After declaring its first quarter of EBITDA profitability in Q2 2023, DraftKings management today (4 August) helped elucidate exactly how the business managed to reverse significant losses in recent years.
DraftKings generated revenue of $875m during Q2, up 87.8% from $466m in the prior-year period.
That increase helped the business reach EBITDA profitability for the first time, as it posted adjusted EBITDA of $73m for the quarter, compared to an adjusted EBITDA loss of $118.1m in Q2 2022.
A more detailed breakdown of the Q2 financial results can be found here.
How did they do it?
Naturally, analysts on today’s earnings call were keen to understand the developments driving DraftKings’ change in fortunes.
The operator’s management was not shy about explaining how the turnaround came about, citing myriad factors all contributing to DraftKings’ Q2 success.
Fundamentally, CEO Jason Robins explained, the business has been laser focused on continuing to improve its product offering, with great attention paid to the development of its own same-game parlay (SGP) capabilities and the differentiation of its live betting content.
The business now has live SGPs built in-house for most major US sports including NFL, NBA, MLB, and college football and basketball.
The company’s “persistent focus on product differentiation is already apparent in share trends,” said Robins, suggesting DraftKings achieved OSB handle share of 35% and OSB GGR share of 32% in the quarter in states where it is currently live.
“We also maintained the number one iGaming GGR position and set an all time record for iGaming GGR share at 27%,” Robins concluded.
DraftKings’ CFO Jason Park, meanwhile, was able to provide a more granular view on the specific financial benefits of several converging factors during the quarter.
He also set out how the strong Q2 performance had contributed to an upswing in the company’s expectations for the full-year 2023.
“Customer retention and engagement outperformed expectations as we successfully transitioned customers from the NBA season into MLB,” Park said, adding that “we have seen significantly better-than-expected engagement on MLB due to our enhanced product.
“Structural hold is also above expectations, at approximately 9% for the quarter, while promotional intensity improved, together supporting a more than 550 basis point year-on-year improvement in our adjusted gross margin rate to 47%,” he added.
In addition to those improvements, DraftKings’ fixed expenses were better than expected as the company focused on managing its costs and “exerted discipline on our compensation expense.”
Park also explained how the company’s more mature state markets had contributed outsized results to the business.
In states where DraftKings went live between 2018 and 2021, handle grew by more than 35% year-on-year, while revenue grew even faster at more than 70%, he explained.
Meanwhile, the adjusted gross margin rate in those states increased by more than 800 basis points, and the number of total unique customers increased some 25%, all while DraftKings was able to reduce its external marketing spend by more than 10% year-on-year.
After increasing previously issued revenue guidance by $315m, and adjusted EBITDA expectations by $110m, Park also broke down what specifically drove the improved forecast.
Customer retention, acquisition and engagement “are exceeding expectations,” he said, and therefore account for $225m of the expected revenue improvement and $100m of the adjusted EBITDA improvement.
Expected improvements to DraftKings’ sportsbook hold percentage, supported by the introduction of improved SGP and live betting capabilities, accounted for a further $40m in expected revenue improvement and $30m in EBITDA improvement.
Favourable sport outcomes in Q2 contributed a further $30m to the expected revenue improvement and $20m to the EBITDA improvement.
Those improvements are expected to be offset somewhat by an earlier-than-expected launch of sports betting in Kentucky (expected to deliver an additional $20m in revenue but a $30m reduction in EBITDA), and an increase in Ohio’s sports betting tax rate, expected to result in $10m in additional costs.
CEO Jason Robins explains how DraftKings seeks to continually improve its product:
The best question on today’s earnings call came from David Katz of Jeffries, who asked management whether further M&A could be on the cards in order to help DraftKings keep up its recent momentum.
CEO Robins’ response was somewhat cagey, as he reiterated that: “It’s about to be the most important time of year seasonally for us. We have fall coming up with the NFL and college football calendar, NBA – lots of things happening this fall.
“So this is the most important time of year, this is when we acquire the most customers, when we have the biggest opportunity to gain more market share, and it’s where we generate the most revenue and the most EBITDA.”
As a result, he said, DraftKings’ teams remain “laser focused on executing,” and the business has “a lot of exciting stuff coming for NFL and college football and basketball and hockey and everything else.”
Finally providing a somewhat direct response to Katz’s question, he concluded: “Listen, there’s always talk of things happening in the background, and we have small teams that make sure they’re aware of what’s going on.
“But as a company, we’re very, very focused on executing and winning in the US.”
Current trading and outlook
Revenue for full-year 2023 is now expected to fall between $3.46bn and $3.54bn, representing an increase of $315m at the midpoint compared to previously issued guidance.
Full-year adjusted EBITDA is expected to fall between a $190m loss and a $220m loss, down from a previously stated expected EBITDA loss between $290m and $340m.
Elsewhere, DraftKings’ adjusted gross margin percentage is now expected to fall between 43% and 45%, rather than the previously stated range of 42-45%.
The business ended Q2 with $1.1bn in cash and now expects to end 2023 with more than $1bn on its balance sheet.
DraftKings has followed in the footsteps of its US-facing peers to become the latest operator to turn to EBITDA profitability in Q2 2023.
DraftKings generated revenue of $875m during Q2, up 87.8% from $466m in the prior-year period.
The increase was driven primarily by continued customer retention and engagement, efficient acquisition of new customers, product innovation and improved promotional intensity, the operator said.
For the first time, DraftKings reached EBITDA profitability, as the firm posted adjusted EBITDA of $73m for the quarter, compared to an adjusted EBITDA loss of $118.1m in Q2 2022.
Still, the business declared a loss from operations of $69m for the quarter, down from a $308.9m loss, and a net loss of $77.3m, compared to a $217.1m net loss in the prior year.
The results were driven by an increase in monthly unique players to an average of 2.1 million, up 44% on the prior-year period.
The average revenue per monthly unique player was up by 33%, meanwhile, to $137.
Following the improved results, DraftKings has updated its previously issued revenue guidance for full-year 2023, raising the midpoint of the guidance range by $315m to $3.5bn.
“DraftKings produced outstanding results for the second quarter of 2023,” said CEO and co-founder Jason Robins.
“We grew revenue at an impressive year-over-year rate, captured additional GGR share in a cost-effective manner, and maintained our focus on operational efficiency.
“The positive adjusted EBITDA that we generated in the second quarter exceeded our guidance, and we are well on our way to achieving positive adjusted EBITDA again in the fourth quarter of 2023 and for fiscal year 2024 and beyond.”
DraftKings CFO Jason Park added: “Our unit economics are outstanding with older states generating more than enough cash to fund investment in new states.
“This performance, combined with fixed costs that grew at only a mid-single digit year-over-year percentage rate in the second quarter, resulted in an inflection to positive adjusted EBITDA that we expect will occur again in the fourth quarter and for full year 2024.”
DraftKings has raised full-year guidance after beating analyst estimates to report revenue of $770m in Q1 2023.
Revenue soared 84% year-on-year to $770m. Analyst estimates were closer to $704m.
DraftKings said this was driven by the efficient acquisition of new customers and a higher hold percentage as driven by product innovation.
The operator also decreased promotional spend in more mature US states.
Despite the reduction, sales and marketing costs rose by 21.1% to $389.1m.
DraftKings reported a Q1 loss of $389.8m, a 24.4% reduction on the $515.6m loss recorded in the same period of last year.
Adjusted EBITDA came in at negative $221.6m, which was improved from a $289.5m loss in the prior-corresponding period.
Stock-based compensation fell by 37.2% in Q1 to $117.4m.
DraftKings CEO Jason Robins said the revenue growth was underpinned by a “relentless focus” on efficiency that positioned the company for continued sustainable success.
Monthly unique players (MUPs) increased to an average of 2.8 million in Q1, representing an increase of 39% over Q1 2022.
Average revenue per MUP, meanwhile, rose by 35% year-on-year to reach $92 in Q1.
This was again attributed to an improvement in the firm’s structural sportsbook hold rate and reduced promotional activity.
On a sequential (quarter-on-quarter) basis, however, revenue dropped by 9.9%, in part due to the seasonality impact of the US sporting calendar.
“The seasonality of US sports means that a good Q1 and Q4 is vital to overall performance,” said Regulus Partners analyst Paul Leyland.
“However, for DraftKings and others ‘good’ cannot just mean reaching the barbed wire of EBITDA breakeven, it needs to mean double digit cash flow profitability to make up for the lean content months and the inevitable bad luck months.
“With signs of underlying maturity in early adopting states and little progress on online gaming, the US online sector needs to deliver an awful lot more structural improvements to get out of its self-dug hole,” he added.
Following Leyland’s comments above, DraftKings expects to breakeven in the second quarter and expects to reach almost $150m in positive EBITDA by Q4 2023.
The best question on today’s earnings call came from Deutsche Bank gaming analyst Carlo Santarelli.
He asked: “Your marketing last year was a little over $800m, how do you think about that number relative to revenue and as a percentage of revenue?”
Robins said the percentage would fluctuate depending on new state launches but that he was comfortable with 10% as the “right” number as communicated at the latest investor day event.
“As revenue grows, it doesn’t mean that marketing needs to continue to go up iteratively,” he added.
CFO Jason Park said that marketing as a percentage of revenue was more of an “external” metric.
“Internally, we’ll continue to look at LTV to CAC as a state goes into its fifth, sixth, or seventh year and adjust the total marketing dollars depending on the adults that are left to be acquired,” he added, suggesting total marketing dollars have declined over time in the more mature states.
Current trading & outlook
The strong Q1 performance saw DraftKings increase midpoint full-year 2023 guidance to $3.19bn, up from $2.95bn.
Adjusted EBITDA guidance for the year was also raised to a loss of $315m, compared to previous forecasts from February of negative $400m.
“Strong execution across the organisation is showing up in our results,” said DraftKings CFO Park.
“Our efficiency efforts produced clear results as demonstrated by significant year-over-year increases in gross margin and Adjusted EBITDA,” he added.
DraftKings is now live with online sports betting in 21 states following recent launches in Ohio and its home state of Massachusetts. It is live with online casino in five states.
MLB has become the first US sports league to take a side in the California sports betting ballot battle between online gaming companies and tribal operators.
Two competing sports betting bills are on the November ballot in California. Proposition 26 would limit wagering to in-person bets at tribal casinos and race tracks, while proposition 27 would allow online sports betting and open up one of the most lucrative states in the US.
Leading US operators have backed proposition 27, also known as the California Legalize Sports Betting and Revenue for Homelessness, Housing and Education Initiative.
Firms including DraftKings and FanDuel have so far ploughed more than $350m combined into the campaign as the industry looks to educate Californians over the benefits of legal online sports betting.
Their lobbying efforts are being met by fierce resistance from local tribes, however, and the battle is expected to become increasingly bloody and expensive as November approaches.
Online operators received a boost on Friday (12 August) however, after the MLB told ESPN it would support proposition 27. FanDuel and DraftKings are among the league’s official betting partners.
“As legalised sports betting continues to expand across the country, MLB remains committed to protecting the integrity of its games and creating a safe experience for fans who wish to wager on those games,” said MLB in a statement.
DraftKings CFO Jason Park: “We feel good and polling looks solid, but you never know in these situations.”
“Proposition 27 — the only measure on California’s upcoming ballot that would authorise and regulate online sports betting — includes strong integrity provisions designed to help MLB carry out those commitments.”
MLB said the measure would require sportsbook operators to notify the league over suspicious wagering activity and would also allow the league to propose potential restrictions on betting markets that are susceptible to manipulation.
“MLB believes that Prop 27 has the safeguards to create a safe and responsible online sports betting market in California — a state with millions of MLB fans looking for alternatives to illegal offshore betting sites,” it added.
Other prominent US operators such as Caesars Entertainment have declined to take sides.
Experts have so far suggested California – which is the largest US state by both population and economy – could generate up to $3bn in annual revenue should the state legalise online sports betting.
Discussing the ballot battle at an Annual Growth Conference hosted by Canaccord Genuity on 10 August, DraftKings CFO Jason Park said: “I think cautiously optimistic is the right phrase to describe how we’re feeling about the potential in November.
“We passed that first step, which was to get the required signatures to get on the ballot. We feel good and polling looks solid, but you never know in these situations.
“We’ll be investing in good ROI to educate the citizens of California on the topic and make sure they understand what’s really in there and then we’ll leave it up to them,” he added.
DraftKings stock has risen more than 60% in the last month, with the prospect of legalised sports wagering in California counted as one potential driving force behind the surge.
DraftKings has reported a 34% year-on-year rise in revenue to $417m for Q1 2022 although net losses at the company deepened on both an annual and sequential basis.
Net losses for the three months ended 31 March came in at $467.7m, representing a further stretch into the red of 35% year-on-year and 43% quarter-on-quarter.
The operator also made an adjusted EBITDA loss of $289.5m in Q1, although this result was 12% better than guidance provided by management suggested in Q4 of 2021.
As a result, DraftKings has improved its full-year 2022 adjusted EBITDA guidance from a worst-case scenario deficit of $925m to $840m.
It has also raised 2022 revenue forecasts from a range of $1.85bn to $2bn to between $1.93bn and $2bn, which would equate to annual growth of between 49% to 56%.
However, the new guidance does not include contributions from its recently completed acquisition of Golden Nugget Online Gaming (GNOG), nor from the expected launch of online sports betting and iGaming operations in Ontario from Q2.
These two tailwinds will contribute up to an additional $150m in full-year revenue but a further decline of between $50m and $70m for adjusted EBITDA, according to estimates from CFO Jason Park.
Sales and marketing costs increased by 40.6% year-on-year to $321.5m, likely made worse by new state launches in both New York and Louisiana. The operator did not quantify the cost of launching mobile sports wagering in New York, whereas some competitors have published bottom line figures excluding The Empire State in the past week.
DraftKings CEO Jason Robins on GNOG: “Until we closed the deal, there were limitations with what the engineering team could have access to, so a lot of what you learn happens in the weeks after you acquire.”
CEO Jason Robins does expect marketing costs to improve in the coming quarters, however, as the business increases its national advertising mix over state-specific spend, which has already bolstered the firm’s profitability profile in New Jersey, according to Robins.
“DraftKings delivered significant growth across our key revenue and performance metrics,” said Robins. “We are not seeing any impact from inflationary pressures on customer demand, and we continue to improve the user experience by adding breadth and depth to our DFS, mobile sports betting and iGaming products.
“We are also improving our efficiency in acquiring and retaining customers and have a strong pipeline of new jurisdictions to enter,” he added.
Monthly Unique Payers (MUPs) increased by 29% year-on-year to two million monthly unique paying customers in Q1 for online sportsbook and iGaming, although DFS MUPs declined during the quarter.
Average revenue per MUP (ARPMUP) stood at $67 in Q1, up 11%. This was primarily driven by strong customer engagement and a continued revenue mix shift into iGaming product, although was partially offset by low hold rates during NCAA basketball and a rise in promotional intensity in newly launched states, and especially New York.
DraftKings is now live with mobile sports betting in 17 states that represent around 36% of the US population. The company is also live with iGaming in five states, representing approximately 11% of the population.
DraftKings bolstered its iGaming portfolio by sewing up the all-stock acquisition of GNOG this week. Analysts were keen to understand the integration timeline, with Robins suggesting a platform migration would contribute to $300m in eventual synergies.
“We have a strong integration plan so everyone knows what they need to do to perform that migration,” said Robins on the operator’s Q1 earnings call.
“Until we closed the deal, there were limitations with what the engineering team could have access to, so a lot of what you learn happens in the weeks after you acquire.
“We are not prepared to put a timeline on that integration now but will do in August and fully intend to do so,” he added.
DraftKings has major plans for its Marketplace product, which is described online as “the best place on the blockchain to buy the latest NFT drops from your favourite celebrities”.
The US operator views Marketplace as its fourth digital entertainment vertical, alongside online sports betting (OSB), online casino (iGaming) and daily fantasy sports (DFS).
“We went through a very rigorous process to think about what else we could do and what our fourth vertical should be,” DraftKings CFO Jason Park told Bank of America analyst Shaun Kelley during an online gaming virtual field trip session last week.
“We realised that crypto and NFTs were something that our players were already engaging with. That is important for our investors to know. This was a systematic process and there were other good ideas, but this emerged as the clear winner,” he added.
DraftKings Marketplace launched in August 2021 after the US operator struck a partnership agreement with Autograph, a sports collectibles specialist backed by Tom Brady.
As part of the deal, DraftKings has exclusive distribution rights for Autograph’s sports products, which includes a portfolio of NFTs from US sporting royalty such as Tiger Woods, Wayne Gretzky and Tony Hawk, among others.
DraftKings expects Marketplace to contribute revenue of approximately $70m in full-year 2022. Crucially, it does not believe investing in the vertical will drag on the bottom line, unlike the costly and competitive arena of US online sports betting, for example.
“The economics are very good in terms of the percentage of the growth merchandise value and the flow through to EBITDA,” said Park.
“It only takes a small investment around marketing and fixed costs in people to manage that, so we absolutely think this will be profitable out of the gate – not like OSB where you have to invest in a state before it becomes profitable two or three years later.”
Marketplace will only be profitable from the get-go if consumers understand the product and its use cases. DraftKings is primed to launch a new NFL-branded NFT concept in the coming months, which will combine NFT collectibles in a more conventional DFS format.
DraftKings CEO Jason Robins said he didn’t want to upset his product team by giving too many details away during a recent investor day, but the basic premise is that customers will build an NFL draft where ownership of NFTs will be required to transfer in certain players.
— Jason Robins (@JasonDRobins) October 1, 2021
Robins, who is described as an “NFT bull” in his Twitter bio, also revealed that DraftKings was exploring adding cryptocurrency payment capabilities to its platform due to customer demand, although there were no concrete progress updates to share at present.
In December 2021, DraftKings gained access to licensing rights for active NFL players via an undisclosed agreement with The NFL Players Association and OneTeam Partners.
Elaborating on the concept, Park said: “The thesis here is that NFTs can have utility. So not just the collectible portion, but the ability to actually utilise your NFT to play a game.
“To put it really simply, what if you had a DFS game or contest where in order to put a player in your line-up, you actually needed to own the NFT to be able to do that?
“When it was explained to me – and I’m going to embarrass myself here – they said think about Pokémon. The card itself has value but once you own the card, you can play the game as well. That may be an easy way for folks to think about it,” he added.
Finally, the operator hopes to attract a new breed of customer via its disruptive technology offering before cross-selling those individuals to more profitable verticals, including OSB and iGaming.
While DraftKings remains bullish over the technology, there is concern in investor circles that the hype surrounding NFTs has already reached its peak.
The average selling price of an NFT has dropped by more than 48% since a November peak to around $2,500 over the past two weeks, according to data from the website NonFungible and published in the Financial Times.
Daily trading volumes on NFT marketplace OpenSea have also plummeted 80% to roughly $50m in March, just one month after they reached a record peak of $248m in February.