DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

Good morning, everyone. Ryan Sigdahl here, senior analyst at Craig-Hallum. With me is Founder and CEO, Jason Robins. Thanks for taking time, Jason.

Thank you. Thanks for having me.

So similar to the past years, these are topics specific. This year, we will be talking the current state of OSB in the U.S. So a lot going on with weekly volatility in sports outcomes, to mix of parlays, to taxes, to competition, et cetera, et cetera, that we will get into here. But maybe to start, Jason, you detailed on your Q3 call and as we saw kind of in the state data and the outcomes, but rough start from a sports-friendly October. But anything surprising? How did November turn out?

We definitely don't want to get into the habit of giving week-to-week or month-to-month updates. But I would say November was a more typical month, even a little on the positive side. Yesterday, it was not. So it kind of goes up and down depending on the day, depending on the week. But over the course of time, obviously, everything kind of regresses to the mean.

Yes. And we all stare at or many of us stare at New York weekly, just because it's a very important state, and they get weekly data. And it looks quite a bit smoother and normal as you get over the past 5 weeks. From those October winnings, anything changed from a player standpoint, better engagement? Are they returning those winnings back in a bigger, better way, but anything notable from that standpoint?

We've seen great engagement. I think it's hard to sort of point to whether it has anything to do with winning or not. I definitely think that conceptually it makes sense. But from what we've seen, if there is an effect, there isn't a tremendously large effect on future handles from whether players are winning or not. But nevertheless, we're seeing tremendous engagement, some of the best numbers we've seen really all season still now. And so at this point, midway through the season, sometimes you hit a little bit of a lull, but we're not seeing that this year. It's been fantastic. NBA got off to a really great start. So really excited about that. So really seeing great traction across all sports right now.

Maybe taking a step back, U.S. market, the evolution here. We love to compare to the U.K. just because it was the biggest market prior to the U.S., and it's the oldest one that we can compare to. But we've seen technology, parlays, Bet Builder, a lot of those things, features just coming to those markets. How do you think the U.K. versus expectations, kind of how that evolved versus what you're seeing in the U.S.?

Well, it's so early in the U.S. that it's hard to compare really. I mean obviously, there's a lot of similarities between the U.K. and the U.S., both Western cultures, English-speaking, but then there are some differences. The sport mix is obviously completely different where global soccer is the vast majority of revenue in the U.K., and here, obviously, it's not nearly that. And other sports, which are very small in the U.K., like the NFL are the most important ones here. So definitely a different market in some ways, similar market and others. For a long time, I had always heard of -- well, I shouldn't say a long time, it's still early in the market. But first few years in the market, I would hear often that the U.K. and betting there is just -- it's part of the culture, and it will never be that here, and I always thought to myself, I just don't buy that. The U.S. kind of leads almost I think in every single entertainment spend per capita in the world category, so I don't know why this would be different. Obviously, gaming in general is very large in the U.S., whether it be through lotteries or casinos. So it never quite made sense to me, but we always kind of view the U.K. as at least the floor. And I think what you're seeing now is that the U.S. is probably going to be larger comparatively on a per GDP or per capita standpoint, however you look at it. How big and how much bigger we'll see. Obviously, there's a lot to do, to your point on. The evolution of the U.K. was very different with the first several years in the market, the products were much more rudimentary. Live betting wasn't a thing. Obviously, the U.S. had the benefit of starting later and having more fully developed products, technology that wasn't available back then. Mobile was barely a thing when the U.K. first -- sort of actually wasn't to. Smart devices didn't come until nearly a decade after the U.K. started in the online market. So obviously, very different in that regard, too. But we'll have to see where it caps out. But I think for sure, it's going to be -- at least amongst the regulated markets, it will be the largest in the world by any measure.

If you think about your biggest peers in the U.S. have international thinking Flutter, Entain but they have international business that have been around a long time that they've evolved those products to the U.S. market. You guys are U.S. born or U.S. native and you've built this product for the U.S. market. But can you compare and contrast kind if you think that's an advantage or potentially starting at a disadvantage given what they have?

I think it's a bit of both initially because, obviously, while having a presence and focus here, having a customer base, having all of those things here, having a brand all helped a ton. Initially, we were behind when it came to product and technology, and it wasn't until we acquired SBTech and then ultimately put a lot of work into it over the last several years that we feel like we're really a premier place in the market when it comes to our technology and product capabilities. So I think that what you're seeing is, over time, that's going to become more and more of an advantage because the things that we were initially behind on, we have been able to rapidly close the gap and now, in some cases, actually get out ahead of the vast majority of our competitors in the market now. So I think that if you look at it over time, we believe that having that focus and having that knowledge and really just being all about winning in the U.S. at this stage is very helpful. But I also think that over time, we will be able to expand globally, too, and that there are benefits to having a platform across the world. For example, you opened up this conversation by asking me about the NFL outcomes. If you have a lot of markets that are betting on soccer and other sports predominantly, the NFL outcomes become less of a variance in the business, not that, that matters long term because over the long term, it should smooth out, but there are benefits to having more diversification across different sports and different geographies. So it is something that we believe there will be a place for us to do in time. But I do think that what you're seeing now is that some of the advantages that we've had of focus are really being combined with now having close gaps and started to put some distance between us and most of the competition in many categories of both the sports and casino offering. And we feel like this is the time where we really can continue to gain share and do well.

Yes. It's a good segue into the product side because you guys have made a lot of progress in the past couple of years, I think closing that gap, mainly with FanDuel and the kind of head start Flutter had. We've seen hold improve. You've narrowed that gap. They still have a lead there. One thing that comes up a lot is pricing. FanDuel has kind of best pricing and trading. I guess, how much of that delta between you and them, do you think really is the pricing trading capabilities versus VIP mix is something that might be a little bit structurally different. But can you talk through kind of how your acquisitions, the SBTech, the evolution there, and then what close is that gap between you and them?

Yes. I don't think that really -- yes, I'm sure there's little nuances that can range everything from which sports that we might be more -- or they might be more -- have more share into, what percentage comes from live betting, but I think there's very little difference, that can't be explained by bet mix. That's the vast majority of it. And anything else is sort of just marginal, I think. Not to say that collectively, there isn't a long tail of a lot of those things. And like I said, for example, we happen to do really well in college and college happens to be a lower hold sport. FanDuel does a little better than us in NBA, which happens to be the highest hold sport. So there are things like that. But I do think that those are still very much marginal, and the vast majority of difference between our hold rates is bet mix. If you look at it from a handle share standpoint, we're actually neck and neck, even a little ahead of them. Player-wise, we're about even. So I like the fact that we're at a place where we get sort of the same benefits of network effects and other kinds of things that come with being a market leader, but we're actually still staring at so much upside with every move upward of hold rate. And to me, that's the most exciting place about where we are. It's not how do we figure out how to grow handle another 20%, 30% on top of what we think we can do next year. It's just how do we move another 25, 50, 100 bps of hold rate. And that in of itself is going to create tremendous value on the size of handle that we're generating now. So to me, that's the most exciting thing. And then as you kind of go down further in the P&L, we feel we win across the board. We have a much better promo efficiency than anyone in the market. Our marketing in CAC is better than anyone in the market at the scale that we're at. So we feel very good about all the other kind of key components, and we know what we have to do to move the hold rate, and we've made a ton of progress on it over the last year or 2, and I think we're going to continue to do that over the next couple of years.

NBA, the highest hold. Good to hear that you say it's up to a fantastic start. And I agree the flywheel is just starting to accelerate here. One of the things that over the past couple of years, the evolution is a couple of years ago, maybe 3, 4 years ago, when we did the first one of these, Jason Robins, it was -- you guys were talking about that flywheel and what was working for you. And then we had several dozen other sports books that all thought they were going to get 10% market share and that was seemingly the bogey that everybody thought they could get to. That's fizzled pretty quickly. How do you see the market evolving from here? It's very top heavy right now between the top 2. There are several kind of competitors in that tier 2 that have big ambitions. But how do you see kind of next several years? And maybe taking a step back, 3 years ago to today, did it evolve as you thought it would from a market share standpoint -- competitive standpoint? And then how do you see the next couple of years?

Yes, it's a great question. I mean, I actually -- my IR team always is like, we're getting asked about the next wave of competitors, like hasn't -- but I kind of like it because I think that it's important to always have new competition, aggressive competition in the market. It keeps the team and it keeps everybody really focused on winning with the customer and keeps that edge. And we've always, for better or for worse, been a company that does better when we feel like we're under some sort of pressure. And it's easy to get complacent. We obviously would try not to, but easy to get complacent when you don't have that. So I kind of like feeling it, even if in the back of my mind, I also know we've seen now multiple waves of competitors. No one has been able yet to make a dent in the top 2 of the market. So I don't think that it's likely that you're going to see that. And it seems like most investors, even though they ask about it, get it. It used to be -- now it feels like a check-the-box question versus a real question of how 8 different companies going to have 10% to 20% share. But we also don't take anything for granted. I think that everything that we do every day, we have to earn with the customer, and we realize that. And there's always a potential for disruption if you take your eye out off of that. So I think having that edge, having the ability to always point to somebody that's coming after us has been helpful. And I think that will continue because even though I don't think that there's going to be a huge dynamic effect, if anything, I think you're going to see more consolidation to the top in terms of share. What I also think you're going to see is that a lot of companies, as this market continues to evolve, that are losing money now. We'll figure out how to survive at smaller levels of scale. And that's something that I think is -- you're at a disadvantage for sure. But as long as you're profitable, you can continue to keep going. And I think there are companies that will do that. So I kind of see more consolidation in share at the top, but I also don't see a complete disappearance of the long-tail competitors either. And I think there's always going to be somebody that is the next kind of threat or the next one that everybody is talking about, for sure.

I agree. It's long been our thesis. There is a place for the tier 2 if they run it and operate it appropriately and rationally. It can be strategic and profitable...

We'd still have to do long term, right? Like there's a phase where everyone goes for it. But at some point, companies will say, look, this is where I'm at. And I think the smart ones will realize if they are going to gain share, you have to do it over time. There's just -- I think the one thing we've proven is, this come grab a bunch out of the gate isn't going to work. It's just -- it's never proven effective. And I think that that's something that hopefully the smarter companies that survive will realize that you got to kind of grind out and build product and try to earn it over time. So I do think that you'll see that. But like I said, I also think that the advantages of being at the level of scale that we're at are so great the reinvestment that we can make into our product and into expanding our offerings and the data that we have and the ability to buy at scale and acquiring customers, those things are really, really hard to overcome. But it doesn't mean you can't build a nice little company on a few percent share finding a niche in the market.

Sign-up bonuses acquire customers, and it's fantastic for doing that, but product and user experience retain them, and you guys certainly are proving that out. Shifting over a little bit to in-game mix. Seems like a bigger focus now parlays the past couple of years really getting the same game parlay, the progressive parlays, a lot of innovation and feature enhancement there, which makes a lot of sense from the hold standpoint that it brings. But can you talk about in-game betting. How much of an important sort of, I guess, focus at is now maybe versus where it was in the pipeline a couple of years ago? And then what are some of the future enhancements that can potentially be an accelerant to that?

Yes. I think in-game, if you look at overseas, the trajectory is going to continue to rise in the U.S., if it follow -- you asked the question earlier, how much can we sort of take from the U.K. and obviously you never know, things could be different, but this is one that I think will follow a similar trend, which is as time goes on, you're going to see more and more growth coming from in-game betting. So I think that right now, we actually feel like unlike kind of a few years ago where we were on the parley side, we're actually playing from a position of strength. With in-game, we think we have the best offering as it stands today in the market. So we want to build on that and really continue to make it a differentiation point. And it's something that I think -- if you come back to kind of like hold and all that, it's really not about hold in and itself. It's about monetization of the player, LTV. There are multiple components of that from retention to spend to what type of frequency that you're getting. And I think that in-game, while certainly maybe not accretive to hold rate, is very much accretive to spend per customer and LTV, at least that is what we have seen thus far the in-game betting we have and that has certainly been the experience from overseas. So that's something we really think that while we continue to drive the hold rate up, we can also maybe create an advantage by having an LTV advantage when it comes to the best in-game offerings and the most volume coming through that and something that we hope we'll be able to continue to build on.

It's a good point. As we all stare at hold and want to see that structurally keep moving higher as in-game is slightly lower, but the velocity somewhat higher diversification of...

It's monetization of the player, right? And so hold is a component of that so is promo rate. These are all parts of it. And so I think you got to remember not to overly fixate on one thing, not to say that we don't feel there's room. We think that actually hold is one of the biggest places of upside that we have right now. So definitely a focal point. But I have to remind my team always, I think it's important for investors to remember that there are multiple levers that go into driving monetization and LTV of a player. And that's really what we're trying to maximize here, not just one metric.

Taxes, much more of a focus area I think 6, 9 months ago than maybe it is today. You had Illinois that raised taxes. You've had several other states that have talked about it, but haven't really come close to doing anything. Missouri most recent state to legalize, should come kind of mid-to-late next year live, but very reasonable, low average 10% tax rate there. So I guess point I'm trying to make is not all states are pushing for the New York type 50%, 51% plus type tax rates. But what did you see from Missouri? And maybe where do you think the market goes? We know your thoughts generally on taxes and maintaining reasonable balanced taxes overall for all parties. But just any thoughts on Missouri and kind of breaking that trend?

Yes. I mean I think Missouri, and every state, has its own -- Missouri was a ballot initiative, but every state has their own process, their own politics. So you're going to see different states approach it differently. I actually think it's important that we educate. The industry at this point, if you kind of count taxes plus free cash flow, something like 80%, 90% of our free cash flow is going to taxes right now. So that will obviously change as time goes on, but when you think about it that way, we're going to end up paying close to $1.7 billion in taxes this year on -- we guided to just under $300 million in EBITDA. I think that sounds a little crazy, right? So hopefully, as we continue to educate, we will see more discipline among states as they're setting tax rates. And I think they just have to understand that we're competing within an illegal market that pays no taxes and puts no money into things like responsible gaming and following regulations. So in order for us to be able to do that, we have to have reasonable tax rates. Great to see that Missouri has a reasonable tax rate and hopefully, a sign of things to come in future legalization.

And to be clear, that is gaming taxes and cost of sales. So your EBITDA conversion to free cash flow is extremely good.

Yes, exactly right. So that is COGS. But if you kind of put it that way to the states, a lot of them are like, really, I didn't realize that. And I think there's some education to be done. I think that there's a belief among some politicians, incorrectly so, that the companies can compete at those levels of taxes like you have in New York. And we just have to continue to find ways to explain that, that's not the case.

Media. So a bigger focus kind of these integrated media strategies. You guys acquired a few companies and started to push more towards that. But how do you think about media and the importance for online sports betting for a strategy and for a brand today maybe versus what you thought a couple of years ago and where you want to go with that?

Yes. I assume you mean in-house produced like content. So I think that there's a place for it, it really intertwines with the marketing, and it's kind of hard to separate it because the way that we think about it is less sort of, hey, how do we build a complete stand-alone media business that we would be doing anyway regardless of whether we're doing sports betting and more. How do we use this to create synergies for marketing and effectively increase our reach and our customer acquisition at a more efficient cost. So more tactically, we would say, okay, if we have a program that we can -- the sort of net equation between the production of that and the ad sales or other revenues that we're going to generate is going to be less, hopefully, breakeven, but even if it's slightly in the red, if it's less than what we would have spent to sponsor that show, we're better off acquiring the rights and doing that in-house. And so that's kind of how we've approached it so far. We've had some great partners in this space that have really helped us prove this out. But for us right now, it's a very small thing, and it's a component of how we look at marketing, again, not something I don't think there's a place for, I do, but I wouldn't say it's a huge needle mover in terms of -- it's more of an optimization for us.

Last question, Jason, but what are you excited about as we head into 2025?

Well, I think 2025 is going to be another huge growth year. Every sign is pointing to that. Obviously, really excited about the state legislative front. 2024 was an election year. It's always hard to get gaming bills done in an election year. I think this year coming up, 2025, we're going to get some real momentum, potentially even get some iGaming bills over the hump, which would be great. So those are some of the things that I'm really excited for what we have planned. On the product front, we have an incredible product road map, and I think really you're going to start to see us make huge accelerations in live betting and continue to drive that hold rate up. So a lot of upside, we think, there. So really excited, big year coming up.

Sounds like Minnesota might even get over the finish line this year from a sports standpoint.

I hope so. I hope so. We got to get that done for you, Ryan.

It's close. It sounds like we got there last minute last year, just a minute or 2 late. With that, we are on time. Jason, very much appreciate the time today. Thank you, everyone, for joining.

Thank you.