DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

I'm Trey Bowers, the gaming lodging leisure analyst here at Wells Fargo, and it's my pleasure to welcome remotely, Jason Robins, CEO and Chairman, Co-Founder of DraftKings. Thank you so much for your time today.

So we'll just go ahead and kick it off. I think top of mind for a lot of investors these days, Jason, is prediction markets. And maybe you just want to kick off with kind of an update 1.5 quarters into the market, what you're seeing, and any learnings you've made in this first, what do we have, 5 months?

Yes. So it's been only a couple of weeks of NFL. So obviously still early, but we really are seeing just phenomenal trends, not just with predictions, but also in the core business. Actually, maybe I'll start for a moment on the core. Everybody was concerned about handle growth. We have seen enormous handle growth to start the season, 15% so far month-to-date and really just great engagement from customers there. This is on the Sportsbook side, obviously. IGaming, we've started to regain some share, seeing growth accelerate there as well. So really, really healthy trends in the core business. That business is on track to deliver what we had previously communicated, which is about $1 billion in adjusted EBITDA in 2026 and should increase pretty materially in 2027. So really excited about that. We'll have an update more on what 2027 looks like in our November earnings call. And then Predictions, not surprisingly, has been a huge growth story for us. We're up almost 2.5x from our July volume. That's just 2 months ago. Obviously, with World Cup, it was still a big month in July, and we're about 2.5x, a little less, but almost 2.5x and trending higher every week and really just seeing a great improvement from a competitive positioning. We're up to almost double-digit share of the sports market and higher if you look at the just NFL piece of it. We actually feel we have the best offering now in NFL. We have 3x as many NFL markets as our competition, about 1.5x as many college football and Major League Baseball markets. So we feel like really quickly in a very short period of time, we've gone from what was objectively not the greatest product in market about 8 or 9 months ago, 10 months ago to now, we feel the best sports product in market, backed up by the content offering and the breadth of that. And we have a ton of new features and other stuff coming, too. So we're just getting started. As I mentioned, we're only 2 weeks in the NFL season, and we have a lot more planned for the coming weeks and months.

And was -- that share number you referenced, was that a handle share in prediction market states? Or just help us understand...

Yes, consumer volume. So the total volume that is traded by customer is not the sort of number that is inclusive of the backing on the other side of the state, but the actual true consumer volume.

Any update just on what you're seeing from a competitive response from either the prediction market platforms or your OSB peers?

Well, everybody, obviously, right now, it's just sort of like OSB was in 2020, 2021, maybe a little bit of 2022, it's kind of the time when there's a lot of competitors out there that are thinking that they can have a material share, and we welcome that. We love competition. We've dealt with that in every single vertical we have. And again, our strategy has always been and consistently has been to win on our offering to win on our product and customer experience. And we again think that we're executing that. As I mentioned earlier, we think we have the best sports marketing, at least in the core sports. There's some tail sports stuff and tennis and a few other things that we need to build out. But we obviously prioritized NFL, college football, baseball, the ones that the majority of the volumes coming on. And I think the fact that in such a short period, we put together the best offering shows that we actually are on a trajectory to, just like we did in Sportsbook, have a superior product. And ultimately, that's what wins in these industries, I believe.

On the second quarter call, you guys talked about being really pleased with the customer acquisition costs you were seeing. Is that -- are you still continuing to see that trend? And where should we go from here?

I mean, same story, really. I think the customer acquisition costs and the pace at which we are getting new volume, new customers on in these non-OSB states is real. We did mention earlier that we are going to evaluate and be data-based. I do expect that we are going to increase some of our spend, probably pulling forward from some of the spend that we intended to deploy in 2027, just because we are seeing such amazing conversion under the product, and the efficiency seems really strong.

And any sense on an order of magnitude on that? Or is it too early to say?

I think too early to say. We did want to communicate that based on exciting early results, we do anticipate spending a bit more. But I don't know exactly what that number will be. And it will obviously be just like this is very data-dependent. And it's still a long season. We have a lot of ways to go. But based on the trends we're seeing, we could see meaningfully more investment. And I think that's a good thing because it should accelerate our revenue and our gross profit for next year.

And is that investment kind of spread equally amongst promotional dollars, marketing dollars? What -- just give us a sense for kind of how that's deployed?

Yes. It's really a bit of both because, of course, new customers, more new customers mean more new customer promotions. So it is some additional marketing spend that we are deploying into a very friendly and efficient environment. But also, it's just the fact that we're getting a higher volume of new customers than we thought. And even if we didn't spend any more in marketing, that would come with more new customer promotions, but also, of course, comes with more gross profit next year. And really, our plan right now is to kind of let that data come in, optimize. And then on the November call, we're going to have an update for what we think not only the rest of this year will look like, but also how much gross profit and additional revenue we believe we can generate in 2027.

And just to move on to kind of an app update, you referenced this a little earlier in saying that you had the best sports app out there. But one, is the app fully rolled out on kind of the universal app? I'm pleased to say when I got here, I was able to use my Massachusetts deposits to make bets in California. So at least these 2 states, it's working seamlessly. But can you just give an update on where it stands? Are you guys still a little bit ways to go? Or is it kind of fully up and running?

It's pretty fully up and running. I mean, there's still a handful of states that haven't fully integrated. But really, for the most part, the experience you're describing is what we've been able to produce now in most states across the country. So we think that is a huge component, especially knowing that not just do people travel, but also, we have a lot of customers that at some point in their life have opened up a DraftKings account and made a deposit in another state that had legal sports book when they were traveling, that could be any amount of time ago. And so for those customers to be able to go in and access those accounts and those funds is really a huge part of the conversion funnel that we're able to jump start. So I think that was a big feature for us. And of course, on an ongoing basis, we'll just be more convenient for people really, to be fair, do not understand why should I have to have a separate account and separate balance. That's really not what we're trying to get at. And obviously, behind the scenes, there's some maneuvering we had to do in order to make sure that funds were not intermingled in a way that didn't work for our regulators. But from the customer perspective, it's totally seamless.

And you referenced this before, but I think, myself included, a lot of people would like better clarity on is what makes the DraftKings platform or user interface or gameplay just better than your peers? What enables you guys to gain share either against your OSB competitors or the PM platforms?

Well, a huge part of it is content breadth. We have 3x as many NFL markets, as any predictions competitor out there. We also think that the smoothness of the user experience. So in sports, in traditional sports book, that means I can get my live bets down. They're not timing out. I can get the amounts that I want. Everything just sort of works. It's fast. In Predictions, it means that my orders are getting filled and I'm getting the volume that I want. I can make the combinations that I want of different types of markets to be able to create those combos, which has been a great story for us, too. Last weekend and NFL Sunday, we were up to almost 30% combo mix, which, just to put in perspective, it took us 5 years plus to get to that level of Sportsbook. So really a great story there, too. But again, that means the product has to work, things have to be combinable and you have to be able to get the orders filled. So a lot of that is trickier, of course, with Predictions because it's a little bit of a different model where you have sometimes third-party market makers, sometimes our own market makers and you have to do RFQs and things like that. But these are all things that we love -- problems we love solving. We think that the more complex -- it is to create the type of user experience that we want, the more advantaged we are because traditionally, we've just been able to move faster and to innovate more when it comes to those things.

And over time, would you expect on those combo bets, the majority of the market making to take place through DraftKings? Or is it kind of bet-specific as you think about taking on that risk?

Well, we'll have to see how that all plays out. We do believe that there's a path to our market maker being able to do more and more of it. But also we want to make sure that we're getting the absolute best experience for the customers. So if there are times where there's a better offering from another market maker, of course, that's something that we would want to make sure we surface to our customers. And it's going to also depend on the category. Of course in sports, we're really looking to focus a lot of that volume through our market maker, but crypto and elections and other categories have not been as much of a priority, at least in the short term for us to do market making on maybe over the medium term, we would look more at that, of course. But we've really been sports-focused to date.

And I know it's highly state by state dependent based on whatever the tax rate is, but over time, if we were to think about kind of a post-tax contribution margin for a prediction market state versus an OSB license data, I mean, over time, do those look somewhat similar? Is one potentially higher than the other? Just help us frame out kind of the economics for the prediction market states.

Well, it's a great question. Obviously, there's still a lot that needs to shake out. At least to date, what we're seeing is that the actual margins, the equivalent of what I would call hold rate or net revenue margin are a little lower on prediction markets, but the gross margins are much higher. So there's a reason to believe those things could net out either in a positive way versus sports or a neutral. I certainly don't think there's a lot of reason to believe the economics will be worse, although we have assumed a smaller TAM in terms of the top line side. But again, I think with higher gross profit margins, there's a lot more room to make bottom line for sure versus Sportsbook, which has a higher, I think, top line TAM, but has a little bit of a lower than Predictions gross margin profile.

Got it. So just wanted to -- it wouldn't be a DraftKings discussion if we didn't get into the regulatory and legal side of things. And I know much of what you might be able to answer to this is you're making your own guesses or assumptions on this, but maybe we could just do a little bit of game theory of -- after the Ninth District Court ruling, potential move to the Supreme Court, other district court rulings. Just love to get your thoughts on where we're going from here, if prediction markets are here to stay, if some of the rulings ultimately results in less sports betting on prediction markets, how non-licensed states might react to that? So it's a very open-ended question, but I would love to get your broader thoughts on this.

Well, I think it's really hard, of course, to predict what will happen. We are observing and are certainly an interested party and would like clarity. And I think clarity is good for everybody. But we don't control that process. We only control the choices that we make in terms of how we invest, how we think about paybacks, how we think about long-term value creation. I will say one of the really positives for us is we feel like we're in a great position either way. We have a healthy core business that is on track to produce $1 billion adjusted EBITDA and growing pretty substantially in 2027 and beyond. That business, despite all the chatter about cannibalization, we have seen as resilient and as strong. I mentioned 15% year-over-year handle growth to start the NFL season, really good number considering I think a lot of what people were expecting. So really pleased on that front. And then obviously, there's the Predictions investment, but I will say that we are seeing great cross-sell as well. So when we acquire a Predictions customer, we're cross-selling double-digit percentages of them onto Pick6, onto Lottery, on to DFS. So we have other products that we can retain those customers on if there were to be a ruling that removes sports from contracts from these states. I would also say crypto has been interesting. We are seeing pretty good conversion of these customers onto some of the crypto trading as well. And that could be a nice little thing that we weren't expecting that could contribute meaningfully into the business. So something to keep an eye on also that I think could give us upside. But overall, we're just watching, we're observing. We're seeing what the different plays that this could play out are, and we're making sure that we are making choices that position us to be really strong and in a really great competitive position regardless of what the outcomes are.

So I guess to summarize, you feel like you're kind of in a win-win position, that prediction market is here to stay. You're effectively competing in the early days. Prediction markets, maybe see an OSB shutdown. You're still one of the best games in town, and you still have that optionality of those states then deciding to go licensed?

Yes. I mean, it's funny because if you ask me, I would say I'd rather see them stay. But I would also guess that if prediction markets got shut down by the Supreme Court tomorrow, our share price would pop. So seems like our investors are happy with that outcome. I do think we are in a good position either way, though. I really believe that we are well set up regardless of the outcome, which was not easy. I think credit to our team and doing a lot of great work, both strategically and executing really in a great way and having strong relationships and transparent conversations with our regulators. All of that is what has led to us being in a position where I really think we are well positioned no matter what the outcome is. And as I said, I hope it sticks around because I think it's a huge incremental TAM. And we're doing well. I mean, we are clearly separating ourselves as right there alongside Kalshi and Polymarket and climbing in terms of the conversation and who I think will be long-term viable competitors in this market. So I feel like we've really done a great job there. We have the best product and market. Obviously, those are all investments I'd like to see pay off for many years to come, but I do think we're well positioned regardless of what the outcome is.

You referenced the license state growth in OSB. But before we get to that, the iGaming business, you mentioned as well. And I know it's a focus for the balance of the year. It's a small number of states represent a pretty meaningful piece of revenue. So maybe we could just dig in a little bit on some of the actions that are being taken to kind of get that iGaming business back on a growth trajectory that you guys would like to see? And then any broader thoughts on what the ultimate TAM of iGaming is from here? Any states that you think could come over the [ transom ] in the next couple of years? And again, an open-ended question, but would love to dig in a little deeper on that piece of the business.

Well, I'm glad you brought that up. The iGaming story finally has been a good one for us the last month or 2. So if you look at the latest state reports to come out, we have regained share pretty substantially in a couple of states. And I believe we are on a trajectory to continue to gain share in the coming months. A lot of the things that we are doing seem to be resonating with customers from the content that we have, to the experiences that we're creating. A lot of new features have been launched, and more are coming in the fall. So really feel like that product is humming in a completely better place, much different place than it was even a year ago. Now the results are starting to show with those share regains and that growth acceleration. So really excited about that. As far as additional TAM, we hope Maine will be launching later this year. As a reminder, it will be us and Caesars as the sole operators in Maine. So we should have a pretty good share of that market. Obviously, not a huge state, but helpful one to get on the board. And then pretty decent momentum in a few other states. Hard to say what will or won't get done, but definitely feel like there's some momentum in the DMV area, for example. And I do think that in the coming years, you will see more iGaming states, but I also know that it's been a little while. So I'm hesitant to start throwing states out there and making any projections on that. But I do feel like especially in the DMV area, there's a lot of momentum. And I also think states like Illinois and New York, it's a matter of when, not if. But not sure that, that's as immediate immediately on the horizon as some of the momentum we're seeing in the DMV area.