DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

I am Michael Bluhm. I'm a Managing Director at Morgan Stanley. Joining me today is the CEO of DraftKings, coming off a fantastic quarter. Congratulations.

Thank you.Thank you.

And I think really eye-opening for the industry in terms of how the path to profitability is shifting.

Thank you.

So maybe just to start, maybe sort of take the audience to step back a little bit on kind of how do you -- sort of how the industry has evolved, how you see it from -- in terms of total size, structure, players, the trajectory of how it's evolving? Just to sort of level set things and then we can kind of dive in a little bit deeper.

Sure. So I think from a size potential, we're really focused on the U.S. right now. So I'll talk about that. Obviously, there's a huge potential, global opportunity, which we won't talk as much about today. But from a -- the U.S. should be the largest online gaming company in the world in due time. It all really depends, since it's getting legalized state-by-state, on how many states legalize sports betting online and iGaming. What we've said is that we believe -- at full legalization, you could have roughly an $80 billion market opportunity -- $70 billion or $80 billion market opportunity. And we expect about 65% of the U.S. population to have online sports betting and 30% to have iGaming at maturity. Obviously, maturity, over some reasonable period of time, it could be higher over the long run. So really a big opportunity. We think that for DraftKings right now, we're ahead of these numbers. But just being more on the conservative side, we pegged our long-term share at roughly 25% to 30% for sports betting, 15% to 20% -- actually 20% to 25% for iGaming. We also think there's an opportunity in Canada. We launched in Ontario, which is just under 50% of the Canadian population. That's a little bit longer term, and we don't project to get as much share there because we don't think we have some of the same inherent advantages around brand recognition and database to quite the same extent there. So that's sort of a picture of how big we think the opportunity is. And then beyond that, I think the technology we're building and what we can do globally will be massive. But right now, we are very focused on the U.S.

Great. What do you think are the kind of key factors that could alter those expectations around on that path?

Well, I think there's certainly some upside in the total size from like a participation standpoint. We'll talk a little bit more about this, I know in subsequent questions, but we're just seeing an unbelievable ramp in some of these new states. And hopefully, that means there's more long-term upside, for example, Ohio, which we launched on Jan 1. In under 2 months, we acquired about 6% of the adult population of Ohio. So that compared to when 1.5 years ago, we launched Arizona, it took us about 6 months to get about 3.5%. A few years before that, we launched New Jersey. It took us 6 months to get 1.3% of the adult population. So really seeing just more adoption, faster ramp, which is great. That could change the upside opportunity for sure. If you look at what we've assumed in our previous Investor Day, we had some very modest conservative assumptions around further growth. We really mostly run rate off of where the market is today, but we know that's not true, too. For example, states that we launched in 2018, 2019 -- we disclosed in our last earnings call, those states grew over 50%. For us -- not as a market, we differentially took share, but for us, over 50% last year. So really could be some upside on that. There's also been the wildcard around state legalization. We've seen really strong momentum now with 45% in the U.S. getting online sports betting. Our long-term projection is only 65%. There's some big states in play that could swing that pretty quickly over 65%. So I think there's some upside there. I think beyond that, really, we continue to expand longer term our global footprint. We've built nothing in as far as that, and we haven't really built in any assumptions around any other types of verticals or products we might launch either. So just focusing on the online sports betting, iGaming and daily fantasy sports market, that's how we built our long-term projections. So all sorts of upside, I think, was beyond that, things that we could expand into.

How do you think about sort of global expansion? You mentioned Canada, I guess that's North America. But beyond North America, how do you think about the strategic benefits of growing globally?

Well, I think it starts with -- this is an Internet industry. And unless it bucks every other trend, if any other product that's sort of gone from the transition of brick-and-mortar offshore -- offline, excuse me, to digital. There should be eventually consolidation at a global scale, there should be big advantages if you have your own vertical integration around product and technology, not just from a cost perspective and a scale perspective, but we can actually monetize the customers better. So we have inherent advantages. Obviously, there's some local differences. Different sports are popular around the world, for example. But the inherent kind of the core technology behind it isn't different. We can run odds for any sort of soccer league just as easily as we can for the major U.S. sports. So lots of scale and I think both revenue and cost advantage on the product side. The operational side, not just the actual doing it, but knowing how to do it. I think it's a huge advantage. We have a huge database. So that feeds everything from having more rapid optimization of our pricing models to more effective deployment of our marketing dollars in any place that we choose to enter. So I think a lot of advantages. And just like I said, it sort of makes sense, right? Like that's the way typically the Internet works. You get such operating leverage on your fixed cost base because you don't have to go and open stores and set up facilities in every market. You have such upside, from an operating leverage standpoint, on your fixed cost that it just creates this massive advantage to be able to be a global player over the long term.

Very good. Maybe to switch gears a little bit and talk about product for a second. Well, maybe pull back from -- just generally the business, right? Online sports betting versus iGaming, can you talk a little bit about the differences in those businesses? And sort of how does that play a role in how you navigate your business?

Sure. So for anyone to know, iGaming is online casino games. Online sports betting is being able to bet on anything from the outcome of a game to what color the Gatorade -- what color of Gatorade will be dumped on the head coach who wins the Super Bowl? So lots of different things in the sports betting realm that you can do. Even Massachusetts, which we're going to be launching, has included the Oscars as sports betting. So we're taking bets on the Oscars there as well as in some other states. So really, in the end, we think people want to bet on all sorts of things, but two very obvious categories are sports and casino games. So that's the big focus for us now. As far as like how they work, typically, the main way that you acquire customers is through the sports engine. That's where you have a lot of big events that generate a lot of top of funnel activity. We do still acquire people directly on to casino, but it's much more precision-oriented marketing. It's not the mass market product. But what happens once you acquire them on to sports is we are able to cross-sell a very significant percentage onto the iGaming product. So it creates this additional monetization engine for the same player. You don't have to pay more to acquire them. You get the same play, you just convert them into new products. So at a high level, that's how it works. And typically, this isn't us inventing this. If you look around the world, with markets like the U.K. that are more mature, that's been the playbook, acquire them on the sports betting product and then cross-sell them into the online casino.

And what's been the differentiator between the winners and losers?

Product is a big deal. So one of the things that I think has now been debunked but early on, there was this notion that everybody's product is the same, right? Like I can bet on this here that there is actually massive differences in products. Sports betting, in particular, is an incredibly complex product to run. Your trading markets, and that means not only do you have to have good pricing, but you have to have active management of those markets, risk management, all that sort of stuff. That's definitely a lot of model, a lot of operational know-how. Availability and breadth of markets is really important. Markets being different things you can bet on. So having more ability to bet different players, like is this player going to do this, that player going to do that. To combine bets into parlays, which is a huge source of both growth and profitability for us. Availability is also key. So particularly with live betting, markets that are for games that are happening now. When the game is happening, all sorts of developments in the game affect what the right pricing should be. So think if I want to bet is to touch -- next play is going to be a touchdown. All of a sudden, there's a flag on the field. The only thing we get back from the data feed is there's a flag on the field. We don't know if it's in the end zone, signaling maybe pass interference ball in the one yard line, or if it's in the backfield, maybe a holding call moving it the other way. So what most operators will do is they just take the market down. They say we're going to wait until we get the data, and we're going to -- and so being able to then incorporate into your models, probabilities and other things that allow you to keep the markets up longer becomes a big differentiator, too, I think. There's all sorts that I could go through the product forever, but it's a very complex product. And in the end, what people want is they want to be able find the stuff they want to bet on. They want to have lots of different things that interest them to bet on. They want to go to five different places to bet on things. They want to have everything in one spot, and they want to be able to access the bet whenever they want it, make it whenever they want it. And there's other features we built, too, like cash out, which let people in the middle of a bet if you're like, "Hey, I'm up on this thing. I'm feeling pretty good. Maybe I have a 2x odds on it, but I'll take 1.5 and cash out now." Or if I'm down. I don't think I'm going to win. I'll take back what I can still get. There's other sorts of products, too, like Gamify, within it that make it fun as well. And on the casino side, it's the games, right? I mean people are playing games, whether that's table games, like Blackjack, which we built in-house. We built a lot of our table games in-house at this point which, by the way, is not only something that we could differentiate a little bit, it's also a huge cost savings because we don't have to pay third parties for those. Most of those are done on a rev share. So you cut that out, it's immediate margin accretion. And then secondly, there's like slots and other sorts of games. We've also started to create this new vector of what we call more modern games that you wouldn't typically find in a casino. So we created from scratch a game called Rocket, very simple game. Basically, there's a rocket that launches and goes up in the sky and at some point, it's going to crash. You put in your money and the dollars are going up. And you get to stop cash out or you get to wait and see if it goes a little further. And if it crashes, you lose. If you cash out, you get what you cashed out for. So when you think about it, it's actually very similar to most random number generating, some random number generating, it's the same thing. But we've created a front end that wouldn't be something you typically find in a casino. It might appeal to a little bit more of the 20-something audience, more so than maybe a slot game or something like that would. So I think there's a whole lot of room to innovate there. We've seen people talking about like game shows. I think there's a lot of stuff you can do within that category, too, that I think is not just in the vein of traditional casino games.

How is that evolving now from -- you've seen the competition really start to gap out, right? The three podium players. What's driving that? Who the winners and the losers? I mean product you point out, and it's complex -- it is a complex product, but not a lot others have it. So maybe give a little bit the audience an understanding of why your technology has enabled you to really offer something a bit different than others are offering? And which we'll talk about later will manifest itself into your profitability?

Yes. So we bought and this is for a company that has developed pretty much everything in-house. So it just shows you how complex it is. We bought a sports betting B2B provider. About 3 years ago, we went public. We migrated on to that, which is now our own proprietary platform about 1.5 years ago, right, before the start of NFL season. And we've been since pouring resources into product. So we've built all of the features and types of bets out over the last 1.5 years that 99% of the market wants. And we're now adding and innovating on top of that, I think. There are still some things that we need to do, I believe, to make the UX what it should be around some of it and also some things that like are just obvious gaps that I think we need to fix. But for the most part, we're light years ahead of almost anybody on the product front. I think the companies that you mentioned that are competing with us flutter and then the joint venture between Entain and MGM, BetMGM. They're probably -- I would say, we're a little behind flutter on sports betting, but rapidly closing the gap, And we're a little behind MGM or BetMGM on casino. But I think that one we're actually kind of caught up, if not, a little ahead now. So definitely, like those are the two in terms of the competitors that you're referring to when you say 70%, 80-plus percent of the market. And if you look at the products of everyone else, they're just -- it's a huge drop-off from there. So I think we're -- we want to be #1 in everything. We're still competing to have the best products across everything. But I think even if you sort of took those top 2, there would be a massive gap between where the three of us are and where I think most of the rest of the offering in the market is right now.

Okay. Great. Can we maybe talk about the customer for a second. And online sports betting, iGaming, specific customer profile, but maybe how is that different than a casino customer? Help us kind of understand that a little bit.

So very similar to what you might expect on online sports betting. So skews male. We're working hard to get more women interested. That number percentage creeps up every month, but definitely still skews male. Average age is like early 30s, a lot of 20-somethings and 30-somethings playing the product. Definitely from a cross-sell and casino, the same people. But if you look at the pure casino player, it's more balanced male, female, particularly when you look at slot, slot skews female. A little bit higher average age, more 5, 10 years older than us in that -- in our core customer in that market. Common across both is tend to be upper income college education. Definitely skews towards at least on the sports betting side, a little less on the casino side, but still both like a more tech-savvy cord-cutter type of person. So that's an interesting thing, too, is the audience is becoming increasingly harder to reach through traditional channels. And I think that creates kind of an interesting -- over time, this audience that we're able to get, it's going to be harder and harder for any new entrants in the market to reach, I think.

And how do those customers different? And how do your marketing strategies differ?

Well, I mean, those demographic differences definitely drive a lot of it. So if you look at our sports betting commercials, where we're featuring Kevin Hart. Kevin Hart also place a lot of poker so maybe there, but maybe less so on a slot machine kind of thing. So you have different things from a creative standpoint. And then also, obviously, from a targeting standpoint. If you know your demographics are different, certainly through some of the digital channels, like you can just directly target those demographics through others, you indirectly get there by advertising through media channels that you know you're not going to advertise online sports betting on Bravo, but you might advertise online casino there.

Great. Great. Why don't we switch gears a bit. Now let's talk a little bit about the business model and how it's transformed over the past couple of years. And I think this quarter, in particular, I think, a really strong statement about the path to profitability. And so maybe take the audience through a little bit of the puts and the takes that got you there and how you kind of see the year evolving?

I appreciate it -- thank you also, again, for nice words on the quarter. So like, I think, everyone, 2 years ago, we were living in a different financial world. The markets were very different, more of a focus on growth over profits that slipped. Capital was less expensive. That's obviously a big difference between today and a couple of years ago. So I think like every company, we're doing the things that we need to do in that environment, but also what I've been really proud of is we've been able to do that while also maintaining strong revenue growth, while also gaining market share, while also really rapidly developing and innovating on products. And it's been a great testament to the team when I've asked them to step up and to do more with less, that they've done it. It's been a great testament. They want when I have asked them to, we say and, walk and chew gum, and I've said, you need to continue to drive revenue, continue to compete and you need to find cost efficiencies. And either like that's not a trade-off. That's not a -- we do this and this software, we have to do both. And the team has really stepped up and responded. So some of it was going into last year. We completely overhauled the management incentives, changed it from being pretty much entirely revenue focused to be balanced between cost and revenue growth that we have people focusing on both. And then over the course of last year, we were able to identify over $100 million of in-year synergies. And then we also, just in our last quarterly call, came back and said, "We found another $100 million that we're putting towards this year." So really excited about that. And I think that, that's just the start. This is a year where we're really digging deep and we're finding more I think. We certainly have hypotheses of areas we can find more efficiency. So there's a number of cost initiatives around the company. There's also initiatives aimed at improving revenue, both from having more efficient customer acquisition and also having better revenue per customer. And some of those, just like any year, you have some things that will come through some that won't, but we've baked none of that into our guide. Our philosophy has always been, if it's banked, if you know you got it, put it in the guide. If you don't, then don't because some things will come through and some won't. So we look at that all as upside. There's also some upside, I think, in especially like as you look at sort of the back end of the year and that states are ramping faster now. So I mentioned Ohio, Ohio -- typically, we would have thought that, that marketing spend would be spread over at least 6 to 12 months. But instead, we're actually able to spend more at better tax now. It's ramping faster, and we'll be able to ramp down the spend faster as a result. So net, what that means is it pushes a little more marketing into Q1, but it actually means Q2 through Q4 will be better. And Massachusetts hasn't launched yet, but I would expect from some of the prelaunch signal that we're seeing, as well as just from recent state trends, that you see a similar thing there where I think you're going to have Massachusetts is supposed to launch this Friday. I think you're going to have a faster ramp, and then probably also a faster inflection to profitability.

Is that customer familiarity? What's causing that ramp [indiscernible]?

I think a big part of it. So a lot of it is optimization. We've just gotten better and smarter about when we -- in how we deploy our state launch playbook. But I think a lot of it is what you're saying. So a big shift that started to happen over the last 6 to 12 months is, and we've been talking about this for years, and it finally came to fruition when we hit this kind of critical threshold of like 35-ish percent of the U.S. that has online sports betting, that it would start to make increasingly more sense to do national advertising in lieu of local advertising, and it would be more cost-efficient. So what that means is, let's say, I can buy it in roughly TV ads for 3x less cost per impression, national versus local. I would need to have at least 1/3 of the population to make that breakeven. And then anything above that, it starts to become accretive, right? So that then just based on the math made us do more national advertising over the last 6 to 12 months and really particularly during this last NFL and current NBA, NHL, this season. So I think by the time in Ohio or like a Maryland, which is December launched, they've been seeing months and months of DraftKings ads nationally. And so there's a lot of like top of the funnel pent-up demand there. Consequently, that also allows us to ramp our spend down faster. We don't have to spend as much as long locally in Ohio as an example. There's a bigger upfront first, but it's going to get much quick -- ramped down much more quickly both because the market ramp faster, but also we can continue to lean on that national advertising as opposed to thinking how to keep advertising is heavily in Ohio.

And then how does that impact the advertising in existing states?

Same story. So we've been able to -- this is something like we, for years, were saying too, and I think no one believed us. But finally, now we have real data showing like we've been ramping down for multiple years in a row now the marketing spend in some of the states we launched in 2019, and we're still growing. Our 2018, 2019 states, we talked about this on our last earnings call, we grew revenue in those states by over 50% year-over-year, and that's despite the fact that we have reduced marketing spend in those states. So I think that's like the really nice part of the cycle that we're in now. As these states are turning, we're seeing better flow-through of the revenue because a lot of our revenue is not actually taxed by net revenue, it's taxed by things like handle with the exit and other stuff. So as we increase hold and as we ramp promo down and as we increase in revenues, we're seeing really good flow through. And then we're seeing this other effect of promotional dollars, marketing spend coming down because as you move out of that heavy customer acquisition phase, as you can lean more on national advertising, there's simply less of a need to advertise locally in some of those earlier states.

And when you think about the trajectory of new states opening, how does that play out in your guidance for the year?

It's a good question. We -- when we talked about guidance at our last call, there were still some big wildcards around like we saw it was super early. We were like a few weeks in, but we saw a really exciting things in the way Ohio is ramping. We knew Massachusetts was at least targeting a Q1 launch. Now that those things are a little bit more clear, and we've seen more what Ohio's looked like through the quarter, we've seen more -- again, not celebrating until the day of, but it looks like we're on track to launch Massachusetts on Friday. So we feel very good about the timing there. I think we're starting to feel like Q2 is getting a little better. And some of that expense, of course, moving to Q1. So we're not changing our H1 guide. We're very happy with where we guided to H1. We still feel very good about those numbers. But I think you're going to see maybe less than 10% or around 10% of what we projected, the loss in H1 to be coming in Q2. And there's an outside chance, depending on how things break, that we could even maybe get to a profitable quarter there. But probably more likely, we're looking at like roughly 10% of the loss coming. So it's really exciting. We've been saying previously that Q2 is still going to be a little bit of a loss-making quarter. In Q4, it would be our first big quarter of profit. But because of that ramp coming a little bit more in Q1, Q2 is starting to look really good.

Interesting. And so I guess that just inevitably leads to the question of liquidity. Maybe just talk for a minute about the balance sheet and how you're thinking about that today?

I think same story where we felt very good, but the trends are even more positive. So we've said that we expect to finish the year with north of $700 million on the balance sheet and that next year will be a profitable year. I think we might be a little better given some of those dynamics. I think Q4 will be a really good quarter for us. So I think there's a decent chance we end the year north of $800 million on the balance sheet. And I don't think we'll need very much if any cash from that point forward. I mean there's some seasonality to 2024. So there might be periods of the year like Q3, where we're doing a lot of advertising. We have to dip in a little bit, but Q1 same-store -- Q1 and Q3 tend to be the more heavy investment quarters in Q2 and Q4, especially Q4, where you can really start to see the inflection of profit. But on the year, we should be profitable. So we feel, as we've been reiterating for a long time, very good about our liquidity position. We do not need any more capital for organic purposes. Obviously, if there is something else that were strategic, but that's not really a huge focus for us now. So more likely than not, we're very focused on organic, and we definitely don't need any capital from an organic growth standpoint.

Great. Great. And then any -- maybe it's the inevitable question everyone is getting, but just sort of how you're seeing the macro today, the consumer pull back? Are you seeing anything in your business that sort of gives you concerns?

I mean we continue to look at every little thing in every possible way. I mean we cut and slice the data every way you can imagine to try to see if there's something that should concern us and also just to understand the health of our cohorts. And we're seeing nothing with goodness. I mean there's no -- obviously, we'll see as maybe who knows if there's a recession, something like that, but we're not seeing anything in our data. All we're seeing is incredibly strong cohort growth. Our revenue per user keeps going up. And we look at that and we compare it to earlier, and I think this is largely because of the optimizations and the product improvements we made. We're actually monetizing better now than we were a year or 2 ago. So I feel really good about the health of our consumer. Also gaming is pretty known to be resilient to almost any economic cycle. There's been a lot of studies done on this. And as you get into like some of the like ancillary spend in Vegas, like shows and stuff like, maybe a little bit from like the pure gaming side and definitely when you look at lottery and other things that have had more research because they've just been around longer in the U.S. There's a lot of data that suggests that gaming is just very resilient in any economic cycle, and we're certainly seeing that in our data.

Last couple of minutes, just what sort of gets you excited, particularly on the technology innovation side? I know you guys have been investing heavily on that and would love to hear kind of what your -- what gets you excited?

I think the most exciting thing for me is having seen the last 1.5 years of what we can do. We control our own destiny. And knowing that the next 2 years at least, there's just obvious stuff to do. It's really about the velocity and quality, less like what do we do. I've been at companies in my lifetime where you sit down at the beginning of the year, like how are we going to find 5% growth. What are we going to do? This isn't that. This is like we have 50 things we can do, and there's some discussion of like what's the priority, but really the bigger thing is we got to do all of them. So can we execute at a high rate of velocity with a high level of quality. And I think that's the thing, if I look back in our 10-, 11-, 12-year now history, I feel like we really hang our hat on is the ability to execute across the business, particularly in product and technology, though, but really across the business, at a higher rate of velocity with a high level of quality. We've been building same game parlay features for less than 2 years now. And we were the first to launch live same game parlay for NBA. So we're like finally hitting a point now where -- there's still some things we need to do to close gaps, but we've largely closed all the major gaps. There's a couple more, but that will be done this year. And now it's really about how do we differentiate. How do we do things that are totally different and are better than what our competition is doing. And it feels really exciting to be at that point.

Congratulations. It's been a phenomenal performance.

Thank you.

We appreciate your time today.

Thank you so much, Michael.