DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Good morning, everyone. My name is Ryan Sigdahl, Senior Analyst at Craig-Hallum, covering online gambling. With me, I have Jason Robins, CEO, Co-Founder of DraftKings. Jason, thanks for taking the time.

No. Thank you for having me.

So these fireside chats, as in past years, we tried to be more topic specific drill down a little bit more but focusing specifically on sources of competitive differentiation with Jason, given the accelerated share gains, industry-leading player retention, strong operating leverage, DraftKings is clearly winning. And so we're going to dive into that.

Before we get started, I do -- there's 2 kind of industry hot topic items. I'm going to quickly cover those, Jason, just as I think everyone is interested. But there's been some recent press about customer-friendly run on sportsbook outcomes. Any thoughts, I guess, how this impact you guys in the near and longer term?

I mean longer term, not at all. That's one of the joys of being public, the timing, sometimes, right, when you guide in this case, literally had the worst stretch of the year, the next few weeks for NFL, especially but across the board. And I think that happens. It always is if not -- sorry, when not if it turns around and there's 4 weeks left in the quarter, so we'll see plenty of time. But it's just a matter more of whether it comes in the next 4 weeks or in Jan, Feb, but it always kind of evens out. And sometimes that happens when you issued your guidance and then the outcomes are holding less and like I said, sometimes that happens and then it swings the other way. So we'll see. Still got almost a month left in the quarter. And it's good for customers. I mean, definitely helps to have some winning runs for customers. They definitely appreciate it and enjoy it. So it's good to see that, too. And usually, there's positive impacts to activity and other things when you see that.

Yes. It normally flows back in spades, I think getting reinvested. So second one, just ESPN Bet, obviously, a lot of publicity with their recent launch ahead of Thanksgiving. But can you talk about the competitive impacts does that impact your go-to-market strategy? And then have you seen any impact on your business thus far, where you would maybe consider your sign-up promotions or even ongoing generosity because of it?

No. I mean we've had many waves of competition. This is not the first. We've seen I think in the past, some aggressive and even at times, irrational competitive behavior, I've not seen that now. I think there's been a pretty rational launch from Penn and ESPN. So we expect to continue to see that. I think they're planning for the long term, not to kind of come in and make a splash and disappear, and it's our job to continue to build better product and compete just like we do with everybody. So far in the short term, haven't seen any material impact to our business. I mean the hope is they're bringing some new people into the market, which would be great. I think that's good for everybody if the overall TAM is growing. And for us, handle has been strong, actives have been strong. We look at this stuff every day. Now only problem has been sport outcomes, which I'm sure it also is probably helpful to actives and handles, they're not the end of the world in the short term. But we've seen really no -- we watch this stuff very closely. We've seen nothing to suggest that our trajectory is changing, but obviously something we're keeping a close eye on, and like I said, we're prepared either way. We've seen lots of waves of competition. And I think our expectation is that this is a competitive market, and we're going to continue to have to fight for the customer and build great product, and that's what we've been doing. And that's why even despite competitive environment, we continue to be able to take share and be successful. So -- and by the way, do that in an efficient manner that's consistent with the path to profitability that we've laid out. So if anything, I feel like we've just reinforced that no matter what happens competitively no matter who enters the market, even what their behaviors are if we stick to our playbook, good things will continue to happen.

Yes, it's a good point on competition. I mean there's been north of 50 competitors, fits and starts many with double-digit market share aspirations that no longer exist. And I guess the winners, really the top 2 has happened more quickly. I guess is the pace of consolidation at the top surprised you? Or is this kind of as you expected from Day 1?

Well, it's always hard to know exactly how markets are going to play out, but most Internet markets, most digital markets and especially, I think in the consumer space, where, yes, people do get used to their platforms and sticky, but the switching costs aren't as high, typically best product always wins. And if you have products or a product that is clearly sort of viewed as best-in-class. You get all sorts of organic benefits to LTV and CAC, which then reinforces the advantage. So usually, that's why I think these markets tend to drift towards having a concentration of market share and more consolidation. And ultimately, that's good for the consumer because the consumer is being given that choice and is picking the best product. Also what's nice about this market is there can be businesses with low single-digit share that survive. I think that they will be able to exist, especially if you're part of a larger entity. I think that's very possible. So there will always be consumer choices out there. But I think as we continue to see this compounding advantage and invest more in the product and make more cash flow and have better LTVs and stronger CAC. I think that's just a tough cycle to break. And so I'm not surprised. I think the pace -- this is a market that I think no one kind of knew the pace at which it would develop and it's gone quicker than people think there's been more states and more scale. And I think it was really about the opportunity to build scale quickly. So that was really the wildcard. But once it was clear that there was momentum and there was going to be a decent chunk of the population and a lot of revenue to be made. And I'm not surprised that those scale advantages have really paid off early in the market. And I think you're going to continue to see that compound as time goes on.

Yes. Maybe an open-ended question just piggybacking off of that. But excluding industry regulation and TAM, which I think have materialized faster and larger, and every update you guys give and as we do it as well. But as you think back over the last 2 or 3 years kind of from when you started, whether it's the business, product evolution, user experience, I guess, what has gone better or worse relative to your expectations?

Well, one of the things we just talked about the consolidation of market share, I think definitely expected that to happen. It was hard to predict piece and also hard to predict ultimately, would it be 2 players, 3 players, 4 and thus what our share would be. And I think we really outperformed on that front, and it's really reinforced to us that we can actually achieve really outstanding share in this market and do so efficiently just by building great product and great customer experience. So it's something we thought but I think the degree to which it's yielded benefits and really the speed with which we've been able to gain share. I frankly thought it would be a longer grind than that. Not to say we still don't have a ways to go, we do. We'll never stop grinding. But I think that we felt like it might take 5, 6, 7 years to get to the level of share that we're at today. And the fact that we've been able to do that just to -- a little over 2 years after migrating to our own technology, to me means that if we continue this pace, we should be able to gain even more and continue to build on that advantage. So that's give me the confidence that the investments we're making in our product are really the things that are driving it. And I think it's been consistent all the way through, but the fact that it's really played out in such a significant way and the fact that we've been able to execute so well has even exceeded my expectations.

Yes. So on that product, Progressive Parlays, you just unveiled it at your analyst event. Can you give us some background on how that product came to fruition? It appears like it's in beta testing right now and also maybe some time line around when it'll commercially go live and kind of the -- maybe the marketing playbook around it?

It's weeks away. So we're getting close. I'm excited about it because it's differentiated and it's also something in that category of really strong sort of value proposition for the customer, the opportunity to even if you don't hit every leg of your parlay, be able to win something. So it gives you that sort of still thrill of chasing the big payout. But there's some consolation prices in there. So I think it will really scratch a niche on the customer demand side. And it's great for the house, too, like all parlays it should hold well. So really excited about that product. I think it's an example of us not just trying to reinvent the wheel but looking around the world. This is not a new product. There are other progressive parlays. There's nobody really in our competition set and the major online U.S. players that are doing it. So it's something that we feel is very differentiated, but it's also not reinventing the wheel. We have a high degree of confidence it will work because it's been tried and true in other places. So I think there's a lot of that left actually surprisingly a lot. It's amazing. People think that the products kind of have everything, but there's so much in different places around the world that if you just kind of look works because it's been proven. And maybe the way that you brand it or the way that you kind of bring it to market is a little different here, but the concept, the mechanic is the same.

Yes, it never fails that last leg of a 6-leg parlays, is going to bust. And so...

Yes. That's it.

Having a little bit of built-in hedges isn't the worst from a sports better's standpoint. You alluded to it a little bit more innovation potentially coming, but there's been a big focus on parlays really, the last 18 to 24 months here. New innovation, cross-sport, same game, in-game, all of these things. But how much is left, I guess, from an innovation possibility standpoint from parlays specifically, maybe before going to other parts of the business or other features?

It's a great question. I think that there's a lot throughout the business. I mean, we are just starting to sort of focus more on live betting, in-game betting is an example. So yes, there's been a lot of early focus on parlay. Do I think that there's nothing left? No. I mean we just are launching Progressive Parlays, you noted now. So it's definitely more innovation there. But there are other parts of the business like cash out could be way improved. I think that as noted, live betting, in-game bedding, there is so much room there. So really, it's a good question and how much more to focus on parlay. I mean, I think we sort of when the good ideas run out, I guess. But right now, there's still some, I think, room to run there with also, I think, still an enormous number of other topics to focus on, some of which we just mentioned.

Yes, it's the U.S. players certainly loves the parlays. But maybe in-game betting, can you evolve on kind of the product features and where the focus is? And much of that is around the product versus educating the player. Because from my standpoint, it's part of the maturation of the player, right? You get them to download. They figure how to make a bet, then they like the parlays, then it's kind of the in-game, you want that immediate gratification. But I guess how much is education versus product versus marketing? Or is it a combination of all?

It's a good question. I mean, I think some of it is just time. As the customer base matures, they're going to explore the product more naturally, you're going to find things that they weren't playing before that are interesting and there is an element of that. I do think product, particularly on the micro betting side, there is still this lag with broadcast that makes it really hard to bet alongside the live. Actually, the NFL released the low latency one, which we're exploring integrating. I know that that's been talked about in the past. There are other sports that have that. So it's a mixed bag, but there is definitely, I think, a need to improve there in some of the major U.S. sports figuring out how can you get the viewing experience to sync up better with the real-time betting experience. So I think for that to really take off and at least some of the sports, we're going to need that. And really beyond that, I think it is a lot of just marketing and continuing to build out the markets. And also, as you said, just time and customers being sort of board 1 day and looking around the product and finding something else. And you can market things, but sometimes you just have to catch people at the right time too, people are running around on a Sunday morning, they just want to get their bets in. Maybe they have an extra hour, one morning, their kids slept in, whatever it might be, and they have time to start exploring some of the other parlay options or things like that or maybe in-game or something you obviously not before it starts. But that's something I think that just does happen with time. I mean some -- it's one of the beauties of these types of products. They're very easy on a surface to adopt. I know some people talk about them looking and intimidating and everything, but it's really not. I mean if you will, it's pretty easy to figure out how to use it. There's also a lot of depth to it. So people who really get into it can find a lot of extra things that maybe they didn't even know were there. And it's our job to know when and how to surface does and really to personalize that experience for the customer.

Yes. As a father of 3 under 5, sleeping in the morning isn't an option, maybe up at 2 a.m. searching through new features is more relevant. But you mentioned one -- the NFL low latent. You guys are not currently signed up with that vision, you have -- for your competitors that are, I guess, given that what I view as the biggest problem, at least right now. I guess why not get that feed?

I mean, it's something we're looking at. If you're saying why not earlier, I think it's just an example of how many great things are on the road map right now. I mean stuff that like whenever I get asked, like why don't you have a particular thing? This is a good example. And I'm like there's no reason other than we had 10 other good things that beat it to the cut. I mean that's a good place to be, I think. So I feel like there's some real obvious stuff. That's one of them that can unlock some of these live betting markets and other things that we talked about. So really just a matter of getting around to it all. For us, making sure we had the absolute best offering on the parlay side and on some of the other areas that we're differentiating, I think, was important, but this is something we're certainly exploring.

Good. Maybe switching over to iGaming, strong market share from you guys, that you've taken for the last 12 to 18 months really. But can you talk about internally what changed or caused that inflection? And then how you think about that product relative to the online sports betting opportunity when you think about, hey, we only have so much time in a day and so many engineers where you put resources?

There's always even within something like even within sports betting and allocation of resources thing that you have to do, and we're fortunate we have a very large product and engineering team. So we don't have to make that trade-off at a macro level. But certainly, on the micro level, there's a lot. And we're always tweaking how much you have against one thing or the other. Certainly, the sports product is a little bit more complicated of a product. So I think it just demands a bit more focus. But iGaming is something that we have a very large team and very talented team put against as well. It's a very significant chunk of our revenues, and that's only in 5 states. I mean it's going to grow. So really, for me, iGaming is kind of the unlocked or the hidden not yet unlocked, I should say gem of DraftKings. I think a lot of people are sort of sleeping on it a little bit. And maybe you're just focused on how big the sports side can be and not realizing the iGaming side to make the business even larger. I think it's something that also maybe because there wasn't a lot of momentum in the last year or so on the legislative side, people kind of forgotten about it a little bit. But I think that's another one that's only a matter of time. We did hit a bit of a period where I think a lot of states had their pockets full after the COVID federal relief packages and some of those states are starting to pull their head up now and say, "Hey, we're looking for new sources of revenue." And I think once you see a few big ones go, then already, we do have some pretty decent size, but I think if you see like in New York or in Illinois or something like that. I think that's going to unlock some other ones in the region as well. So we're very bullish on iGaming. I think it's something that is sort of like I said, for many at least a hidden gem and we're investing a lot behind that product. It's something that we intend to continue to compete and try to gain share. Also, I've been surprised how much share we've been able to gain there. Initially, I thought iGaming, we were going to have a hard time getting to close to 30%, but that's where we are. And I think now I feel like this is another example where we just keep investing in product and I think our multi-brand strategy is going to be -- it's really just something we haven't even started to scratch the surface on. We've only launched in 1 state on our own platform at this point with more to come in the coming months. So I think that's going to yield some benefit and really feel like iGaming is an area that I'm continuing to feel better and better about the upside from a share perspective, too. So really just excited about getting more states, and I think the share is going to continue to grow in iGaming, I wouldn't be surprised if it's bigger than sports at some point for our business.

Hidden gem is kind of funny when you think about you guys are the largest iGaming operator in North America -- well, United States, I should say, probably in North America as well. But it's a very good business for you. And you're just so good at sports at oftentimes, it gets overlooked. Curious to say you think about content on the iGaming side. So third-party content is obviously a big, big focus you have to have the core titles, but you guys have also had a lot of innovation, a lot of unique games to DraftKings. But how do you think about that balance of, is it features? Is it games, content? What can really drive share gains from here?

I think it's all of the above, but content is king, as the same goes. So content is probably #1. But I also think content is table stakes in many ways. You've got to have the best title. So really for us, making sure we have all the best titles integrated, but then trying to find that edge on content, where can we get something exclusive either because we deal with somebody here because we created ourselves. We're releasing dozens of our own titles every year. We've created some new formats that we've been able to build around like Rocket, which we created years ago, we continued to release different variations, balloon popping games, just other versions of the same thing. Continues to perform once you find a mechanic that will work, it's usually just putting a different front end on it, and we'll get you some new eyeballs. So that's something we've also found really works on the more commoditized like table games, the RNG games. We're almost entirely in-house at this point. So -- and then live dealer is an area that we are just starting to invest in on our own. We've released our auto left game, but there's still a lot of room to innovate there. Live dealer, to me is an area that really -- as you think about technology and experience becoming more and more real, and feeling more and more like you're there whether that be with augmented reality or virtual reality or other things, which at some point will inevitably be part of that experience. I feel like the live part is so important. So that's an area we're going to always make sure we have the best partners, but also that we're investing in and building our own IP as well. So I think tons of room on the content and product side. And then feature-wise, it's really all about personalization with this. I think people expect a personalized experience even more than they do on the sports side. It's also a little bit harder because you could tell what titles people are playing and things like that. But it's not like I can tell what state you live in, and therefore, you're probably a fan of this team. So there -- you do really have to get more data on people individually to be able to do it. You can't just sort of create segments and do it as easily from a more macro data, you can, but there's not as much sort of using things that you don't need to first-party collect to be able to do it. So I think that's a big thing. And really, I think, continuing to figure out the multi-brand strategy. Sports is one that I think could be multi-brand. I think iGaming really is built to be multi-brand. So for us figuring out how do we reach different segments but also recognizing that the customer likes variety, and a very significant chunk of the customers are going to want to play on more than one platform. So how do we make sure they're concentrating as much of their share on platforms that we own and operate. And making sure that there's a differentiated enough experience, but also there's things that sync together that give you an incentive like common rewards programs. So that you do say, okay, this is something where all things being equal, I'd rather concentrate this is my second place that I have play if you're somebody likes to have two that you balance between -- so those are some of the key things, I think. But really, iGaming, as I noted, is an area I feel like people -- on the investment side, at least some people are sleeping on, which is surprising given how big it is, but I get so many more questions about the sports market than iGaming.

It's a -- that's a great segue, Jason. I appreciate it because live dealer with Evolution's CEO is our next fireside chat. So anyone that wants to listen in. Do you guys use Evolution? Any of their software?

Yes. They're a great partner of ours. They've been a partner of ours for years. Evolution's been very successful and they put a good product out there. So definitely, I appreciate their partnership.

Last question for you. Anything else outside of core online sports betting iGaming that you're excited about as the longer-term opportunity for DraftKings?

I think for us, really the important message is we're focused here right now. And we talked about this in our Investor Day there's upside of just in the existing states we're in alone without even gaining any market share over $2 billion in EBITDA. And then if we were to somehow get 100% legalization, there's over $6 billion in EBITDA, just the same share. So that's a pretty large company if we can get even a fraction of that. And I feel like of the incremental, I mean. And the growth should continue for quite some time, too. So there are other vectors. And I do think that if you're thinking longer term for DraftKings, international expansion, expansion new product verticals, those are all things that we should have a right to do. But we also recognized the benefit of focus. The fact that we've been able to gain so much share and do well and focus on the product over the last couple of years. I think that, at least in part, I mean, I think we would be executing well anyway, but I have to say it's at least in part due to the fact that we are really focused on one geography and I'm winning there. And I think if you look at some of our competitors, they're not. So -- or they're focused on other lines of business. So I think that, that singular focus really has helped us. And not to say we wouldn't do something else, but the bar is high because we realize there's a real trade-off there. And so, we're taking our time on other stuff and being selective right now, but there will come a time when those types of things are on the table for us. And at that point, I could see easily billions of more EBITDA opportunity emerging.

That's great. A remarkable job, Jason. I look forward to what's come. We will end it there. I appreciate the time, everyone.

Thanks for having me.