DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

My name is Daniel Vyravipillai. I'm in Morgan Stanley Investment Banking. Today, we're very pleased to welcome Jason Robins, the CEO and Co-Founder of DraftKings. Thanks for attending our conference.

Thank you.

For those less familiar with the industry, DraftKings hosted an Investor Day in November and outlined longer-term revenue and EBITDA guidance. Jason, can you talk about those targets and what gives you confidence in them? And the rapid evolution of the industry over the last few years?

So first, for those who didn't see, we put out existing states. So DraftKings, of course, hopes that we launch more states, but it's a little harder to forecast which states are going to launch when. So we put out a guidance number that was just for the states that we're operating today, and we included North Carolina because we knew it was launching actually in, I think, 4 days from now, North Carolina will be launching, so we included that in. And what we put out was that by 2028, we think we can do over $2 billion -- $2.1 billion EBITDA -- adjusted EBITDA in existing states only. And that with additional state legalization, there was up to another $6 billion plus of adjusted EBITDA upside were we to get all states in the U.S. legalized. And then we put some interim targets out, too. So in 2026, we said we'd do $1.4 billion. And the reason that we feel confident in getting there is that the underlying assumptions are actually, if anything, quite conservative. We took an industry growth rate over that period of 30%, which is quite modest, especially considering the growth rate has been far more rapid in the preceding years. We also assumed that we would not increase market share any further from where we are today, even though we have had a dramatic increase in our share over the last few years, including over 1,000 basis points last year. So I think we are fairly conservative, assuming none of the existing trends on growth and increased share would continue and that still got us to that number. So I think there's upside if we actually perform the way that we've been performing and continue our trajectory. And also upside if the industry continues to grow at the rate it's been growing.

Absolutely, and this all excludes Jackpocket, but we'll get to that...

That's true, yes. So we also -- just as Daniel was saying, we just recently announced an acquisition of a company called Jackpocket, which is a lottery -- a digital lottery product, and that was not initially included in those numbers. So we actually added numbers for -- we added -- we said in 2028, $100 million to $150 million of EBITDA, and I believe $60 million to $100 million in 2026. So that should be added to the numbers that we put in our Investor Day.

So you're in a much stronger position than you were 12, 18 months ago -- much from a financial position, rather. What trends have outperformed or underperformed your expectations over the last year?

It's been a lot of things, Daniel. I mean first, the kind of output of it is we've grown share quite a bit year-over-year. So in 2023, we went up over 1,000 basis points in share. And underneath the hood, that's really a number of different things from hold rate increasing to average handle per customer increasing to customer acquisition cost decreasing and more customers coming in the door. And really at the heart of all that, we do a lot of things around the business to optimize our marketing and all sorts of things. We're a very analytically driven company, but at the heart of that, it's been the product and what we've been able to do with product over the last couple of years. That's really been the biggest driver, I think, of both our share gains and then also all those KPIs going up. And really, I think the other thing, and you mentioned this earlier, is just the market growth. The market growth has also exceeded expectations. So I think the combination of the market growing faster than people expected and also us continuing to share, really, like I said, primarily -- I'd point to a lot of things, and I don't want to take away -- it's not as easy as one thing, but product is really the most important thing. And I think that's true in most digital industries, best product typically wins. Customers can compare easily because you just pull up 2 apps on your phone. And also word of mouth spreads quite a bit. And I think we've developed a reputation for having the best product in the market at this point.

So how do you see online sportsbook and iGaming legislation evolving over the next 12 to 24 months?

So we're in about 50% of the U.S. population after North Carolina launches for online sportsbook, which -- if you think about it in 5 years is incredibly fast to get to half the population, much faster, honestly, than I think most thought it would be. Of what's remaining, there's a handful of big states that have legislative action going on right now, Georgia being one. And then I think the three biggest states, including California, but also Texas and Florida, because those three, all will have to be ballot referendum states and Texas only meets every other year. None of them will happen this year. But hopefully, we're setting up for either in the next session for Texas, which will be next or on the 2026 ballot for Florida and California. But a lot of that really has to do with getting stakeholders aligned in the state. I think the good thing that we're seeing, good in, I guess, in this regard is that the state budgets are more in need of these incremental revenue sources than ever. So certainly, I feel like most states, I think, are going to have to take a hard look at this because whereas maybe in the last few years, they were still living off of the funds that were federally granted post-COVID. I think a lot of these states are running very large budget deficits now. And I think they're running revenue sources, and it's hard to continue to increase taxes on your citizens. So I think we're a very logical place for them to look. And I think, in particular, you're going to see that maybe not this year but certainly over the next few years. I think you're going to see that really start to dramatically increase the pace of iGaming legislation.

Yes, absolutely. So going back to Jackpocket. So again, congratulations on that proposed acquisition. How do you think that deal fits into your overall broader strategy?

Well, really, for us, everything starts with product. As I said, and this is a unique product that we don't have today and one that we know is both mass market and a very efficient vehicle for acquiring customers. We know that their CACs have been historically about 20% of what our CACs are, so 5x low -- or 4x, excuse me, lower -- no, 5x lower. So I think that's a huge advantage. And then when you combine that with the fact that we also know from an overlap analysis that we did during our diligence process that these customers cross-sell very effectively onto OSB and iGaming. And we also saw that the average customer that overlap between Jackpocket and DraftKings actually spent 50% more on DraftKings than the average customer that did not. So not only is there good overlap, they also tend to be higher value customers, too. So really big synergy there. And I think that only continues to increase as more states roll out OSB and iGaming, very similar to the role DFS has played for us. It will just be a way that we can build up that database and build the brand in states that don't yet have online sports betting and iGaming. And then even once those states do launch it, it also -- which is different and even better than DFS is a much cheaper customer acquisition vehicle than many of those other products. Now I think all of that overlap everything that was out without even a concerted CRM effort. So that's something, I'm very excited about once we close the deal, really putting into action. But it's probably a ton of upside there, but we didn't base any of our synergies on that. We assumed a very conservative assumption around cross-sell based on just what we're seeing naturally in the overlap analysis. So I think there's a lot of upside there. And I also think there's a lot of upside for Jackpocket to get into more states. Pete and his team, they built a really interesting and hard to replicate platform that allows them to process hundreds of thousands of tickets. And it's a complicated business because it's not fully digital. They actually have to print and process the physical ticket. So it's not something easy to do. And I think now that they've built that technology, they're positioned to go launch a bunch of new states in a relatively short -- in relatively short order. And unlike online sports betting and iGaming, the vast majority of states do not require legislative change in order to launch Jackpocket's product. So that makes it a much easier path, I think it's more going and working with the lotteries and making sure that everybody is comfortable with the way it's working, but it doesn't require, in most states, a legislative change.

Yes. So turning to capital structure. You are cash flow positive this year and increasing thereon, no mean feat. Your balance sheet is strengthening at the same time. So how are you thinking about capital allocation going forward?

Well, this is something that I started getting asked about probably 6 to 12 months ago. And admittedly, probably was less focused on it then. Over the last few months, I've gotten much more focused on this. And I've gotten much more educated on it because I'm not a finance person by training. So my CFO and lots of other folks on our team have kind of helped me understand different options for how we can optimize our capital structure. And then secondly, how do we -- as we start to generate more and more cash flow, how do we optimize the returns we're getting on that cash for our shareholders as well. And obviously Jackpocket M&A is an example, but we'll continue to hold an incredibly high bar for M&A. It's something that we understand, we have to be very disciplined around. And there are other ways besides M&A to use cash, like share buybacks and other sorts of things. So we're looking at all those different options as well as how we can optimize our capital structure given the changing profitability profile of the company. And I expect sometime this year, you'll hear more definitive plans from us on that. So really, right now, just really focusing on it. And I think, like I said, coming soon, we'll have something more definitive to say about what our plans are there.

So it's a great problem to have?

Indeed.

So on a related note, and you've touched upon this already, what's your interest in expansion outside of the U.S.? Where are your priorities?

Well, similarly to what I was saying on M&A, like it's a very high bar because we do think that it's a big benefit for us to be very focused right now on what will be the largest market in the world, maybe already is. I don't know if it's crossed that threshold yet. But certainly, if not yet, will be the largest online gaming market in the world. And it is an emerging market. So it's not a mature market. It's still very early days. And I think the competitive positioning and growth potential is still very much a big wildcard in terms of how well we can do long term. So I think that really that is a huge advantage we have. If you look at us versus virtually all of our competition, they either have some international presence or some other major lines of business that are taking a lot of their focus. Whereas for us, this is it. This is what we're doing. So very high bar, and we understand the value of that. That said, we do also understand that it's a big world out there. And there are other markets around the world that we ought to be getting educated on and thinking about what our future plans are. So it's another one that we're actively kind of exploring, not in a huge rush to do anything by any means. And I think, like I said, the bar would be high. So I wouldn't be surprised if you don't see us do anything in the international space outside of Canada. We're in Canada now. But outside of that, I wouldn't be surprised if you don't see us do anything for a while. But in the longer term, it's definitely something that we think is important for us. And also, we think we have a right to play. We have great products and technology that we've built, and we feel like those are very repurposable to other markets around the world. So it's definitely something on our mind. But as I said, the focus right now is certainly on the U.S., and we think that, that has yielded us a lot of the competitive advantage and share gains that we've gotten over the last year or 2. So to -- in any way distract from that, we need to think it was a pretty exciting opportunity.

Absolutely. So the journey, you've made some great strides in terms of improving the online sportsbook and iGaming offering over the last few years. You've mentioned your customers are very discerning. They will put the app side by side and then pick and choose the best user experience. Can you discuss in a bit more detail how you've been able to improve the offering and differentiate from a competitive perspective?

Absolutely. So I think a lot of the focus over the last couple of years has been on parlays. And how do you have a better parlay product, drive more parlay mix, get customers into those products. Because they're high-margin products, but more importantly, they seem to be real competitive drivers as well. That are products that customers love. And so I think over the course of '22 and early '23, it was really getting our parlay offering in a great space, and we're continuing to do that now. It's not that, that's not our focus. But I think also recently, we've started turning more attention towards live in-game betting. And I think that's a huge opportunity in front of us as well that still -- if you look at both parley mix, which they call accumulators, of course, in Western Europe, and at live betting mix, both still are significantly underpenetrated relative to the rest of the world. And if you look at the U.K., both of those as a percentage of total revenue has just continued to go up over time. So there's no reason to believe the same trajectory isn't available to us here, but we have to continue to build the products and the experience to drive it. So that's been a big focus for us. There's also been a lot of like the little detailed type stuff that matter. How fast do pages load. How easy is it to get a deposit through the system. How easy is it to withdraw your funds when you need to. Market uptime is a big focus for us. So especially during the games, if suddenly like there's a middle of a game and you want to bet on which team is going to win by the end and another team has a big play or scores a touchdown in football. A lot of times what operators will do is they'll take that market down and they'll wait until they can figure out what the new odds should be. We had a lot of focus on automating that stuff, so that we had maximum market uptime because that's another one that -- you can't just open the app and on -- right away and say, oh, this one has -- but like over time, customers see like, oh, every time I try to bet on this market -- on something during the game, it's locked versus it always seems to just work on DraftKings. And so that was a metric we were tracking very closely, for example, during the Super Bowl, and I'm happy to report we had significantly higher market uptime than any of our competitors did. So a lot of little things, I think, too, that come to the customer experience, we call them customer journeys, like what are the things people are trying to do. I'm trying to place a bet. I'm trying to make a deposit. I'm trying to make a withdrawal. I'm trying to sign up. And how do we look at all the different elements of those experiences and the ways they can play out and make them as smooth and as pleasant for the user as possible. And I think those things, over time, really lead to better retention and more loyalty from customers.

So that's the sportsbook. iGaming and how you're thinking about Golden Nugget in the tech stack?

iGaming is another one that I think there's huge product upside there. So maybe even more so, to be honest, although maybe not in sports. But I think iGaming, there's a lot of new emerging technologies that can dramatically improve the experience. Think about like live dealer but instead, it's AI on the other side. Or think about more interactive video-based betting. There are so many things we could do. We're investing in our own live dealer products now. It's definitely a multiyear effort, but that's something I think could be really interesting over the long term. We've launched several new titles and are increasing our production there. So we're up to a point where the majority of DraftKings iGaming volume comes on games and content that we've created in-house, which we believe is not just good for the differentiation side, but also you're not paying third-party providers for that content. So it helps the bottom line margin too, which is both good for profitability, but also gives us more room to reinvest in the product. Tons there, I think and really people talk less about that. But if anything, I think there's even maybe more untapped upside in that product.

Absolutely. And I'd be remiss not to ask about AI and machine learning. Do you consider it a friend or a foe?

Oh, 100% a friend. I mean, first, we've been focused on machine learning for a long time. I think that a lot of times people blur the lines when they're talking about things between what's AI, what's machine learning. But really, the companies, whether it's machine learning, AI, that will benefit from -- the most from this are the companies that have the most robust data. And so I think that benefits the larger scaled operators like us. And I think the other thing that this will do is, it will help us with the overall customer experience not just because we understand how to personalize things for people, but also we can get faster customer support responses. We can have a more interacting experience when you're actually trying to search for a bet like think of like a ChatGPT-type experience as opposed to just typing in something in a search bar. All those things should increase retention, increase customer loyalty and improve the experience. So I think there's so much room on AI. And we haven't even gotten into the cost side, which obviously, there's like a ton of opportunity there by improving efficiency in all sorts of areas of the business. But I think AI has the potential to be transformational for us in the same way it does for many other industries. And I think the fact that we're starting from a position of scale where we have such a robust data set I think, puts us in a position to maybe capitalize on it in an even bigger way.

It sounds as though you're in the first innings?

Very much so.

You're guiding for sales and marketing expenses to decline modestly this year, while at the same time, you're continuing to grow revenue rapidly in the 30% range. How are you able to achieve that?

Well, customer acquisition is really the main driver of marketing spend. So less new customers as the industry matures and this year just happens to be a year where we're anticipating less new state launches than we did last year. And that could easily flip around and the trend reverses, but it's really a function of new customers, which is really a function of new state launches. So in a year like this where every additional state that we were in already is another year mature. Each of those states, the marketing is going to decline a little bit. And then there's some new states, North Carolina being the biggest one this year, but it's not the same magnitude of the population entering as it was in previous years. So I think that's why you're seeing a decline in sales and marketing. And it's really -- the revenue is more about customer retention and continuing to develop products. Definitely, there's some ongoing promotions and things that you use to activate people at the beginning of sports seasons or other things, but most of that promotional cost and certainly the marketing cost is oriented towards new customers. So in a year like this where we have so many -- or almost 50% of the population going into the year, we will be by the time we launch North Carolina. We have enough of an existing base built up where even if we're declining marketing a little bit because we're not launching as many new states, you're still able to get a huge increase in revenue.

So how are you thinking about your calibration between local versus national marketing?

We've been increasingly moving more and more to national as an overall part of just what we've said years ago would be the trend as more states legalize. It just becomes more and more efficient to do national marketing. And we still do some local, but the bulk of the local is really concentrated towards newer states. So as states mature, a lot of that local marketing starts to come down. But we definitely heavy-up in a big way locally, which we will, of course, in North Carolina, when a new state launches. But more and more of our marketing is moving towards national, and I expect that to be a trend that will continue.

Absolutely. And then on the marketing topic around media relationships and reestablishing the relationship with Barstool. Can you talk us through that a little bit?

Yes. We're really excited about that one. Barstool was a partner of ours many years -- for many years. And back to the fantasy sports days has been a partner of ours. And so we know them well. We are maybe more than -- there's not many partners, I think that we have more data and more of an understanding of historical performance on than them. So we felt very good about our underwriting of that deal. And I think it's a great example of one when the right deal comes along with the right partner, we'll pull the trigger. But it really comes down to getting the right deal. And we've passed on a lot of partnership deals in the past, too, because the numbers didn't work. But this was one where we had such a clear understanding of the partner and the expected performance that we're able to model it out very clearly, and we knew exactly what range we could make this work in and it turned out there was a great deal to be done for both sides. So really, really pleased to be working with them again. And I think they'll do a great job marketing the property to the audience.

Absolutely. So in closing, what's the next big thing for DraftKings over the next 3 to 5 years?

Well, you mentioned AI, and I think there are a lot of emerging technologies. Obviously, AI is the buzz one now. But I think we're entering a phase where in the same way, Internet and even arguably mobile really transformed the way the companies need to reach and communicate with their customers. I think we're going through the beginning stages of another one of those phases and I think those are where dramatic opportunities can be created. Massive opportunities can be created if you get out ahead of it and do it right. So that's something, I think, that we feel like when you're talking 5 years, just to put it in perspective, we only launched our first OSB state, New Jersey, a little over 5 years ago. So you're talking about a doubling of the time that the industry has even really existed in the United States. So much is going to happen between now and then. But really, if you look at. And I would say the same thing is true back in fantasy and the same thing is true really in almost any industry. What drives it are more macro trends that particular industries then are transformed or opportunities are created out of for them. So an analogy I'll make is back when we first started DFS -- DraftKings DFS, we are probably the 25th, maybe 30th to launch a DFS website. FanDuel was 3 or 4 years ahead of us. There are so many that were ahead of us. But we were actually the first to launch an iOS app, the first to launch an Android app. And now you fast forward 95% of our traffic comes there, we actually had first-mover advantage there. And so that's just a lesson learned and like theme product, but different technology. How did we end up becoming -- well, we were just out ahead of it. We would look at our data, and we saw in the first year, about 8% to 10% of our traffic came from mobile phones, from smartphones. And then our second year was up to like 25%. And we're like -- all right, we can see where this is going. And so even though we were still only at 25%, still 3/4 of our traffic was coming from web, from PC, we said we got -- like we see where this is going, we've got to get out ahead of this. So we're started working on an iOS app. We started working with an Android app. Actually, by the time we got them live, it was probably up in the 30s and a few years later, where we are today. So I think really, as a company, we've built into our culture, not trying to guess what the world is going to look like 5, 10 years from now, but more building a culture and an approach to business where we're staying on top of those things. And we're constantly asking the questions of what are the latest innovations happening in the world and how could that potentially -- how could those innovations potentially be impactful to what we do. And I think that's really the right way to look at it. Yes, you need to innovate yourself, but so much innovation comes from just seeing things before other people do that are already going out there -- going out there just having better pattern recognition sooner than others. And I think that's really a lot of how we're looking at AI, is just trying to really understand what are all the applications that are unfolding. Where do we think it will be 2, 3 years from now? And how do we get there first.

Excellent. I think we're -- so we're short of time, unfortunately. But thank you very much Jason for your time and attending our conference and good luck for the next few years.

Thank you.