DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

[Audio Gap] the public company segment of our conference. My name is Michael Graham, one of the Internet and media analysts here at the firm. I'm joined by my colleague, Jason Tilchen, who -- we cover the gaming space together. And we're super excited to have DraftKings here. Jason Park, the CFO, we really appreciate you coming to our conference.

We appreciate you hosting this event.

Awesome. Thank you very much for being here. And I want to start off and just you reported a super strong Q2 the other day. The stock reacted nicely to it, which we were gratified to see. And we're going to get into those results in a minute. But before we do, I just wanted to ask about the legalization road map for a little bit because we're here in Massachusetts, just the latest state to legalize OSB. So that's really exciting. And then of course, you've got the big referendum in California coming up. So maybe just take a minute and give us your thoughts on kind of legalization in general? And then on California, just any thoughts you have on how we should think about that?

Absolutely. So OSB online sports betting, we're just about 4 years -- just over 4 years since -- [indiscernible] overturned. And we're sitting at 35% of the U.S. population legalized and live and another 10% that is legalized and pending go live. So 4 years in, 45% of the population, that's right in line with what we had expected, roughly 10 -- roughly 10% of the U.S. population legalizing and launching per year. So overall, I feel great about the pace. I mean that was -- 4 years ago, you couldn't predict exactly which state was going to happen when, but you roughly felt like 10% per year would be a good pace, and we're right on that. Kansas, Maryland, Ohio, Puerto Rico in the chute for -- in that legalized pending launch bucket. Massachusetts, as soon as Baker signs, would technically become legal. So really, really positive momentum on the OSB legalization side.

That's tremendous. And any thoughts on how to think about California? Like we talked about this a little bit on your earnings call, but is it highly likely? I mean, it's good that it's in the hands of the voters at this point, right?

That's right. Yes. I think cautiously optimistic is the right phrase to describe how we're feeling about the potential in November 8. We passed that first step, which was to get the required signatures to get on the ballot. Proposition 37 for anybody who's in California on November 8 -- 27, sorry. And so we feel good. Polling them look solid, but you never know in these situations. So we'll be investing in good ROI to educate the citizen of California on the topic and make sure they understand what's really in there. And like you said, we'll leave it to the citizens of California.

That's great. And then another quick question on this front is just on the online casino regulation. It's been a little bit slower. Maybe just talk about the outlook for getting more states on board there.

Right. Online casino or iGaming, however, you want to refer to it, so that's Blackjack, Roulette or more casino type games. We've always felt like the iGaming legalization would sort of trail the OSB legalization. If you look at our Investor Day, we sort of said half of whatever the U.S. population gets to on the online sports betting legalization side will be the iGaming legalization. And so it has been slower, I would say that. That was largely what we expected. I think what you would expect is that a state legalizes online sports betting, they see the good controls and the regulatory controls in place for online sports betting. And then they become more comfortable with iGaming.

Jason, do you want to -- I guess, I've got one more. Sorry. So in the -- that was my mistake. In the sports betting industry, you've seen just tremendous growth in -- you're the first or second to market share in every market that you operate in. How do you see the competitive dynamics unfolding? You basically have one like big competitor here. And you're sort of battling for 1 or 2 market share. But just how do you see the competitive landscape unfolding?

Yes. I mean in terms of market structure from our vantage point, this is a well-structured market. I understand that the perception may be that this is highly competitive with too many players. But when you look at the actual market share, to your point, the top 2 or 3 players are in that 80% share arena around that. And so that is -- promotes good behavior among the top operators. I think that will probably -- the total share of the top 3 players will probably increase over time as those subscale operators. I think it's pretty tough to operate in that single-digit share range.

I just want to talk about the product a little bit and in particular, parlays. On the last earning call, you talked about parlays increasing as a percentage of your total bet mix by 17 percentage points year-over-year. We really emphasized parlays a lot because their hold rate is just so much higher than a standard bet. Can you just talk about how the migration over to your in-house tech stack that was completed late last year has really accelerated the product development enabled you to roll out some new features and how that's driving engagement there.

That's right. So for those of you newer to the story, we completed the SBTech acquisition in April of 2020. We migrated to our own -- we migrated to that engine platform in August of 2021, which really allowed us to control our own destiny from a product -- road map product deliverable standpoint. We couldn't even offer Same Game Parlays when we were renting our tech stack before we migrate to our in-house engine. So while we've been really focused on getting that parlay up over the last year now, and we're happy to see the results. That's been a big area for our P&T investment. And it's not just the trading capabilities, but it's also a full 360 approach to getting that parlay mix up, getting our customers educated and aware and excited about those offerings. So if you open up our app right now, one example is our improved merchandising of same game parlay where right across the top, there's every day and really updated potentially every hour, really fund the Same Game Parlays for the games of the day, really fun names. I like the one that we -- our team put out week because I'm a Michigan guy like Buckeye beatdown. And it had -- it was just pretty packed. And that's one element of getting that parlay mix up. It's just making it easy and fun for the customer. I would say another element of the 360 approach to getting our parlay mix up is utilizing our on-air talent, parlay of the day, closing out segments with those types of fun things. So those are all working, and I think we still have meaningful headroom.

And the promo mix has also shifted towards parlay. That's intentional correct to try to drive engagement with those?

Yes. Not so much. I mean I think yes and no. Really what's driving the promo or how we think about promo is just new versus existing customers. So when you are acquiring a new customer, you're willing to put a meaningful promotion out there. But our promotion rate within any given state and for any existing cohort just sort of naturally comes down because once they're in the system, you just don't need to do as much. And whether that existing customer promo is targeted to parlays or targeted to other key moments in this for calendar, that's sort of less of an economic driver.

And right behind parlay, the other thing that we get asked about a lot is live betting and game play. You've made some strategic moves that you've partnered with Simplebet for micro betting and you've rolled out a bunch of new features to increase live betting. Where does live betting as a percent of handle sort of in the U.S. here right now and especially on your platform stack up to more mature markets like Europe?

Yes. I think in the U.S., we're still really early innings on in-game betting, live betting. When you look at the more mature European markets and you look at that in game, live betting mix as a percentage of total, the U.S. is still early. And part of that is, again, similar to parlay it's customer awareness. Part of it is getting the product where you want to be. We did launch pitch by pitch for MLB this last quarter. So that's sort of a first phase of where we're heading there. So I think it's early innings but really optimistic. One, how to think about in-game in the U.S. versus Europe is those game stoppages are really good for in-game. So right before the next pitch, right before the next play in NFL, those are the moments where you can open up the markets and make those in-games. So when you look at the European sports soccer versus the U.S., it's intuitive to say, wow, this is the in-game opportunity in the U.S. is going to be big.

I want to talk about your scale a little bit and sort of the profitability structure. One of the things that we always look for when we have companies coming back to this conference every year is like what's our current revenue estimate and what was it when we first started covering the company. And for years, it's like well north of double, which is great. So you've done a great job executing on growth. And then the big takeaway -- one of the big takeaways this quarter was your marketing efficiency improved a lot. So maybe we could just start there. And especially in your mature markets, you had really great efficiency where you've been able to kind of have the scale to not have to spend so much on a per user base. Maybe just talk a little bit about how you think about marketing, your philosophy in those mature markets. What are the things that are enabling the intensity of that investment to kind of come down a little bit?

Absolutely. So I think there's a couple of things in there. Maybe first, just in terms of the fundamental business model. As the marketing spend within any given state going to correspond to the number of new players that are still to be acquired in that state. So what happens is once you state is 3 or 4 or 5 years in, the absolute marketing dollars in that state is going to decrease because we have to maintain an appropriate CAC for those customers. So I want to be clear that there's not sort of a maintenance level of marketing. The marketing within the state begins to drop. So you're seeing that effect in our business, which is part of the Q2. Second, what you're also seeing is now that we've reached that 30% of the U.S. population where we're live, we can shift some of our marketing dollars away from quite expensive local marketing into national marketing and drive similar CACs or better CACs at that level with a similar number of new players acquired. And that is clearly an advantage that only accrues to the scale operators who are present in more of the U.S. population. I think perhaps embedded in your comment there was, we talked about $100 million of cost efficiencies we found year-to-date. So we had alluded to a $60 million find back in May. And then we disclosed that we found another $40 million in Q2. Some of that is marketing, but a lot of it is just this year. We -- Jason and I and the entire organization just said, look this year is about maintaining our focus on revenue growth, do not let up there, but let's go find efficiencies through organization that don't touch the customer, vendor renegotiations, implementing new volume tiers with certain vendors, changing the Doritos in the snack room versus more expensive potato chips. We looked and it was really awesome to see the organization sort of embrace that balanced approach to revenue growth and efficiency. I think we found the big nuggets, but we'll continue to drive that rate and find more efficient. I think it was like it was a real cultural mindset shift.

Personally, I'm a fan of Doritos, so I won't mind that.

That's what people -- they were thrilled with the shift to Doritos.

You did say -- so along those lines, you did say that you expect this year to be your peak EBITDA loss. Maybe just kind of talk about that for a second. And is your philosophy going forward in terms of profitability? Is it to kind of just be profitable? Is it to increase profit margins a little bit every year? Or just like talk about how you're thinking about profitability going forward?

Yes. So this will be our peak EBITDA loss year. What we've said in the past is that in Q4 2023, we'd be EBITDA positive, assuming a normal legalization cadence. If California legalizes, that would certainly put us in an abnormal sort of percentage of population. But even with California, I think we'd be profitable in Q4 of -- pretty close to profitable EBITDA positive in Q4 2023. I think I'd break it into 2 parts, sort of the fundamental playbook of our business, which is invest in marketing as long as the LTV to CAC looks good that you're looking at 3-year or less gross profit payback periods for every customer acquired, that's not changing. Like we're not doing that. Could we toggle that to improve profitability and say, "Well, let's cut it down to 2.9 years rather than 3 years, sure, but none of that is embedded into our comments on profitability. And then really, the other part is just how we're thinking about our fixed cost structure coming out of this year and into next year, really doing the work in addition to the $100 million we found on where we still need to grow our fixed costs, where we're already at scale. It's early August. We're kicking off our budgeting process for -- the internal budgeting process for 2023. And I think we've got being -- it's only early August, but we've got like a lot of clarity on where those costs will and will not grow next year.