DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Great. Good morning, everybody. We're excited to have with us the team from DraftKings. On stage here with me is DraftKings' Chief Executive Officer, Jason Robins, first time and hopefully continued participant in this conference. Thank you for you and your team coming out here and supporting the conference. We appreciate it.

Thank you.

I thought Jason it would be great -- we have a bunch of detailed questions, I thought it would be great if you can just speak to as we continue going through this year and the next few years, what your strategic priorities and objectives are?

So great question. I think right now, this -- I'll start with this year and then speak a little bit more beyond. This year, we're focused on continuing that balance of how do we maintain strong top line growth and competitiveness while also having a laser focus on efficiency. So that really started last year. It actually began really in the beginning or in the end of 2021 when our compensation committee sat down at the board and said, look, we need to rethink management incentives. We redesign management incentives for 2022 to much better balance revenue growth and EBITDA. And that led to then a number of initiatives throughout 2022 that helped improve our efficiency. But what I was really proud of is we did that while also improving market share continuing to have really strong revenue growth, including in our oldest tenured states, even in our 2018, 2019 cohort states, we grew over 50% revenue '22 versus '21. And that work has really continued into '23. So '23 has been essentially just a continuation of that, where we've said our work here is not done. There's a number of other initiatives that our CFO and finance team are leading to find efficiencies in the business as well as a lot of initiatives focused on top line growth through things like improving hold rate, finding further optimization of promo as well as just launching new features to engage customers and give them better experiences.

Great. We've seen market share domestically, become very consolidated. How do you think that plays out for the, I guess, the secondary, the tertiary players. And your market share goals and aspirations, how much of it is coming from what would we consider your larger peers versus some of the smaller operators?

Well, I think you're right that there's been a lot of organic consolidation in the industry, which is really interesting to see. I think there's a lot of drivers behind that, which would probably take the whole conversation to get into speculating on, but we do see that's happening. I think for us, the gains come across the board, we feel like we can compete with anybody. Our goal is to be the #1 player, but also to be the most efficient, most profitable player as well. So I think we can accomplish both of those, and it means we need to beat everybody. And as far as where do I think the market for secondary tertiary players goes, I think it's going to continue to be harder because there is a real scale advantage to this business. There's also a real capital constraint that's out there for a lot of these companies now. You saw several of them didn't even choose to enter some of the new states like Massachusetts. So there are real trade-offs that are having to be made now that are sacrificing growth and competitiveness over the long term. And we know that beyond just the revenue generated from entering on new state that there's real advantage to having a national presence from a marketing perspective, from being able to invest in product technology and distribute those costs over a larger customer and revenue base. So I think that's going to continue to create the divide between the top players in the market. Already, you're seeing most of the market consolidating amongst the top 2, sometimes 3 players in a given market on sports betting and same story on the iGaming side. And I expect that trend to continue organically.

Right. You've touched on Massachusetts a little bit, can you talk about the launch there? And then maybe how the launch in a state like Massachusetts, compares to other states of similar size, maybe proclivity to game and to bet. And the timing of Massachusetts may be coming after football season, but before the NCAA tournament, does that make for somewhat of a slightly prolonged initial investment in a newer state like Massachusetts just based on the calendar and the timing of it?

Yes, it's a great question. I think it's still early to tell. We launched last Friday. So it's been 4 days to sort of fourth day now. So definitely early, but very strong signal early. I think the ramp has been much like the trend in general in recent states has been much more accelerated, much more front loaded. We did talk about recently, Ohio. Ohio, in the first 2 months, we acquired 6% of the adult population, which is an astounding figure, I think. And comparatively, we acquired in the first 6 months. So 3 time is long, about 1.3% of the adult population in New Jersey. So I think it really shows that ramp. Now that said, given to your point, Ohio launched Jan 1st, you got the Super Bowl and then you got all the NFL playoffs. So do I think that this is quite a strong time of year, no, March Madness is pretty good, but I don't think it's quite as strong as Super Bowl and NFL playoffs. So again, not seeing this 3, 4 days into Massachusetts, but just more speculative, I would think that there'd probably be a little bit less of a front load in Massachusetts, but I think it's still going to be way ahead of where states even a year ago, certainly states 2, 3, 4 years ago, we're on this at this point in the curve. And what that means is that a state like Ohio whereas previously, that would be 2 to 3 years to generate positive contribution profit. Now we see that happening in Q4 of this year, first year of launch. So Massachusetts too early to call on that, but I think it will follow a very similar trajectory. So either Q4 this year or certainly early next year, it will be there. And again, that's just much more condensed of a time frame than the previous 2- to 3-year path that we've been talking about.

And so what is driving that quicker path to being profit contribution margin positive? Is it the benefit of scale that you just referenced? Is it how you're marketing and promoting? Is it your technology that might be better, launching in a new state today or last year versus a few years ago like in New Jersey? How do you sort of attribute that to get into a condensed profit ramp?

I think there's a number of reasons, but the 2 biggest are, one, we -- this is not just sort of 21st state. We've optimized the playbook quite a bit. I think we've gotten a lot smarter about how to go to market, and how to maximize the total value creation. And one of the things that we've learned is that pulling forward some of that investment, not just because you can get a higher volume of new customers, but it also happens to be your most valuable customers. You're going to get the customers who're getting year 5 in New Jersey are not going to be the same LTV as the customers we've got her once, that's part of it. The second part, which I think if I had to guess, although hard to really break down something like this, I would guess, is the biggest part is, remember, in Ohio and Massachusetts. These are customers that all NFL season have been seeing our advertising throughout national ads. That was not true a year or two ago. We had talked for a while about when we reached this inflection point of 30% to 35% of the U.S. population, it would make sense due to the pricing of advertising to shift, especially in things like television and other offline sort of advertising, it makes sense to shift into more of a national footprint. And that started to really happen in the NFL season, this past NFL season. So by the time Ohio launched, they were seeing these ads for months. So the pump was primed, the funnel was built, and we were just seeing far better conversion in response on the lower end of the funnel, digital type conversion stuff. I mean the CAC was -- could debate whether we should attribute some of the previous stuff, but like we weren't attributing spend in September to Ohio's CAC. So the CAC after we launched, just plummeted because these channels were converting so strongly. So we kept pumping up. We still got a better CAC then we've gotten in some early stages at these enormous volumes. And I really do think a lot of it was just because of that first big year of national advertising coming off of the NFL season.

Got it. And how are you better able today to identify who are the lesser promiscuous customers that just kind of shop around for the best deal versus knowing like these are the patrons that we're reinvesting in and going after it and know there is a return on that?

I mean that's a big -- I'm glad you mentioned that. That's another benefit of more data, more scale. The more data we get, not just at the individual level, which obviously, those types of things need to be applied to. But just in aggregate, to understand behavioral patterns and to improve our models, the faster we're getting and identifying sharp betters that we need to limit. The faster we're getting identifying bonus hunters that aren't going to create real long-term value and just going to hop around and take bonuses. And so that also improves. It's part of when we improve the state launch playbook. We're more quickly getting to a point where we can identify those people, and we can take the appropriate steps afterwards. And that's just another advantage to of scale. The more data you have, the better all this stuff becomes.

Great. And one of the things that you talked about over the last few months is reducing operating expenses. What other operating expenses -- we had Tom from Caesars talk about they're having a number of partnership expenses that roll off and some of those won't be renewed, and these partnership expenses that were done a few years ago didn't really bear as much fruit as what they had thought and so they're not going to renew them, maybe not renewed to the same extent. To what extent do you have additional operating expense levers similar to what Tom was saying?

Well, I mean, we definitely feel we were disciplined and we feel pretty good about the approach we took to do deals. But like anything, when you do a lot of deals, there's going to be some that are performing better than others. So I think we have some opportunity there, too. And that could be in the form of either rolling off things that we don't think -- and by the way, some of that might not be -- the deal didn't work. Some of that might be, it worked in the first year or 2 of a market. And now that we're in a more mature phase, we don't need it anymore. And it's not -- at the lower level of marketing spend, it doesn't make sense to be part of the portfolio, at least at that level anymore. So some of it is that. Some of it are things that could work if we got them in the right pricing zones, so we're working on trying to see if there's an extension to be renegotiated versus just letting them roll off. And then some of them are great deals that we want to continue, but even though we're still trying to negotiate where we can because everybody is negotiating right now. So I think that's like really the way I break it down. And as far as other levers, I mean, we're looking up and down the P&L. Our work here is not done. We have a number of initiatives right now, literally targeting every single area of the P&L to look for cost efficiency, everything from -- every element of COGS down through headcount and certainly, marketing is an area we think we can continue to find optimization opportunity, deals. So it's really just -- the way we've done it is we've broken them into individual projects, which each have a target to go after and each of them are then going out and trying to execute against that target.

Great. A part of what we've seen, probably you do better than most is the benefits of your investments in parlay technology and seeing that improve your hold mix. Where does that parlay hold percentage sit or the mix sit today? And then what does it look like at maturity?

I think there's a lot of upside there. It's almost hard to say what it could look like at maturity. We certainly have benchmarks from other markets, but I think the U.S. due to both the nature of sports and also one of the things, I believe, is the U.S., a lot of the gaming market was built on the lottery. There's this mentality. We saw this in DFS to where the most popular games were the ones where you could put in like $3 and win $100,000 or $20 and win $1 million. And people are a little bit less sensitive to margin on those because it's not the same mentality as I'm playing against 1 person or 1 single that type of thing. So I think that it's definitely -- in the U.S., I think there's a mentality of I want to bet to win big. And I think for that reason, there's an enormous ceiling that is higher than probably other parts of the world. The other reason I think is the nature of the sports, a huge part of what makes parlays or player props and U.S. sports are really well designed for player props. So...

And is that different for football versus basketball versus golf, or is it...

There's gradients of it, the trend isn't different. So basketball is like off the charts on player prop, but football is great, too. When we went into the Super Bowl, everybody is asking me, what's this mean if KC versus Philly wins had a good day or a bad day. And it's like, honestly, what really matters is, do we get a Kelce or Hurts or Miles Sanders touch down, like that's what's going to drive the day. It's not going to be who wins the game, which is different than 2, 3 years ago. 2, 3 years ago, like really matter who win the game, still matters, sometimes, obviously, of SKUs, but more and more, it's really driven by a player props. So NBA is a great example. You can assume, if we had a bunch of star players that go off, that's probably a tough day for us. And a bunch of star players have off nights, it's probably a really good day for us. And it becomes more and more important with each passing day than actual outcomes of the games, which, by the way, one of the other interesting elements that and the leagues love this, too, the players love this, is it keeps engagement throughout the game because, yes, start of it is maybe you're betting basket by basket or play by play, but also even if you're not doing that, even if you're not live betting every single play, you still may have a player that is 2 points away from reaching with the 25-point blowout, you're still watching that game. So it's a really cool effect there, too, I think.

Great. I'll pause there and see if there are any questions from the audience, or I'll continue to go through my list of questions here with Jason. To what extent do you see newer entrants to digital gaming, media firms those that have aspirations to be media type of firms? And how does that impact potentially what you're doing?

I mean, there will always be new entrants coming in and out of the market. And I think that for us, like it doesn't really impact what we're doing. Obviously, we're watching everybody. We're paying attention, no pride of authorship. If there's a good idea out there and one of the things I've been super proud of is our team -- I've talked a lot about our velocity on product. We have just got such a great engine going on product and technology. We're able to crank out things quickly. So if we see something good, we can mobilize around it pretty fast. So we're always paying attention what the competition is doing. But we're not proactively changing our plans based on speculation of what somebody may or may not do. I also think that even if you see new entrants, and we most certainly will, it's a very different environment. New entrants coming into the market 2 years, maybe even 1.5 years ago, we're coming in thinking that this mentality of all you got to do is spend a bunch of money on marketing, and you can buy share. And I think we've proven over the last 1.5 years that doesn't work. Even if you can buy some shares short term, it doesn't stick. And really what wins over the long term is strong products, strong customer retention, good monetization, those sorts of things. So I feel like even today, if you did see new entrants come in, it's going to be in a much more rational environment. I don't expect to see any sort of major aggressiveness on the marketing front, partly because it showed it didn't work partly because the environment isn't conducive to it now, partly because we're far enough along in the market where it's just going to be tough. I mean, we have 21 states, almost half the country now as sports betting to come in and try to dislodge those customers. It's just really hard to do.

Got it. Can you talk a little bit about a market like Ontario, which at least from where I sit from the outside, there's not a lot of great data that comes from that market? That market has been slow to convert from sort of this grayish market to a white market, which has made it maybe for a little bit of a slower ramp. But how do you see that marketing and what's interesting about that market in relation to some of the markets here in the states?

I mean I think Ontario is a perfect example of what I was just talking about, where we waited until it regulated. We did not launch in the gray even though there were a lot of pretty reasonable companies that did. And I think it's hard to come back in that. I mean it's going to take a long time. I think with quality product, we'll be able to gain our fair share over time. But you didn't see us come out of the gate spending a ton of money there because we knew it wouldn't work. And I think it's the same dynamic I was talking about now in the U.S. with new entrants coming in. That markets had people at same operators in there for a long time. Even if you think that -- we were just talking earlier with my team about there was a study, I forgot out who did it, came out recently that showed even in legal markets in the U.S. still over 1/3 of volume is going to legal sports books. That's the legal market we're competing with, and you can't pride people away. That's how sticky the product is. I mean these are people that don't even know if they can get their money out and stuff like that, and they're seriously just stuck on they're used to it, maybe they like where they're using. So I think that's another just sort of a very powerful point on Ontario. There's so many other examples where once a customer is acquired, it's hard. It's hard to get them. And the ones that you're going to attract by just throwing crazy bonuses and stuff and them aren't the ones you want, they're the ones that are hopping around looking for that stuff. The real customers that are going to be loyal and stick with you, if you're giving them a good experience, they're already with a book that they like at this point.

Great. How do you think about ways for you to increase your position in market share in iCasino?

It's a big area of focus for us. I think a big one is we're working right now on migrating Golden Nugget, which we bought last year onto our own platform, that will both save money and will increase monetization and retention of customers. It also create -- we have a list day downs. We've looked at it. We know factually that our platform when a customer downloads the app, that customer converts at a higher rate to a paid user than on Golden Nugget. We know factually that once that customer converts, they are going to spend more with our platform than they are in the current Golden Nugget platform. So I think that's going to really help a lot. I also think that a lot of same things we're doing on the sports side, just continuing to have a high velocity of features, new game development. We've made a ton of headway on our own games, particularly on the table games side and are starting to make some headway on the slot side, too. We've been pretty -- not as great as I'd like, but we've been decent on the velocity of cranking out new games. We've got some big hits in there. But really, it's the same story. It's just continuing to have best product and best product means most engaging customer experience, highest conversion, best monetization and all that sort of stuff.

Great. And...

I will note, sorry, on that, too. We're very proud that in January we reached #1 in New Jersey, which I know you can't totally tell externally from the reports because they don't publish by operated post by skin. We obviously have our own data. So we're able to estimate we are #1 in New Jersey, which we're very excited about.

Maybe it's less so today than a year or so ago, but at least all of us on the investor side. We looked at New Jersey as sort of like the Holy Grail of the state, and it was sort of a good sort of learning indicator for how -- maybe other states would evolve. Do you think that still makes sense, or...

It's interesting. I think from like a TAM perspective, it's probably still a reasonable thing to use.

By the way, we've been talking for 20 minutes and TAM is now just being introduced.

First time.

Thought that was 2 years ago, that would have been the first...

[indiscernible] literally than your first question, exactly. Times have changed. So people are no longer question -- I've always learned there's never like just, hey, your business looks good. It's well, I'm satisfied on that. What about those other things. So I'm glad we moved to TAM to now all these other things. So yes, I think from that perspective, but really the dynamics of a ramp, like that whole notion I mentioned earlier, like New Jersey was when we were saying 2 to 3 years. New Jersey was somewhere in that 2- to 3-year period of profitability. That's been pulled in so much. The penetration level in the first several months is so much higher than it was early in New Jersey. So I think there is a lot of change in terms of the shape of estate. But I think as far as like just the overall dynamics of what a player's worth, what a market could be worth. Obviously, there's variations, but I think New Jersey is still a reasonable proxy.

Great. And what do you think the optimal churn is for a customer? And then what's the optimal, I guess the optical is infinity, the optical customer life cycle, how long is it?

I mean, like you said, we want customers for life. So obviously, we're going to try to give them a good experience and keep them around. We know from looking at European and other more mature markets that customers can last for decades. And as far as churn goes, we look at churn in a couple of ways. We look at user churn and then we look at dollar churn. So one of the things you see is that users that churn tend to be lower value than users that stick around, those that stick around tend to grow their value. So it offsets in our case, at least, more than offset the churn. So you get positive year-over-year revenue retention. And that's really the most important thing. So as far as what's optimal, that's hard to say. I mean, obviously, you want to maximize the LTV. So that some combination of retention and monetization. I would usually, especially at this stage of the market here on the side of I want to see great retention numbers because I do think the customer life cycle is long. And I do think that there's lots of things we still have in the common to do to improve monetization and revenue per user over time. So I'd rather lock in the user now, but it's still something we're always kind of looking at and trying to find that right balance.

Right. How do you think -- I think if you could break it out between OSB and I guess how do you think over the next 5 years, newer markets, newer states that come to the fore?

It meaning like what are they likely to do from OSB and iCasino standpoint?

Correct.

Well, obviously, we've had great momentum on OSB. iGaming has been a little bit lagging, but that was something we always expected. We always thought that OSB would be the leader. And I think the thing that's been a little different than maybe we expected is and it's twisted and turned on this whole COVID Saga. And I mean, it happening like a lot of states got flush with cash. I mean you have states there, in some cases, I won't call it specific states that have been broke that now have cash. And obviously, to legal lot, there's some motivation that's on entirely it, but some of the motivation is tax revenue. So I think the more that they run through those coffers and the more these states need tax revenue, the more likely you'll see states, especially those that have already done online sports betting come back to the table to consider iGaming. I still think we feel great about our long-term target around 70 -- excuse me, 65% of the U.S. population with sports betting, 30% with iGaming. Actually think there may be a little upside on sports betting. But definitely, the pace has been more skewed towards sports betting. That's been really like the momentum, there has been tremendous. And iGaming got -- I was actually a little surprised as many states as did, did everything at once, like Michigan, Pennsylvania, New Jersey, obviously did it separately. West Virginia was 1 year apart. Connecticut did it together. So surprised how many states did everything at once. I always thought it would be almost entirely OSB first and iGaming. So I think from that perspective, it's kind of been what we'd expect. But obviously, we'd like to see some iGaming momentum in the next couple of years.

And do you find it interesting that there's, I guess, some degree of support at the State Senate level in New York for iCasino, while they're also trying to get a bunch of cash for 3 downstate casinos. And just on the topic of New York, is there a realistic chance that they ever kind of have a more reasonable tax rate than what they have right now?

It's hard to predict what any legislature is going to do in New York is one of the wilder rides for a state that I've been on. So it's hard to say. I think we're excited to see that there's a reasonable dialogue happening and that there's an understanding that if we aren't going to see some relief on the tax front that it's going to mean a worse consumer value proposition, which will ultimately lead to a decline in tax revenues. And I think they get that. So I'm optimistic there's going to be some sort of change, whether that's a headline tax rate change, a deductibility of promo dollars, I don't know what exactly it will be. And maybe there's nothing, but I don't think the conversation is over, if it doesn't happen this year. Either way we'll adjust, we're going to make our margin in New York. So if we have to pull other levers, that's a nice thing of this business, lots of leverage you can pull. You can increase hold rate, you could do a lot of things. So decreased marketing, obviously. So there is certainly, like levers to pull, but I think it would be unfortunate if New York customers had a worse value proposition because the tax is so onerous. But that's in the end new pace for it, it's the consumer. As far as iGaming goes, I'm not surprised, even though I do think it's going to be a tough pot to get all of this done, downstate casinos and everything like usually like -- well, sometimes it goes either way, sometimes they do everything at once, sometimes, they piece it out. But I'm not surprised because I think that New York is completely surrounded right now by states doing iGaming. So from their perspective, you got New Jersey, Connecticut, Pennsylvania, I mean, literally, like everything surrounding you. And you're bleeding revenue to those states, you know it. It's not controversial as much because everybody around you is doing it. And we're not quite there yet. I think back to the COVID point, they're still working through some. But like obviously, they're looking out a year or 2 in the future and saying, could you use the tax dollars. So I'm not surprised that they're considering it. And I think you're going to see these regional things like where states get surrounded by another state, or by other states that have a product. It starts to become really hard to argue against doing it.

Right. And when you think about your longer-term very positive EBITDA dollar targets, within that, is there much of a margin difference between OSB and iCasino? I'm surprised at that. Why wouldn't an iCasino have a much higher margin than the OSB...

Well, it depends on how you allocate, if you allocate like all of the marketing dollars and all of the promotion dollars to one or the other, then yes. We don't typically do that. Our promotion dollars are typically usable across products. Sometimes they'll be specific to a vertical, but not always. And on the marketing side, while mostly we advertise sports, we do advertise again to mostly sports. That's just because it's more efficient to get the customer on the platform. So we don't necessarily want to penalize and say, like, when we look at it as more we acquired this customer. This is the best way to get them on. But then once they're on the platform, what's the margin profile. And in that regard, it looks similar. So there's some offset between sports has a little bit of a higher promotion rate, but typically a little bit of a lower tax rate and it kind of nets out to a similar level.

Great. Kevin?

Jason are you seeing any trend differentiation when you think about the customers that have been with you for over a year and are kind of established engaged players. Are you seeing any differentiation amongst the age cohorts behavior, whether it's frequency or gaining budgets or anything to call out there?

Yes, definitely, as players mature, frequency goes up, average bet size goes up, number of sports in the case where they have iGaming, the state, number of products engaged with goes up. All of that tends to increase over time as player cohorts age.

So my specific question is, are you seeing anything different from maybe a younger peer cohort...

You mean the age of the player?

Right.

I don't know on that. I don't think we've really -- it's a good question. I think the trend is generally true across the board, but I would have to check to see if there's any splits by age demographic. I'm guessing there is, but I also think that general trend, like most people, if you think about it, I remember the first time I set foot in a Vegas Casino, I was very timid and then a little bit more willing to play whatever and -- so I think most people, that's a dynamic comfort wise. I think most people as time goes on, their income tends to go up at least earlier in their life and in their career. So I would think that like there's probably some differences in terms of magnitude, but those trends are consistent across all demographics.

Great. Actually we have time for one more question.

Just one quick one. Just a follow-up on the conversation about high LTV customers versus some of the [ deal ] shoppers. Can you just look at the concentration, like how much could they cost? If you look at the top 10% or better on the platform how much do they contribute in terms of overall?

We never disclosed that, but it's a decently high percentage. So it's like most things in life, but also most games, casinos are no different. There's definitely a concentration of volume amongst the highest value players, for sure.

Great. Thank you so much, Jason.

Thank you.

Appreciate it.