get off to a good start in some of those other states. But despite that, we saw the huge increase in ramp from some of the earlier states in Arizona. And same thing in Wyoming. Wyoming obviously, not as big a state, but that ramped faster. So a really great start to the NFL season from an activation and customer acquisition standpoint. That's really the thing we look at in Q3. Q4 is a bit more of a monetization quarter; although at this stage in the industry, it is still more focused on bringing on new customers, keeping them active, keeping them going, getting them to try new things. But Q3 is really all about that given the start of NFL season. The other couple of things I'd mention is we completed the migration onto our in-house proprietary betting platform. So that was the largest tech project we ever took -- undertook, I should say, as an organization, it took about 15 months. And everything has been pretty smooth. We were expecting a little bit of bumpiness just because it's hard to imagine migrating and a month later, starting the busiest time of the year with a bunch of new states and a significant ramp, as you noted from where anyone thought we would be including us 1.5 years ago. But it's been great. It's been really smooth. The performance has been strong. So really proud of our team for doing that. And then the third thing I'll mention is we launched our NFT marketplace. I know you talked about that a little bit before we started the call, how you guys are bullish on crypto and NFTs, and we are too. We think Blockchain is huge disruptor much in the same way the Internet was, much in the same way mobile was. So we're excited to sort of take the foray step into the space with the NFT project. And I think you'll see us doing more and more as the years go by.

Awesome. And congrats again. I mean, it's just a really amazing execution from the company. So it's great to see and congrats. I want to touch on 2 key items that investors were focused on coming out of the quarter. The first one was the lower than typical hold that you saw just from lack of upsets, I guess, in the NFL. Maybe just touch on that. We look -- we've written that we think that's very transitory, but maybe you could just touch on that and if there's any update to that, that you can share, that would be great.

Yes. So definitely saw some customer favorable game outcomes, not just in September but through the first part of October. Really, it wasn't until the last week of October that things kind of flipped. And November has been kind of the opposite. So I mean that's just the nature of the industry. You'll have a bad month or 2 and you'll have a great month or 2 and everything kind of evens out over time. Particularly that's true with the NFL, where there's fewer games. So it's a lot more volatile based on just having a few weeks in Q3. And obviously, towards the end of the quarter that can kind of swing a quarter one way or another. We did end up hitting our guidance. It came in a little bit below consensus, but we hit our guidance. We always put guidance out there with some caution towards making sure we're not counting on certainly not above expected, which we saw in the first 2 quarters of the year, we had better-than-expected hold rate. Q3 was below expected hold rate. So that's just kind of natural variance to the business, and it all evens out over the course of the year. And no sooner time than this month to see that November has been reported publicly to be a very strong month for books on the hold side and October was a record low month going into the last week. So just kind of the way it works. It swings both ways and over the course of time, it all evens out.

Just curious, when you go through these swings in these quarters, does it -- does it open up opportunities to like design the product in a different way or improve the product design, I guess, to make it a little more -- a little less volatile? Or is that even possible?

I mean the thing is that the things you can do to make it less volatile, actually reduce expected value. So for example, reducing your mix of Parlays will reduce volatility because big Parlays can swing things either way but that also makes your overall expected value go down because Parlays are some of the most profitable bets that you can take. I think similarly, people -- and this happens really only in the case of really big bets. So the kind of classic example of hedging that is what we're sort of talking about is back when McGregor fought Floyd Mayweather, And everybody thought McGregor was likely -- in the booking world, everybody thought that McGregor was more of like a 25 or 30 to 1, but he was listed at like 7 or 8 to 1 on most books. And so you would think from an expected value standpoint, you'd take that all day. But when $10 million, $20 million is coming in on McGregor, it's a lot for a book to handle, and some of them decide to hedge and it ended up lowering expected value. And of course, McGregor lost as was predicted. But it ended up making things a little bit more -- I guess people slept a little better the night before the fight who were working there. So there's a few examples where you have extreme action on one side or the other where you might do that, but you really don't want to if you can avoid it. We have over $2 billion on the balance sheet. This is a blip on the radar for us when we see some of these outcomes that vary one way or the other. So it's really not something that we really contemplated. But in a situation where it's big enough, who knows. The other thing I would say is that as we mix in more products, iGaming is growing quickly. We just launched the NFT marketplace. Obviously, those are products that have much more stability in terms of the -- there's no game outcomes that they're dependent on. There are things like jackpots in iGaming, but there's so many more bets, so much higher frequency that maybe you'll get a day that's off, but you're not going to get a month or a quarter where it materially swings anything on iGaming. So I think that's an example of other things that we can do, just mixing in new products, so that sports betting, which is currently very large for us, is no longer quite as big, although obviously, we're very excited about that, and we think it's going to grow to be much more significant sized product than it is today. So I expect that the swings will get bigger before they'll get smaller.

Speaking of fights, it looks like Muhammad Ali is fighting with the Beatles back there behind you. So that's an awesome photo.

Love that photo.

The other thing I wanted to touch on coming out of the quarter was all the background you shared about how things unfolded with Entain was really helpful, just really great transparency there. But it does present a couple of interesting questions that I wanted to touch on and the first is just generally iGaming versus OSB. Just talk for a minute about the relative unit economics there. And how important is it for DraftKings to become materially bigger in iGaming?

Well, right now, we're #2 in iGaming. We're behind MGM. And we think that we have a lot of upside. We're in the process of completing our acquisition of Golden Nugget. That should add some share and we think there's upside to growing that share because I think Golden Nugget has a great brand that reaches a different type of consumer in the iGaming space than what DraftKings reaches. So we're very excited about that opportunity. As far as unit economics go, we don't really look at them separately. You kind of look at what's the most effective and efficient way to bring customers on board and then how do we cross-sell as many of them into as many products as possible. It's really hard to tell. I mean the dollars are fungible. We have a single wallet for everything. So it's really hard to know which thing is sort of performing. That's why we don't report that way from a vertical P&L standpoint. I will say that the iGaming revenues, as noted earlier, do not experience quite the same volatility because there's no sport outcome. But from a unit economic standpoint, they're pretty similar, given that it's all part of one shared wallet and really kind of -- the taxes are a little bit higher in iGaming, the promotion rate is a little bit lower. So it all kind of nets out to a similar place.

That's helpful. And then the other kind of question that the Entain process sort of shown a spotlight on is just international opportunities in general. Canada seems like it's close to being a market for you guys, but just maybe talk about the international opportunity.

Well, Canada, we already have a significant presence in DFS. So it's very similar to us to the U.S. Obviously, culturally, there's a lot of similarities different sports, hockey is king in Canada, of course. But NFL and others are very popular as well. So I think Canada is going to be a good market overall and we're excited about Ontario opening up, hopefully, in the early part of the new year, but we'll see on timing. As far as overseas goes, I think that really the way we look at it is we think there's so much opportunity in the U.S. right now, and there's such purity of focus that we have that to disrupt that would take a pretty high bar. We do have ambitions to be global someday. We think that day could be a ways out, but we also think that there might be opportunities that come up that could accelerate it. And we feel like we have an obligation to look at everything. Doesn't mean we're going to do it. But certainly, we feel like it's our duty to look at things and make sure that we run the traps. And I think that, unfortunately, because of the U.K. takeover code rules, we had a very early discussion with Entain that had to get publicly disclosed. So it kind of played out in the public and I think people just assumed the deal was going to get done. But after we decided not to do it, a lot of people said, okay, what does that mean for International. I think the answer has kind of been the same, which is, we want to be global one day. It's going to take a very high bar for us to say let's go do something else where I think we would have to feel like the asset we're getting is kind of on autopilot and we don't have to focus much attention because we really do need to focus all of our attention on winning in the U.S. and Canada. And so the likelihood of that happening is probably not high, but you never know. And we think it's our job to make sure we look at everything, and then we're disciplined when it comes time to make decisions.

Okay. Great. Thanks for that. I want to shift into talking about some of the cohorts in your new states and some of the competitive dynamics. And one of the -- the approach that you all took on your Analyst Day and was really helpful in just sort of laying out some of the -- how unit economics were evolving in some of your older states like New Jersey. And I understand New Jersey is still a relatively young state from a penetration perspective, but it is your most mature state. Maybe just talk for a second about how unit economics are evolving there? And do you see the competitive landscape getting more intense or less intense? Or just what's the update on sort of the conditions on the ground there in New Jersey?

Well, we're still seeing great growth in New Jersey. We had MUP growth of 23% year-over-year; over 100% when compared to 2019. And when you look at year-over-year, we had -- the way MUPs work is, it's an average of the 3 months. It's not a -- take all the 3 months active and divide by 3. It's actives in July, plus actives in August, plus actives in September divided by 3. So when you have months like we did last year where you had basketball, you had hockey or baseball all happening in the July, August time frame, that lifts that monthly active number in those months. And of course, NFL was the only big sport in Q3 this year. We had some baseball. But basketball and hockey were not active in July and August. So that made a big difference in the 2020 numbers. And despite that, we still saw a 23% year-over-year growth in MUP. So very pleased with that. New Jersey continues to be growing. And it's profitable. So that's exactly what we set out to do when we went public last year, we talked about a 2-to 3-year path to profitability for states. We think some states will be on the lower end of that, some on the higher end, but most, if not all, should fall into that 2- to 3-year time frame. And it's really exciting to see that despite the fact that we're -- I know it's still early, as you said, but we're in the profitability stage. We're still seeing really healthy growth in New Jersey. And as time goes on, more and more of that growth will just drop to the bottom line. So I think New Jersey is a great template for us. We're looking at reporting out on both New Jersey as well as some of the other states that are a little bit more tenured. Early next year, you'll see that. So we'll have some more updates on how that's doing. But overall, I would say we still believe that 2-to-3-year path to profitability is the right timeline, and we've seen nothing to change that.

Are you seeing your players coalesce onto your platform in some of those mature states? Or do you have intelligence that they're using multiple platforms?

Well, we've done some research on this, and this is a big question that everybody asks, especially when you see money going into customer acquisition, how sticky will these players be? What will the LTVs be? We're very cautious in our modeling. We look at 2- to 3-year paybacks on players too, for the only reason being that we don't have more data. So I just think it's dangerous to say, hey, we're going to count on 5-year paybacks when we're 3 years into New Jersey. So we're very cautious. As we get more and more data, we'll obviously reevaluate that, but right now, that's how we operate. But as far as what we're seeing and as far as the research goes, there's definitely evidence that players coalesce onto one product. Certainly, there's evidence that there's downloading and trial of different apps, particularly in the early phases of a market. But usually, what we see in the research is that most players favor one app and direct the vast majority of their game play there. And the ones that don't are more the ones that you don't really want, they're bonus hunters and odd shoppers, and it's a very small fraction of the audience. It's less than 10% of the audience. But those are not the most profitable customers for obvious reasons. So the customers that you really want tend to stick with one app once they get used to it, once they're comfortable with it, once they trust the brand. It's also a pain to move your money around, I think a lot of people just prefer to leave their money in one place. So not only is that helpful from like an in-state basis, but also we're, I think, one of the only companies that you can use the app in any state, any product and you'll have the same wallet, the same account, which I think is also a very convenient thing for most customers.

So that brings us to an interesting question on just customer segmentation. It seems like your early users in a state would be more serious betters that are maybe harder to make money from and then you sort of move into like an entertainment segment, I guess, but just wondering if you're seeing that as you get more mature in some of these states?

Well, it's still early. I mean, I think we're still seeing very high LTV customers. But if you look at Daily Fantasy as a corollary, Daily Fantasy, it took about 3 or 4 years before we started to see a noticeable drop off. Now the ramp of that business was different. The marketing spend ramp was different. So I'm not sure if it will play out exactly the same way here. But we did see that after about 3, 4 years, certainly by year 5 that there was a drop-off and we adjusted our CACs accordingly. And I think you'll see the same thing in this market. What's interesting is that, especially as you think about moving to national advertising, there's going to be states that are in year 3, 4, 5, and there's going to be other states that are in their first year all at the same time. So we're going to have to get pretty sophisticated on the modeling side to figure out what our blended CAC should be and how to think about local versus national mix. Because you're going to want to heavy up in some of the new markets by buying more local even if the base is more national. So that will be a fun mathematical exercise for everybody. But yes, I think the general point you're making is correct that in all likelihood, unless this behaves differently than any other gaming market in the world, you're going to see the first few years have the strongest customer LTVs. Those are going to be the ones that you can justify spending the most to acquire. And then as the LTVs come down, we'll bring the CACs down accordingly. The good news is that the curves all look very similar. So you can tell pretty much in the first few weeks, even especially in the first month or 2 of a player's life cycle, what they're likely to be, at least as an overall cohort, you can tell, obviously, individual players, there's variance with. So you can tell pretty quickly if you're seeing early numbers that are not in line with previous cohorts that you can adjust accordingly. And that's a good thing, I think, for an analytically driven company like DraftKings.

That's great. And there are lots of recent progress in terms of new states legalizing and launching. Maybe just touch on briefly, are those states sort of getting to sort of scale more quickly? And then I just wanted to get your thoughts on the big tax rate that New York state has in place like just any thoughts on that? And sort of is that a precedent for other states? Or just how do you think about that?

Well, on the first question, it's hard to know because it's still early. Take Arizona, for example, is that state just ramping faster? Or is it just a really good state? I mean it's probably a combination of the 2. And this has been an interesting part for us at this whole state-by-state thing as you launch a state and you look at it versus some of the others, and it tells you something just life interesting about the market and the people there. And so I personally was not expecting Arizona to be as big. We didn't have data in Arizona because it's one of the handful of states that we didn't have DFS in. So we'll see whether it's just a really good state or whether it ramped faster due to momentum in the industry. It's probably some combination of the 2. And Arizona has a great tax rate, it's 8%. So that also gives us really healthy long-term economics. But moving to your question on New York. The way I think this will work and if you look around the world, this is true in different high tax regimes, for example, Australia has a 43% tax and it's one of the most profitable countries for a lot of the operators there. I think that high tax rates certainly favor its scale operators because the fixed costs are buried in a lot more top line revenue. I also think that you adjust, so we'll run less promotions. We'll spend less long term on marketing. Early on, we're going to approach it the same way, 2 to 3-year path to profitability. So nothing is going to change in terms of the playbook, but the individual sort of numbers will change. And I think over time, it will be pretty similar in terms of profitability to other states. But we'll have to see how New York does long term. There could be changes in tax rate over time. We're obviously prepared for anything that happens. But assuming it stays in the same place it is today, we'll adjust accordingly. And maybe the result is some of the best players are going to still continue to want to go to New Jersey or Connecticut because they think they'll get a better deal there. But that's a policy decision for New York. And from our standpoint, we're going to manage to similar profitability margins that we are aiming to do across the country. And as far as other states, we haven't really seen that. I mean most states tend to do things their own way. There's some sort of copycatting that happens here and there, yes. But it's not very common. We haven't really seen much influence. For example, when Illinois did the in-person registration, we didn't see that pop up in any other states. And I think New York is unique in so many ways. And in some cases, particularly when you look at like red versus blue states, there's states actively trying not to be like New York. So I don't really expect it to change the way other states approach it. I've heard people say, well, what does that mean for California. California is a ballot initiative state and the tax is written directly into the ballot initiative. So that's not one that I think has any risk on that front. Are there other states that maybe look at what they're doing and say, we can charge a little bit more? Maybe, but I don't see 51% being the norm by any means. And I think if anything, we'll see that New York is kind of an outlier on that front.

I want to mention to the audience, we've got a ton of questions coming in. We're going to try to get to a couple of them. But if you do have good questions for Jason, go ahead and put them into the interface there. I want to talk about the platform in a moment, but you mentioned California, Jason. So maybe just a couple of years ago, there was a ballot initiative came pretty close, but ultimately didn't make it. Any updated thoughts on how things are evolving there?

Well, there was a ballot issue for poker a few years ago. There has not been one yet for sports betting. I think poker, there were a lot of things that could have been managed differently, but that was actually going to be done through the legislature. This has been directly through signature gathering. So the kind of lobbying and politics side of it is very different. It's really more throwing money and gathering signatures. And we built a great coalition there and there are 7 different operators that have contributed. We've raised over $100 million for the effort. So I think that there's a real good shot in California coming up in 2022. And we'll have to see how it plays out, but I feel very confident that we're going to put our best foot forward. And I think we have a real good shot at getting that initiative passed.

Okay. Great. Just moving on a little bit to talk about the product and the platform. So you have your great integration of SBTech. So you've got this fully integrated tech platform, and you started to roll out some new in-game betting opportunities. Still like live betting in the U.S. is pretty far behind some of the more mature markets like Europe. So maybe just talk a little bit about how quickly you see your product evolving from here now that you've got the integration complete.

Well, as I mentioned earlier, this is the largest tech project we've ever undertaken in our almost 10 years as a company. It consumed a ton of engineering product resources. Those resources, while there's a little bit always of after work to do, those resources are mostly freed up now and we're focusing them completely on innovating. So that's been really exciting to see. We have an incredible roadmap for the next 12 months. And I think what I'm proud of is we got a lot done even while we were doing the integration, we're going to get even more done now that we have all these resources freed up and people can focus their attention on driving innovation instead of migrating the entire tech stack and betting platform. Live betting, I think, is a very interesting area. We obviously have seen in other places such as Western Europe, live betting is a big part of what people do and a big part of what generates revenue. I would expect that to be no different here. In fact, you could argue the U.S. sports are more built for live betting with more stoppages in play than a sport like soccer, for example. So I think it's going to be a big part of the U.S. It will -- if you look at the U.K., it took over a decade before live betting really became a big part of it there. I think it will be faster here. But certainly, there's going to be some ramp. There's going to be some work that needs to be done to build the product out, to be as robust and have as many options and targeting and being able to curate the bets for people because you can have 100 different options, but you don't want to throw them all at somebody and give them 10 seconds to make a decision on which one they want to bet on. So there's a lot of work to do there, but we're definitely focused on it. And I think we feel like we're going to be out ahead of the curve on that one.

We've got a couple of minutes left. I just want to try to integrate a few questions that are coming in with one that I had earlier, which is just talking to you in general about the vectors of competition. Is it around user interface or the economic proposition to the player or the breadth of the offering or the entertainment value? Or just like how do you think about the key ways to sort of outcompete the other players in this space?

I think definitely convenience is important, ease of use. So that's everything from making it simple for people by having a shared wallet across products. They can easily navigate product when they're in different states, they can use the app. They can use the same account, the same wallet. It goes to having a very simple and intuitive user interface, having great service and customer support, being able to curate bets for people so that the things that they want, they don't have to go searching for, you're able to serve them up based on the data that we have and personalization that our Data Science team does. I think all those things are really important. This is an entertainment activity for people who are doing it for profit. Those are not the kind of players we want. People who are doing it for entertainment are the players that we want. And so being entertaining, being convenient, being easy to use, knowing the customer through data science and personalization and giving them the things that they want and having a broad offering to be able to do that from, it's that combination of really broad offering and then really well curated experiences for people so that they don't have to search around and find something. You know what they want and you give it to them. I think that's what really wins the customer at the end of the day.

All right. Great. We could talk for hours, but we're out of time. Thank you so much. Great to see you, as always. We're really grateful that you joined us today. Our next session is going to start in 2 or 3 minutes. So please stand by everyone, and thank you, DraftKings and Jason Robins.

Thank you. Thanks for having me.