DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Jason, thanks for making time for us this morning. And welcome to our summit. I think this is perhaps the first time you've done this summit with us. Is that correct?

It is. And really, thank you for hosting this great event.

Look, we have a list of questions just by way of agenda. We have a list of topics we wanted to run through. And then we will take some Q&A, both through the web and those in the room.

But if I may, I'd like to start before we dive into the topics if it's okay. Having done this through the full day yesterday, without looking at a stock screen of any kind, the information flow was quite optimistic, better than expected over the past year or so. It's really been all quite good. And then toward the end of the day, I went back and checked my -- went to my office and checked my stock screen, and there was a different message in there. If we can just spend a second before we dive in and get your impressions on what kind of discussions you're having, what impressions you have? What do we think is going on?

Well, goodness it's hard for me to unpack all of the macro -- truly macroeconomic elements, inflation, treasury yields from sector-wide maybe sort of negative as well as all the way down to DraftKings specific micro. Frankly, I watch it. I try not to pay too much attention to it. We're really just focused on executing the remainder of the year and making sure that we're just doing everything right in every one of our states. That's what we can control. And we're confident that as long as we continue to perform and we hit the growth and the path to profitability outlook that we've outlined that everything will work itself out in the -- over time.

And look, I do want to get into the topics, but I will agree with you that every time we sat down to touch your model, it's been to raise numbers just a little bit further. And for us, that's a pretty optimistic thing to be doing. I do want to start off and just talk about the path to profitability, right? And I think we've modeled 2023 as a year that could turn profitable but so much seems to be happening along the way. If you could just give us your perspective on that path to profitability, I think it's certainly a question investors raised with us, and we love your updated thoughts on that path.

Yes. So, what we've said from the beginning that is that DraftKings enterprise profitability will really be a function of the profitability of every state that we're operating in and that we acquire customers on a 2- to 3-year gross margin payback period that's sort of a truncated LTV to CAC. And therefore, states turn profitable in a sort of a 2- to 3-year time frame. So in order to get to a viewpoint on DraftKings enterprise profitability, you have to have a viewpoint on what states are going to legalize and launch at what period. And so that is the analytic construct of how to think about our path to profitability. As long as you have conviction that we turn profitable in every state in 2 to 3 years, then the enterprise will turn profitable. Now we did share that New Jersey turn profitable in 2020. It will significantly increase the profit it generates and that's -- that was -- 2020 was a second full year and it turned profitable. We are seeing consistent results in all of our other states that we launched in late '19, and every state that we've launched since is on a very similar, if not better, trajectory. So that is the analytic construct on the enterprise profitability, and we feel great. Now I don't think anybody would want this, but if no states legalized from here on out like the time frame that you outlined is probably about right. But I don't think anybody wants legalization momentum to slow down for OSB and or iGaming.

Understood. We certainly have thought of DraftKings in the context of prospective M&A over the recent past. And you did address that to some degree during the quarter. But can we go back to that and just discuss how you're thinking about M&A in the near term, setting the boundaries. What we would or would not reasonably, potentially expect from DraftKings in terms of M&A.

Yes. I think -- I'll comment specifically on Entain and Golden Nugget. But I think our owners should not expect any transformative M&A in the near term. We're just super focused on deploying our playbook. We've got a nice pipeline of states that have legalized. We've got more states that are coming up for legalization. And that's where we're super focused. I think Entain was a situation where there was enough there for us to want to kick the tires on that opportunity. There was sort of a point in time on the U.K. takeover code that allowed us to have a look. There was what we know at some point, whether that's 10 years down the road, who knows that DraftKings will be an international online gaming operator, so to accelerate the learnings on the not just the mature Western European markets but the state of regulation that is occurring globally, that it was a good chance for us to learn. And we obviously did a little bit of math. We didn't even get very far in diligence, no data room, and we walked away. Golden Nugget, I think that was -- that is a super exciting thing. I don't think you'll see us do anything else in iGaming because we had a very clear need there, which was to have a brand to go after that iGaming first customer. We've scratched that itch. We're well on the way to closing that transaction over the coming months. And then we'll turn our attention to extracting the synergies from that deal and really increasing our iGaming market share with that iGaming first customer.

So this has been kind of the first meaningful NFL season. Any observations? Any surprises one way or the other? How would you classify how it's gone so far?

I think they've all been meaningful. I remember when I first joined 2019 NFL season, we were -- I was worried about New Jersey because I think something like six to seven new operators had gotten a license in August of 2019, and I really wanted to make sure that our playbook was going to set us up for success in New Jersey and sure enough, we gained share in New Jersey in that very competitive 2019 season. 2021, I think it's really highlighted by that tough sport outcome over the sixteen weeks or so of the NFL season, which we really tried to explain to people what that is and why our hold rates are impacted when favorites win and favorites win in cover and they do it across the board in any given week, which impacts that Parlay payout. I think that's probably the biggest highlight from an internal operational perspective as we were watching our results relative to our internal forecast and our guidance. Now great news is that, that's largely reversed over here in Q4, and we're sort of normal at this point.

Normal?

Yes.

Look, I'd like to just follow that up if it's okay, because there's been a number of states that have continued to open through the course of the season and will open by the time we get to the Super Bowl. I'm sure investors will start to discuss the volume and the degree to which operators are comfortable in approaching the volume that we expect to see around the Super Bowl. What thoughts do you have about your preparations for that?

I've never been more confident than I am right now in our product and tech. I think, one, a bit aggravating byproduct of the Entain leak was that there was a read-through of potential lack of confidence in our product and tech and that couldn't have been further from the truth. I think we're really proud of getting that migration done on time, getting really innovative additional betting opportunities launched in that August time frame before NFL. So I just -- I feel great about our product and tech. I think we're set up nicely from being able to handle any volume. This is now a very modern architecture, micro services, buildup. So our engineering team during the NFL season and certainly Super Bowl, they work a Sunday-through-Thursday shift and they're all hands on deck every Sunday, and they'll be -- we're learning and getting better and I think we feel great going into that play off and the Super Bowl season.

Now this is early stage. And one of the issues, and we don't want to overstate it. But as the market has ramped up, the whole percentage that we've seen in some of the public data has swung around pretty wildly. Can you help us interpret that just a little bit and put it in a proper perspective?

Yes. I empathize with everybody who only has those state reports to use to sort of interpret [ handle ] in GGR. It sort of takes a PhD because every state has a slightly different version of handle some states. You can see operator specific. Some it's only the skin, which has multiple operators underneath of it. Some have different deductibility criteria that arrive at GGR. So it's really a mix bag, and it is hard to decipher and we're going to work hard, we are working hard to shed some light on how the different states calculate those numbers for our Investor Day that we're anticipating happening in the first half of next year because I think it's a disservice right now as people get these reports and scratch their heads and try to interpret it. I think fundamentally, when you think about hold percentage, the right way to think about it is sport outcome driven, like I said, favorites winning -- favorites winning and covering that happening consistently over an NFL week will impact your whole percentage on a very short-term basis, over a season, over a year across sports, it is surprisingly consistent and not like highly variable from a whole percentage on a support outcome basis. That is first and foremost, sort of foundationally how to think about [indiscernible]. The other element is that type mix. So I've always thought about it in a 2 x 2 pre-game wagers, in-game wagers, single wagers, Parlay wagers, same-game Parlay would be a subset of parlays. And the whole percentages are fundamentally different. So as your mix shift of your players' enjoyment and what products they're choosing to buy, that will also impact your whole percentage as well. So lowest hold percentage being pre-game singles, highest being in-game Parlays. And I think we're seeing that evolution of what the American sports bettor has appetite for, and we've got a deep understanding of our players and which ones really just want to do in pregame singles versus which ones are beginning to flirt with some of these new bet types. And I think what's important for us is to have those products on the shelf that they can choose from and introduce them using our AI and data science to serve up those new betting opportunities. But we don't try to force them to participate in anything that they're uncomfortable participating in.

Understood. Super helpful. I do want to follow that up and ask about the in-game and the micro wagering because I -- frankly, it's been a consistent question I've always raised. We're interested in, in-game wagering to the degree that it may be more prevalent in the United States and lend itself. Where do you think the product evolution is for you all with respect to in-game? I recall, Jason, indicating we were in spring training when I asked what inning. where would you say we are today?

I was going to use -- I wasn't going to say spring training. I was going to say it's still tip of the iceberg. I think big picture, the thesis that the U.S. will have a larger mix of in-game versus Western Europe is a good thesis and that's just on the backbone of the nature of the U.S. sports and the stoppage in play that exists versus a very fluid, essentially no stoppage in play soccer match. So I think there -- and stoppage in play creates that window for a market to open for an in-game wager. I think we're really tip of the iceberg in terms of innovation that could come and the types of wagering markets. And it's really -- I think this is where step 1 was to get vertically integrated so that you could have the capability to build these markets on top of it. when you're reliant on a third party, you don't control your product road map. So now that we are vertically integrated, we control our product road map. We've got exciting things outlined for 2022. I'm not going to tip our hat today on what those are, but we are -- I like to think that we are in the mind of the American sports bettor, and we are listening and anticipating the types of things that they'd be excited to wager on and will bring those to market.

Understood. And to that end, you've talked about social features and adding those to the mix. I'd love just your perspective on that, an update on that. And to that end, engaging with players in different kinds of ways than perhaps most of your competitors are.

Yes. I'm super excited about our social functionality. I think we're off to a great start. I think there's more to come in terms of additional features we can put into social and driving our player engagement. Look, it's LTV at the end of it. It's just making -- creating the forum. Look, this is a product that lends itself to a little bit of egging and elbowing and ribbing and talking trash with your friends or people that are in your network and to have all of that embedded within your favorite app, I think will drive retention for sure, but also increased levels of play monetization, new sport introduction, all of that. So I think we're happy with where we are, and we'll continue to get players onto it. I think I will also mention -- look, I think social is primarily an LTV thing. There is a nice pack advantage, too, as we utilize the contact list of people who opt into our social functionality as a way to acquire new players as well.

Interesting. IGaming in general, you mentioned the Golden Nugget transaction earlier. Should we be thinking about that in terms of two brands or one? And what is the sort of iGaming strategy for DraftKings going forward in general?

Yes. To answer your question, two brands. So we will continue to offer DraftKings iGaming or Draftkings Casino with our tried and true motion of acquiring online sports betting and cross-selling into iGaming that player, not to be too generalizing, but it's going to be a little bit more table game heavy, Blackjack heavy, our swipe up functionality to play a couple of hands of Blackjack during a commercial break. That's going to -- that's a very tried and true always getting better, but we know how to do that very well, and we'll continue to do that under the DraftKings casino brand. We will also maintain the Golden Nugget and amp it up and go after that casino-first player, probably a little bit more slot machine heavy and taper the value proposition for that fairly different customer segment. Yes, the Golden Nugget, but it was probably around this time last year when we had experimented with a standalone casino app launched a few different go-to-market motions to go after that casino-first customer. I think we were doing well, but we knew that there was so much more with that casino-first customer and really felt the need to have a different brand for those -- for that segment, which was the backbone of the thesis behind the Golden Nugget acquisition.

So if I may follow this up, I think I recall nine months to a year ago, in a discussion someone saying to me, the deep dark secret is that iGaming is where the profits really are and that sports betting is great, and it is exciting. But it provides, in a lot of cases, a vehicle for iGaming where the profits are. Would you -- I mean, would you agree with that? Or is that perhaps going too far?

Well, I mean I'm not sure I agree or disagree with it. I'll tell you how we think about it. We think about it as the DraftKings platform, which is we acquire onto the platform, DFS, OSB, iGaming, and we deploy our cross-sell motions to increase engagement across all of them and which are by the way, I think, is the right way to think about it. In terms of just very directly answering your question, the way I think about it is that the gross margin rate percentage is awfully similar between OSB and iGaming. You've got some puts and takes. Taxes tend to be a little bit higher for iGaming than OSB. You've got perhaps a little less promotional intensity in iGaming versus OSB, but they net out to be awfully similar from a gross margin rate perspective. if you are measuring gross margin dollars per customer, I would agree with whoever said that, that on a per player basis, there's a little bit more gross margin dollars generated per iGaming customer, which is why when we -- our go-to-market playbook in any given state needs to take into account whether iGaming is live in that state, or whether it's only OSB and we'll adjust our tax based on the LTVs of a 2-product state versus a 1-product state or a 3-product state versus a 2-product state.

So if we can just talk about state market entries. What I think is interesting that's evolved is, I think entities rolled into New Jersey as they were ready, whereas now new states that are open, those that are sort of up and running, everyone's starting sort of at the same, right? And so there isn't necessarily a first entry mover advantage of any kind. How do your entry strategies differ in that context versus where they were when you were a -- an instance as a first mover.

I would actually -- sorry, I'd say a few things. First off, I don't actually think that the playbook has changed dramatically. When we -- we've always -- it is an internal operational priority to always be first in state. So our playbook is designed around being first in state, even if that means that you're the first or you're part of the first, we have -- that is how we go to market, and that's all based on our marketing vehicles, how much we're willing to spend to acquire a customer, the type of customer we want to acquire and the corresponding LTV. So it isn't -- it really I don't think about it as being that different, David. I think what we are learning is -- which we -- was evidenced in Arizona is the speed at which the population of a state is adopting the product category. And when you reflect on it, I think it's pretty intuitive. There's just a much broader awareness of the American public of the legal -- the trends of legalized sports betting, the citizens are sort of waiting for that moment when their state goes live versus a 2018 vintage state where three years in, there were still people saying, wait a minute, I can bet on sports legally now? And I think that awareness is much higher. So the implication to our business is that your CAC per -- your customer acquisition cost per new depositors is the same, but there's just so many more people who are excited to engage out of the gates.

Understood. I wanted to talk about some of the marketing partnerships that you have. And it's in the context that entities periodically come out and expect to enter the sports betting market directly, like an ESPN has talked about it but they're also a marketing partner. How do you sort of think about those kinds of relationships going forward and whether somebody like an ESPN hypothetically might be a direct participant in the sports betting market at some point or do you think they won't?

Well, I can't -- I read the same thing as you guys do about what Disney said on their earnings call around their excitement around sports betting. How they plan to participate is, I don't have any information whether that's entering as a regulated operator or just participating in the profit pools through their traditional business models, I don't know. I mean, what I will say is our team and league partnerships are all just part of the LTV and CAC equation. We do partner with teams in states where we launch where we've got very good data on what the ROI is on those deals, and we know what we're willing to pay for those partnerships. It comes with -- and there are other elements that come with that, whether that be in-venue advertising or hospitality in the facility. But that -- this is all wrapped up into the calculation of a state play book.

Understood. I do want to -- I have more but I want to...

But if you're trying to get me to guess on what ESPN and Disney are going to do, I'm not going to guess.

I was not. No high hard ones for me. I just wanted to check and see if there are questions in the room, questions online. Let's just get your microphone. Fire away please.

Jason, I think what is sort of the concerns with the technology has been that historically the SBTech's risk management perhaps was slightly lacking. And obviously, that kind of manifest itself in hold rates, right? And I take your point about the drawbacks in state data and why we can't read too much into it. But can you give us a feel on where your whole rates are perhaps versus is and why they might be higher or low?

Yes. Fair question. I think I can't really talk about what SBTech's historical risk management reputation was. What I can say is that we have -- as part of the migration was evaluating all of our trading models and improving the team around our internal trading and risk management capabilities. And when I said earlier in the discussion that I feel I've never felt better about our product and the tech, the risk management and trading capabilities are part of that. We very rigorously analyze the pricing. And I would say that we have extremely high confidence. When you take a step back and you think about that pregame single bet part of the bet mix, it's very transparent what the pricing is. So the risk of DraftKings or any other operator is meaningfully off on that is very low. But we've got perfect visibility to that because it's just no different than going on Amazon and checking prices for whatever you're looking to buy or googling it. And then parlays are really just an algebraic or -- yes, an algebraic equation off of that. So if you're getting those right, then your parlays are priced right. So no real concerns on that front.

I'd love to just run through if we could some of the -- your perspective on some of the state legalization processes, Florida being important. New York, obviously, one that's opening that provokes quite a bit of discussion. And any thoughts about what California might do or look like in the near term?

So Florida, what a ball of wax there. Both Florida and California, we've been very transparent about what we're doing, running ballot initiatives, while collecting signatures, hoping to get on the ballot, both of those Florida and California in November 2022. The signature collection phase is going quite well and so we're optimistic in both of those. And Florida, there's a lot of cards. It feels like every day, there's another piece of news and some judge said something, seems like more negative than positive on the seminals situation. California, what's really interesting is the way that the ballot initiatives work is that you write the entire legislation on the ballot. So that's a really exciting part about were we to get on and were it to pass that it's set in stone at that moment that it passes, which is great. So I think we're optimistic on both of those. New York, I think we're thrilled to be included. I'd much rather be part of it than not. I have high, high, high confidence that our contribution profit will be similar to other states because we do have other elements of our COGS and gross margin structure and marketing structure that we can play with to get there. We're building out multiple scenarios on how we want to launch there. I think the early days in the golden cohort are important. So we're incorporating that into our logic. But it's harder with such a punitive tax rate, but we do see a path to sort of typical contribution profit levels.

If I could just follow up on New York. Is there some notion that over time, the structure in that market could evolve in a more positive way. We've certainly seen that in the land-based environment in New York. For sure, I think we agree that it's not the best walking in structure. Should we expect that there will be efforts to foot. And do we hope it turns out good, but not too good so that the arguments were changing over time.

Yes. I mean I think there's two parts of the structure. One is the competitive market structure and two is the regulatory tax rate. I think from a competitive structure, yes. I think my instinct is that there will be -- just like you were seeing across the U.S., subscale, long-tail operators that are just going to have an even more difficult time in a state like New York. And then from a tax rate perspective, to me, if I can just suspend, well, if I could just sort of assume that government officials can act rationally, that if they do not see the TAM materialize like they want to then I think that, that would be a catalyst for them to revisit the tax rate. And the empirical data is there that says that when tax rates are high, if you look at the states that have gone live in the U.S., the TAM does not materialize like other states where it's a more open market setup. So I think there is reason for hope that, that there would be a retrade on the tax rate at some point in the future.

Understood. Go ahead, please.

Can you talk about how your average bet size has changed in the last year or two? And similarly, how do you compete for premium gamblers against operators who have strong reward programs?

Yes. So bet size, I think to get to the underlying question, right? Like if I just take the analytically pure bet size, you've got all types of puts and takes because you've got new states launching that messes everything up. But if I just answer the question, for an OSB online sports betting player, what do you see their activity look like over time? We did disclose some retention rate and revenue retention information. We'll update that for our upcoming Investor Day. It all looks fantastic. There -- it is a naturally sticky product. And I think that DraftKings does quite a few special things that make our customer retention higher and our revenue retention higher than other operators. So I think what you're seeing is on a normalized basis, players are enjoying the product category. And I think DraftKings does a very good job of introducing new things to them, whether that be introducing new bet types that drives their activity up, whether that be cross-selling them into new sports to get their participation throughout months and quarters, converting that typical NFL only bettor into an NFL and PGA bettor or an NFL and UFC bettor. I think we're quite good at keeping them engaged throughout the year. So I think we're seeing really positive customer and revenue retention and they're excited to engage in all types of things. So in introducing new bet types and introducing new sports is a big priority for us. Your second question was around premium customers. I think that's a big word. We look at -- we don't really use the term premium. I think we look at our customers in a variety of ways. We obviously look at them on -- when we acquire them, we look at their average bet size. We look at their typical total betting volume over any period of time. Like I mentioned, we look at their sport cross-sell. But I think what -- maybe what you're getting at is what do we do specifically for bigger potential players. We do have a VIP-focused team here who are looking for bigger players. And that's all part of our state launch process. And I think you asked about like how do you compete with somebody who I think might have a land-based rewards program. Look, I think we can appeal to large players. And I think we appeal to them really in a variety of ways. So I mean if you ask really large players, how much do you care about a free suite in -- for three nights and all you can eat buffets for a few days, I mean, I'm sure they care. But I think they care also about the level of service and the personal interaction and the personal touch that they get, their confidence in great pricing, off-line events like invitations to games or very special events like meeting certain athletes. These are things that they care about as well that I think DraftKings can offer our premium players that others can't.

I do want to throw one more out there because I think one of the areas of the business that we're, I think, in the U.S., anyway, investors are trying to get smarter about is the data providers, official versus unofficial, et cetera. And the high-level perception is that NFL in particular is becoming more expensive or at least attempting to become much more expensive. How do you think about that as an input in delivering the products that you're offering and what the cost of that is or becomes or help us understand that just a little better.

Yes. totally a fair question, and I get the genesis with Radar and Genius being out there. I mean the way I think about it is I obsess over every element of our cost of goods sold. And I obsess more about parts of my cost of goods sold where I'm single-threaded on a vendor. And as much as I'd like to take out AWS, we're not going to do that. But like they're a big part of it. And so when you get down to data providers, it's sort of -- it's not my highest priority or biggest concern area of my cost of goods sold. I care much more about, for example, negotiating great retail rev shares in the state where we need a [ skin ] provider, that that's a bigger deal to me. So I think data providers being a relatively small part of my COGS and a nice industry structure where we're not single-threaded is -- gives me comfort that, that's perhaps a healthy part of our COGS structure. And by the way, knowing that if we had to one day build our own data capabilities, proportions of data feeds, we could do that as well. It's always a build by rent question along every element of our COGS, which is why you saw us buy our bet engine, which is why you see us building more casino games. And yes, we are renting data feeds today, but healthy set of providers, that's a relatively small part of my COGS. And for the NFL in particular, I think we have a fantastic deal with that. That was -- I was very pleased to be partnering with them.

Understood. Any -- please, go ahead.

Jason, I was going to ask about your fancy database, if that's all right, because we've heard a lot about how, obviously, the states who are legalizing now. So the adoption curve is just that much more condensed. So just kind of hear your -- really what's happening in terms of the cross-sell from your DFS database in the sports, in the newer states versus the older states? And I guess just kind of how long that runway is for you guys?

Yes. It's a great question. And I probably should talk more and remind people of that big competitive advantage of 5 million plus active DFS users that offer amazing CAC advantages. It's an extremely important part of our state launch playbook. We know how to communicate with our loyal DFS players in advance of a state launching OSB. We're very good at it. We know almost within percentage points of how many of them will cross over into OSB within the first month, within the first three months, within the first six months. So it's very, very fruitful. The -- what actually happens is what I just said, you get a big crossover very quickly. And then you continued across people from that DFS database into OSB for really years after you go live with OSB which is pretty cool. And now I think to your point, some of that is changing, right? That's a bit of the New Jersey situation where you crossed over a bunch and then two years in, people were still waking up going, wait a minute. I can bet on the sports now, legally, on my phone? And so that we were still crossing over. I think it is condensing. So we're seeing higher percentages crossed over quickly. So that part is very well oiled. I want to say two more things on DFS database. One, we have to remember Arizona didn't have a DFS database. We launched DFS like simultaneously essentially a few days before OSB. So I think that was -- that shows our strength of the other parts of our customer acquisition tool kit outside of the DFS database cross-sell. The other thing that I probably don't talk about enough, is that DFS is still growing. So every day that a state hasn't legalized OSB is another day that our DFS database is getting bigger. So for that moment in time. one, two, three, four years down the road when the state finally does legalize, our database in that state is that much bigger. And I think that's important. We continue to put resources into our DFS product offering, innovating, continuing to run the same product management approach in terms of listening and anticipating what they want. And I think we're winning in DFS.

No questions in the room, questions online then I think we'll leave it there. And thank you very much for participating and sharing your thoughts with us this morning. I know you have some other meetings with us today, and I expect that those will be interesting and enjoyable for sure.

Thank you.

Have a great day.