Q2 2020 Draftkings Inc Earnings Call

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Listen only mode. After the speaker presentation, there will be a question answer session ask a question during the session you'll need to press star one on your telephone. Please be advised the today's conference is being recorded do require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today.

Dodge Chief Legal Officer. Please go ahead Sir.

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Good morning, everyone and thanks for joining us today.

Let me make during the call that are not statements of historical facts constitute forward looking statements that are subject to risks uncertainties and other factors that could cause our actual results to differ materially from our historical results were from or forecast.

We assume no responsibility for updating forward looking statements for more information. Please refer to the risks uncertainties and other factors discussed in our FCC filings.

During the call manage a lot to discuss certain non-GAAP measures, which we believe it may be useful in evaluating draftkings operating performance. These measures should not be considered in isolation or as a substitute for draftkings financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our.

Quarterly report on form 10-Q, Intercard report on form 8-K filed today with the FCC into earnings presentation, which is available on our website at investors Dot Draftkings dotcom.

Hosting the call today, we have Jason Robbins co founder Chief Executive Officer in Sherman of Draftkings, who will share some opening remarks, and an update on our business and Jason Park, Chief Financial Officer, Draftkings Who'll provide a review of our financials. We we'll then open up the line to question.

I'll now turn the call over to Draftkings co founder Chief Executive Officer, and Chairman Jason Robbins.

Good morning, everyone before I begin my remarks, I want thank all the health care providers across the country. You continue to help fight to covert 19 pandemic the essential workers to keep our life million power as well as our employees for their continued focus and dedication during this unprecedented in challenging times.

We continue to be tremendously impressed with the productivity of our employees across all of our assumption, especially our product and technology team and we are driving our priorities forward even in a work from home world.

We have tracking I've had many conversations our employees, our executive team and our board to listen learn to reflect on how we as an organization can do better just important foster racial equality in the fight against injustice in America.

We believe that the best innovation comes from diverse perspective stops beliefs ideas and experiences.

We work hard to foster a culture of inclusion of belong that makes our employees feel safe empowered engage championed inspired to be the payback.

I think first that we hired a head of inclusion equity in belong in just under a year ago and together committed to allocating at least $1 million annually to support our company goals. The progress already being made some examples include ongoing inclusive leadership training at all levels of the company, including training to better understand behavioral unconscious bias.

Micro messages and signal.

Enhancing our support and fostering a diversity within the organization to more targeted efforts on college campuses increase partnerships for non traditional pipelines among other things such as who can't.

And we have established global business resorts groups to ensure employee Gordon heard across the organization. We will continue to grow our efforts to support our employees our fans in our community.

I'd also like to thank our investors large and small and give a special welcome to the investor to join to support us on our journey with our follow on equity offering.

On today's call I will cover four main topics first I'd like to share a little insight into our performance over the last few weeks major sports have begun to return.

Second I will share an update on our recent launches in the pipeline on the state.

Third I will review, our recent product innovations an exciting new releases.

And finally I'll provide an update on the integration of our BT business in the migration to our in house proprietary technology partner.

We had a strong second quarter, given the limited sport calendar with second quarter pro forma revenue of 75 million.

At sports have started to return we saw revenue improved sequentially each month in the quarter with June revenue, increasing 20% year over year on a pro forma basis.

The strong overall results and improve in are due to our product innovation, our entry into new jurisdiction and pent up demand for sports betting is live sports like golf European Soccer, NASCAR and U.S. team started to return.

To give you a 10th of demand in the absent the major sports I wanted to provide a couple of highlight.

<unk> NASCAR races, which has traditionally been a knee sport for I saw similar action to popular and be a regular season.

In golf prior to this year, our top event of all time with 2019 U.S. open since the restart of P.J. tour kicks P.G. tour event and the match to top that major.

In both May and June we more than tripled our previous best month for U.S.P. handle.

The momentum we saw in June accelerated with the return of MLB, the M.B.A. and the NHL in late July in early August.

As a result, we are seeing continued year over year revenue growth in the first part of Q3.

Not only did the Yankees nationals game on opening night set records are tracking it was also yes piano most watched opening night baseball game ever and the most watched regular season baseball game on any television networks in 2011.

In the first two weeks then I'll Beazer time, we thought three times to handle compared to the first two weeks of the 2019 and I'll be season, and the first week of the NHL is return or handle with more than twice to handle the first week of make 20, Nike NHL playoffs.

With the M.B.A. Christmas Day, 2019 was our highest handle day, but for the next five highest handle days occurred in the first week of young Da's return.

All of these statistics that provided or just to give you a sense of this unique period and are on a normalized basis and that they do not include the effect of new states are not necessarily indicative of our future performance.

As you can see from these fantastic.

There's clearly pent up demand that is compounded by a truly unique sport count.

Byproduct of this demand is that we're seeing very strong marketing response rates in return on advertising spend and in response. These great returns, we intend to invest to expand our leadership position in the market.

We're really excited the sports have begun to return, but we all realize that there have been they continue to be hiccups in the sport calendar in the back half. The year. We think we can associations are doing a great job, ensuring the safety and health of the athletes and stuff and we're optimistic that sports will continue to be played schedule.

Even if there are short term pickup we have more conviction than ever in the long term prospects in this industry end of our competitive position.

Turning to legalization trends, we're extremely excited to being one of the first to launch sports betting, Colorado, We also launched I gaming and Pennsylvania, and the second quarter.

More recently, we launched Igaming in West, Virginia, and sports betting in Illinois with these launches Draftkings is now live in nine states on mobile sports betting and in three states for I guess.

And as you know, Virginia in Tennessee have already legalized online sports betting and Michigan as legal I spoke on sports betting and bagging.

These three state to count for 8% of the U.S. population.

Separately, we are working together with state officials on regulation and licensing and look forward to launching as soon as possible.

Finally, we are seeing great momentum across multiple states and continue to work to bring legal sports betting two more Americans.

In the second quarter, we continue to develop innovative content products. This is a key component of our long term strategy and it's critical to keeping our existing users engaged to sporting events were suspended or postponed.

With the match to we elevated our content to engage consumers during a time when very few sports for being played this event broke new ground in terms of integration and customer engagement with the broadcast showing live odds for the event winners as well as a variety of exciting and gain market.

The matched to is our biggest golf bedding day ever and we believe that event just scratching the surface potential possibilities for similar integrated contact.

As another example, we significantly expanded our E sports offering and I've seen exponential growth in this category. We added popular Madden stimulated gains and began to include streaming sports and in our App, which has become a very popular fit feature in fact since the return of the NHL The M.D.A. and major League baseball users of continue to engage with E sports.

Which gives us confidence in that product feature.

We launched a variety of free to play pools that covered everything from politics, the NFL draft as well.

More recently, we continue to align ourselves with one moment in American culture like the 2020, Nathan famous Hotdog, even contest that was held in July.

We also launched our Standalone casino out for Igaming in New Jersey, Pennsylvania West Virginia.

This half is geared towards the casino first player and featured themed seamless single platform and while it experience that users are accustomed to from draft.

As we think about the future we know that the best product and technology combined with innovation focused on the U.S. sports fan will be the winning combination in this industry and I'm excited about the continued innovation that we see from our team approximately 850 engineers.

Our engineers are delivering on an innovation they did product roadmaps and powered by our own vertically integrated technology stuff.

In terms of our organizational migration and integration of that technology stack I could not be more pleased with our progress. We're on track with the technology migration in our business integration and are working together extremely well as one company.

Our technology migration is on track to be completed by no later than ended September 2021.

When the migration is complete our vertically integrated proprietary sports betting technology will create a sustainable and differentiated advantage for draft.

Looking forward with over $1.2 billion in cash on our balance sheet in zero debt tracking is well positioned to build upon the broke the online sports betting and I gaming market in the U.S.

We will continue to bring new and innovative products to the market that strengthen our engagement with customers and maintain our competitive differentiation.

Our second quarter performance validates this approach and is a testament to the company's resiliency and our ability to respond in real time to change is the sport count.

The U.S. market is still in the early stages of many years of growth ahead, we will continue to invest in our core competitive advantages to grow and lead the way in the digital sports Entertainment and gaming industry.

These competitive Differentiators include our mobile first DNA in our relentless focus on user experience.

Our commitment to the development of innovative products is the primary means of engaging in retaining users built on our proprietary vertically integrated technology platform.

Very high brand awareness and trial in addition to a large and growing customer base. It includes potential customers in states, which have yet to legalize online sports betting Pandora again.

Our proven technology it allows us to enter new jurisdictions quickly and effectively including our single wallet and scalable regulatory platform.

Our strong data science and capabilities around cross though.

And our ability to operate a highly analytical and data driven marketing machine at scale.

The strength of served us well at the DFS, operator, and will also differentiate us to digital sports Entertainment and gaming.

From a financial perspective, our business model features compelling unit economics due to our strong LTV in cat metrics, which are driven by or DFS beta database and strong brand recognition as well as our marketing and cross sell capability.

Additionally, we have a steep entry playbook that has proven to be both successful and supportive of long term profitability in each jurisdiction we enter.

Our focus areas for the company remain the thing we are laser didn't on entering new states as soon as possible.

We believe it the best product is what will ultimately win with the U.S. sports fans as a technology first organization, we will continue to invest in our capabilities as we love to stay ahead of the competition and truly differentiate our products also we continue to work towards migrating to our own proprietary technology platform.

We will be taking advantage of unique CAC opportunities in the second half 2020.

As we are seeing strong response rate signaling what could be a very productive NFL season from a customer acquisition activation perspective.

And lastly, we will continue to explore opportunistic M&A.

By executing on these focus areas, we will build the best most trusted and most customer centric destination for skin in the game fan offering the most entertaining real money gaming products that will forever transform the way people experience sport.

I will now turn the call over to drafting CFO, Jason Park Who'll discuss our second quarter results and outlook for the rest of 20.

Thank you, Jason and good morning, everyone before jumping in I wanted to remind everyone that the business combination was completed on April 20, Threerd 2020, and therefore, we will be discussing the results on a combined company pro forma basis to improve comparability as if the business combination that closed on January Onest 2019 pro forma means.

We are including B to B for the entire period of Q2, rather than just from the April 24 through June Thirtyth period.

We are proud to announce that we delivered 75 million a pro forma revenue in Q2 2020. These results are very strong given the impact could be 19 has had on the sports calendar.

At sports have returned we saw monthly revenue improved sequentially throughout the quarter with June pro forma revenue, increasing 20% year over year.

Notably our year to date pro forma revenue through the first time for 2020 grew by 7% even with the impact Workover.

Our beauty segment, which represents our U.S. product offerings of daily Fantasy Sports Sportsbook and I gaming generated 56 million of revenue in Q2 down just 2% versus the same period in 2019, we benefited from the product and content innovations, we brought to market in GFS and let's be.

Such as E sports as well in summer entries into Colorado for sports spending and Pennsylvania for I guess, both of which launched in the second quarter.

In addition, our I gaming product offerings, especially resilient in the second quarter as it was not impacted by the sports calendar and perhaps even benefited from people sitting at home.

As you might expect given the codependent <unk> are you just see monthly unique payers in the quarter declined 35% year over year to 295000 more than 100% of the decline was from our daily Fantasy Sports Mumps, which is both our largest source of monthly unique payers and the product offerings offering that has been most impacted by the disruption in the sport.

It's calendar mumps improved in late May and June as some sports resumed their schedules.

On the other hand, AARP mop increased 51% in Q2 to $63 from $42 in the same period in 2019, which was predominantly driven by mix shift into our I gave me product offering.

Turning to our B to B results are b to B business generated $19 million, a pro forma revenue in the quarter down 26% compared to the same period in 2019, Kobin related sports calendar disruptions, resulting didn't decline in player activity, although the trend improved significantly in May and June as a boon this legal firm.

Mirror Liga La Liga in English Premier League all resumed their season.

On a combined company pro forma basis adjusted EBITDA for the quarter was negative 60 million as we were able to control our call throughout the quarter a sports resumed in May and June and in anticipation of major sports resuming in July we invested in marketing.

Gross margin rate for the business declined on a pro forma end to GAAP basis, as we saw an abnormal shifting users out of our highest margin DFS product offering through the code.

In addition from a GAAP perspective, Cogs was impacted by the amortization of acquired intangibles related to that business combination.

Product and technology, and general and administrative expenses grew year over year on a pro forma basis, primarily due to headcount investments from 2019.

On a GAAP basis DNA expense grew due to a large amount of non cash and onetime expenses such as stock based compensation and transaction related fees from the business combination and the follow on equity offering.

Sales and marketing spend increased year over year on a pro forma and GAAP basis, primarily due to the six new states that became operational in Q2 2020 versus Q2 2019.

We began to invest in advertising in late May and June and sports begin to resume and we saw very strong results in terms of advertising efficacy on user acquisition.

We continue to advertise to prime the pump in anticipation of the return of major sports leagues in July and are pleased with our marketing efforts, which we believe to be a reflection of the pent up demand as well as a unique sports calendar.

Moving onto our balance sheet liquidity, we are well capitalized with just over 1.2 billion of cash on the balance sheet as of June Thirtyth and no debt.

During the second quarter, we completed three significant capitalization events first we close their business combination with Diamond Evil NSP Tech second we called Draftkings 16.6 million public corn and finally on June 20, Threerd, We issued 60 million shares in a follow on equity offering.

We are well capitalized to execute our multiyear plan and address our key priorities of entering new states as be legalized continuing to lead the market on product innovation and exploring opportunistic and accretive M&A.

Having now generated 189 million of pro forma revenue in the first half the year, we're guiding to a range of 500 to 540 million of pro forma revenue for the full year, which equates to year over year growth of 22% to 37% in the second huh.

This range assumes that all professional sports calendars that have been announced come to fruition through the end of the year, including the commencement of the 2020 to 2021 season and that we operate in states in which we are alive today.

In light of recent cancellations by certain collegiate Congress is our guidance does not include college sports. However, we are cautiously optimistic that college sports will be played in some form.

In terms of quarterly seasonality compared to the seasonality disclosure in the analyst day presentation and is available on our Investor Relations website, we expect to make up for half of the lower Q2, actuals on a seasonal percentage basis in Q3 and half in Q4.

In terms of Matson AARP months, we expect both mark and our firm up growth rates for 2020 to be in line with 2019 growth rates for the full year with quarterly must grow in line with revenue growth and quarterly art month growth, reflecting normalization of our product offering mix with the return of sports.

Turning to our pro forma adjusted EBITDA, we are investing in marketing that will result in shorter term EBITDA losses, but consistent with our strong LTV to CAC metrics will lead to performance in future periods consistent with our new state playbook.

The Q3 calendar is very unique with all four major U.S. sports leagues commencing play within a seven week period, which includes the beginning of the NFL season.

Given this unique sports calendar investment to implement our new see playbook in Colorado in Illinois, and incremental investment for states in which we launched in late 2019, we expect our Q3 pro forma adjusted EBITDA loss to be wider than Q4.

As long as we continue to see very attractive marketing spend efficacy like we have in recent months, we will continue to invest and advertising in a significant way during the second half of 2020.

As a reminder, our marketing spend is highly flexible and can be reduced or Paul's altogether at the sports calendar shifts.

Looking beyond 2020, we're beyond excited about our long term growth expectations.

That concludes our remarks, and we will now open the line up for questions.

Thank you as a reminder, its asking question you need to press star one on your telephone to lets try your question press the pound Keith Please stand by all we can all the kuni roster.

Our first question comes from Thomas Allen with Morgan Stanley You May proceed with your question.

Hey, good morning, guys.

In terms of month the unit payers in average revenue per player it's hard to read too much into the two numbers just given covert can you guys talk a little bit about what trends you're seeing in July and August today. Thanks.

So we aren't disclosing specific metrics for July and August, but as you can expect with a number of major sports resuming or starting their seasons, we've seen a strong uptick and our active users and the hope is that that continues to be a trend.

We started the NFL season.

Okay helpful. Thank you and then there's a lot of focus yesterday and then today on this IRS memo that came out today than that.

Faster semiconductor federal excise taxes on wagering I'm curious give us some more color on what your thoughts on their we estimate it could be somewhere between a 20 to 30 million dollar annual.

Tax is that a fair estimate and then anyway to estimate how much if it does take through the retroactive payment would be if that does happen. Thank you.

Yeah. So first of all on we have been involved in an audio at the IRS for many years and Ah that's something that continues to go on.

It was a memo they had no force of non binding and you know our view is deeply flawed and its analysis and our position continues to be which we believe it's been reaffirmed do state legislatures and core.

Throughout the country that DFS is not wagering and you know we believe that arguments in the federal level are incredibly strong and <unk> you know many courts in legislatures have affirmed that so.

Thats going to continue to be an ongoing process I expect it can take quite some time to resolve so at this time, we don't have any estimates of what the ultimate resolution could look like and I.

I believe continues to be that our position is correct.

Okay. Thank you.

Welcome.

Thank you. Our next question comes from Michael Grant kind of core you May proceed with your question.

Hey, good morning. Thank you I just wanted to ask two things. The first is you talked about in your slide deck and thanks for that and so.

A new state playbook.

An external marketing and I just wonder if you could give us a little more detail about what's what's knew about the about that state playbook and then I just wanted to ask because E. Sports is going so well could you just give us an update on.

Any progress in migrating from DFS event, you owe us be products for E sports. Thank you.

Sure. So first just to clarify on I think probably in phrase. It is clearly as we could add when we say new state playbook, we don't mean anything new in about the playbook and playbook for new state.

So.

Jason Park was referring to it we have a multiple states that we have launched this year. We also have a several other state.

We're not live going into last year's NFL season. In fact, we only had two state.

Going to lashes NFL season that would be new Jersey, and West Virginia every other state was launched either during the season or after so we have a number of new stayed meaning new sportsbook sorry, a state this year to start NFL and as you probably can gas from looking at our past years. This is the most.

Important time for us to invest in customer acquisition and tends to have the best response rate.

So you know we expect to see with all these days that were not live at the beginning in next NFL really robust returns on our marketing spend and you couple that with on what we've been seeing over the last couple of months.

First you know and a pandemic even as you know very small number of sports started to trickle back with you know PJ toward NASCAR U.S.C. all the way through the start of MLB and resumption of NHL and NBA. We're seeing record response rates and I have continued to be able to acquire above our target.

At lower CAC.

So if that is any indication of what this fall could look like we think that coupled with the new states that are now live at the beginning of the NFL season could prove to be really strong period for us to be able to invest in acquiring new customers.

Thanks, and then any thoughts on the on the on the E sports.

Yes to LSB.

Oh, sorry, though.

Absolutely E Sports think we've talked about this really from Dave from from the first moment, we announced that we are going public. We believe east voice is going to be a huge categories. When not if and you know I think like many things during the pandemic Ah sometimes what you see is an acceleration when you're getting that.

Economic and sort of world shop, like that you more than seeing new things see an acceleration of of trends that were already happening and I think E. Sports is probably the best example of that where I believe we fast forwarded a years ahead over the last few months in terms of the potential growth and ultimate trajectory to E sports market.

Yeah.

There are still only a handful of state that allow for betting on E sports at something we continue to work with regulators on and I believe.

You know as more and more comfort gets developed you'll be able to see more opportunities throughout the state did that on E sports right now because of that we've focused more so on fantasy on daily Fantasy, which has been you know incredible amount of growth, but we.

We believe ultimately E sports betting will be you know if not the biggest certainly one of the biggest categories of sports betting over the long term, it's really a question of whether.

Okay. Thank you Jason.

You're welcome.

Your next question comes from Frank Mcdonnell with Craig Hallum Capital You May proceed with your question.

Great Good morning, guys.

<unk>.

So just curious what early learnings are or what you have on the Standalone online casino apps in New Jersey, Pennsylvania, West, Virginia, maybe how do they compare versus the Igaming play in your combined to App.

Well I think they both serve a very important purpose.

For customers that prefer a sports betting first experience, we still want to make it easy and convenient for them to be able to partake in other sorts of games like online blackjack that they like Ah, but there are customers did prefer and online gaming first experience and really don't care as much about sports betting or or.

They do in secondary for them.

So we wanted to be able to create an experience for both customers. The reality is that theres. So much crossover we feel it's important have integrations in both apps, but you know naturally there is a customer it is going to be thinking sports betting first in a customer is going to be thinking casino first and that's both helpful. In terms of experience in retention of customers, but also for.

New customer acquisition.

You can imagine advertising you know online blackjack, and then driving people to downloading sportsbook gap doesn't convert as well as advertising online blackjack and in driving people to download and online casino App. So we also are seeing some very promising and exciting results as we've transitioned our igaming marketing to focus more on the eye.

Standalone casino.

Great then just on product development How's the endgame betting technology progressing and then what should we expect there for the upcoming football season.

We're incredibly excited about the progress we're making their we actually have a number of new thing that we believe we'll be ready to roll out over the next several months.

That said, we are still in the process of migrating to our own proprietary software that will probably take at least another year or so so you know we will not.

Necessarily be able to showcase on drafting some of the new innovation and technology that we're developing them I bedding until sometime next year.

But I think that gives us even more time to innovate. So I really expect next NFL season is where you're starting to see a real meaningful difference between some of the offerings you saw in the past when it comes to NFL life bedding and what you'll see in the 2021 season.

Great. Thanks, guys I'll turn it over to the others. Good luck. Thank you.

Thank you. Our next question comes from Jed Kelly.

They proceed with your question.

Great. Thanks for taking my question just you know how did you start to enter New States you know you're seeing other players where it's currently offering a lot of incentives were how long do you just kind of see incentives being the key driver a customer.

Acquisition channel versus you know your product actually creating user stickiness and then on the Igaming you were starting to see the New Jersey, I gaming revenue, it's actually bigger than sports betting either.

Sportswear going on you think that market opportunity is bigger than than you thought it was back in March.

Regarding incentive we think of incentive much in the same ways, we think of any marketing, meaning media purchase or any other sort of you know marketing that we do it's all oriented around getting a good return and there are certainly incentives.

Our design more and those are the most aggressive ones for new customer acquisition and then there are others that are design more to retain if you look at our longer term projection, we expect the kind of steady state incentives to be in the low 20, Percentish range of gross revenue and that will be.

Only 1% of handle little bit more so that's sort of where we see it netting out and I think that that's going to be still a mix of new customers, obviously will always be acquiring new customers on a platform and repeat.

But really you know as just naturally your base transforms from you know most of the activity coming from repeated repeat customers versus new that'll come down and then as you noted when we combine that with some of the investments that we are making over the next year or two in product, we believe that that will even more improve iris.

Tension numbers and you know the way I guess you can view it is not to say there is no use of incentives and retention. There is some but really incentives are more designed to drive trial, a and product and experience is designed to retain increase the highest ltvs and loyalty and that's really how we think about the kind of.

Full funnel.

Regarding I gaming I think you're spot on and it is perhaps a bigger opportunity than we are others, where it we're getting a credit for.

Obviously still a very important variable around how many states ultimately decide to move forward with it which you know we'll have to see based on some of the budget deficits, if that accelerates or doesn't but you know certainly within the markets that we have I gaming. The performance has been incredible during co bid and you know we don't necessarily think.

It's just because of that we think that it's just a market that could potentially be larger than anybody originally thought. So we're very excited about that thats why we shifted so much investment into you know things like our Standalone casino App another product enhancements that we put out there we have several hundred games now that we offer including many of our own prioritize.

Again that we've developed in house.

We're going to continue to make those investments as long as a you know we continue to be this excited about that product.

And then just just one more on Illinois is there any way.

To get your product closer to the Chicago land area.

Wow.

Certainly that's something that we've added discussion about and on you know I think that thing to remember with Illinois and feels like a long time, given you know how much it's happened early in the market but.

It really it and the statute calls for 18 months. After the first operator goes live they can begin to issue mobile licenses and once one of those issue doesn't matter who had tissue to the requirement to register in person goes away.

So our hope is that you know that happened at least you know at least on that timeframe and we also think theres potential given you know the possibility of a budget gap that the state of Illinois, it could be facing that they decide that they did a few months ago, two suspending person registration for a longer period of time.

But really I think regardless of where where the in person registration would happen that alone is going to always stifle the size and the market by multiples.

Don't have to look any farther than Nevada, where you know in the major population centers. The you you certainly have many many different casinos that you can go to a in Nevada and you know in only the first year or so of new Jersey with surpassed as a market for online sports betting due to the fact that you had to register in person into casino and.

Hopefully, we'll see other states take notice that the states that have chosen to do it that way or suppressing the amount of tax revenue that they can generate and we believe the long term trend continues to be towards more of an open market with fair access for companies and consumers alike.

Thank you.

Thank you. Our next question comes from burning the terminal with Rosenblatt do you May proceed with your question.

Great. Thanks for taking the questions. Good morning, given the success of I gaming and sports coming back.

You think about the trajectory of per capita growth going forward. The big question in our coverage is whether covance driving tam expansion or pull forward if demand.

You think you can reach the medium or long term goals for per capita spending faster given the recent success.

I think that that is a very good question that really you know the honest answer is no one knows but the thing that makes us very excited that that feels like a real possibility is that number of customers were acquiring because you do you think about penetration. There is obviously two pieces. There is how many customers and then how much of the spin.

Ending and you know as you look at sort of population level penetration.

It's really all about customer acquisition and retention. So the fact that we're seeing such huge response and record customer acquisition numbers. This time of year to me indicates that unit it potentially creating a faster sort of race to do that larger tan simply because there's just more people that.

Are joining the platform right now.

Great and then just also just wanted to put on Colorado.

Really strong start this want if there's any color on why the way to navigate so strong.

Colorado has always been a great market for us and daily Fantasy sports, it's always kind of putt punched above you know its population size. So we're not surprised that it's been very strong on the sports betting front.

Colorado State that also has a great sports culture. So you know there for professional sports teams Great College sports. So you know again not surprised and we're very excited about potential to continue to grow Colorado over the long term, we think it's going to be a great market for us.

That's it from incentive.

Thank you. Your next question comes from assuming currency all that well.

The tangible research you May proceed with your question.

Thank you. Good morning wanted to ask your question about sales and marketing spend an external marketing spend I hear what have concerns from my clients about the following two sort of to two aspects of the same concern number. One you you made an argument in your analyst day presentation, but.

You will be achieving efficiency is efficiencies in marketing spend as you roll out brought a nationally. So I was wondering if you could comment on if you saw in a confirmation of that argument than in recent months and the second concern as a sort of father looking into the future.

Saying that there are so many so many well funded players flooding into this but into the space and the space Im sort of attractive and as competition intensifies, how should we not expect somewhat of an irrational level of spending so would appreciate your thoughts on bus.

Sure on the first question.

Yeah, just to kind of remind everybody on the call.

It was being referenced is that it is a lot at about three times less expensive to by the same media on a national basis on a per impression basis about three times less expensive than it is to buy it and local markets you paid three X premium typically for local markets. It varies a bit channel by channel, but that's kind of the average.

So.

We're really we're going to see a difference is when we get to the point, where north of 33% of the population has online sports betting and then we'll be able to shift international and then as each additional state.

You know adopt sports betting from now on outage should just getting more and more efficient that'll be a tailwind because we'll be buying the same national media, but reaching a larger base of potential customers. So we're not quite there yet to be able to say if that trend is happening or not but simply are based on the popular.

Nishan penetration and ultimately occurs there will almost certainly be a tailwind there.

You know given the way the media market is structured.

On the second question you know why do we believe that you know you won't see irrational spending.

You know, we don't really concern ourselves too much with whether you do or don't because we don't respond to irrational spending when a nice things about the sports media market is there a lots of places you can go to find customers and we don't base our decisions on how much we're going to spend on what our competitors are doing we based them on the return.

On AD spend that we are seeing at least now and potentially this is due to stay at home probably it is so hard to say kind of how it plays out in the long term, but right now we're actually seeing falling CAC.

We're actually able to spend more and continue to invest deeper in marketing than we had thought with lower capex. So at least for now that is the trend. Obviously, we understand there are other capitalize competitors as part of why we raise the money. We gave we have over $1.2 billion on the balance sheet. So we feel we're well equipped to play the longer.

Same here and we're just going to continue with our disciplined approach of you know, making it a making investments where the returns meet our hurdles and not making them regardless of what we see our competition doing where they do not meet our hurdles.

Thank you very much.

Thank you. Our next question comes from David That's for Jefferies. Sir You May proceed question.

Hi, good morning, everyone and thanks for taking my question.

If you could talk just a bit about how you see the landscape evolving competitively right. We have many discussions about you know how other areas of the world have a great. Many players and yet you know still some concentration of share.

You know that would be probably even number one topic of discussion we have around sports betting how does that landscape evolves compared with what we've seen elsewhere in the world.

That's a good question so ANC theres a couple of things to consider here one of which you brought up which I'll talk to in a moment, but the second of which you know the regulatory framework differs in different parts of the world and based on how we are seeing the regulatory framework shape up being both state by.

Date and also in virtually every state having some level of limitation on licenses.

That will ultimately create you know a ceiling for how much competition is able to penetrate any given state in you know collectively the United States.

Hi.

Even though that is the case and we think could create even more concentrated market share here you correctly noted that in a market like say the UK, where there are hundreds of life operating online sportsbook.

Even in that market there is fairly concentrated share a amongst a handful of players. So we think that that is just you know a function of the industry. There's a lot of advantage to scale Theres a lot of brand loyalty customers are very sticky.

The investment and product and technology that you need to make to compete over the long run is very high and we'll continue to increase is hopefully we said that bar.

In the fact that you have data makes a big difference, having more data and more ability to then build the best data science models to optimize your customer acquisition engines to understand player profiles and preferences on that at a huge scale advantage too. So we think when you put all those things together, it's not surprising that there is a.

A lot of concentration that occurs in this industry and it's actually not too dissimilar than other online industry's most online industries have a you know a lot of outsized winners because of these types of advantages.

Right.

As part of second question and I think you started down this road.

With the very end of your answer you know the other topic that we often discuss is the degree to which you know a customer that you are included on your platform also has accounts in three to five other places and you know turns out to be a customer whose only as good as their last offer.

You know what data or what deaths are what comfort can you offer.

You know for that matter and that concern.

Well I think that there are certainly some customers that chase you know incentives, but it appears to be a very small percentage of the market and you know the bet that we are making and continue to have conviction around is that product quality breadth depth user experience.

You know convenience ease of use all of those types of things will ultimately be the primary factors driving where people choose to concentrate their play even though you do see trial of multiple APSR or products in other parts of the World. You do also still tend to see a concentration of wallet on one or two.

And I think that because there is a lot of headache that comes with moving your money around different places and <unk>.

Bouncing around in that regard and so I think most people if you're giving them a good experience preferred to stick with one provider and you know it doesn't mean everybody's that way, but the customers that are the most valuable are those and thankfully encompasses one from what we can tell the vast majority of the market.

Thank you very much appreciate it.

You're welcome.

Thank you. Our next question comes from to stop with Susquehanna. You May proceed in the question.

Thank you good morning.

I wanted to follow up just on your techs that commentary.

Just just to clarify so you know with a backward integration on the sports module and you'll.

Expect to be completed sometime in September of next year. So I guess my question is going forward from there and internal include you know I guess and in play product.

What I guess what else are outsourced services will you still have indoor pay regarding various Texas, because I read it you know your proprietary and the platform then you'll be it on the sports club a module, but I casino. If she is a bit of a hybrid.

Can you comment just on terms of you know.

What other outsource providers you'll be paying.

Posts.

Your own sports launch.

Absolutely so.

First.

We do continue to use payment processors that we partner with in various banks to due process payment second we partner with companies like sport radar I am G.

Formed group to to get data that they are collecting.

Thirdly, we partner with companies that provide security layers Geo location things like that so those are some examples of things that are still outsource pieces of the tech stack.

The Igaming side is one where you know I think you'll continue to see us bring more and more of that in house due to the nature of the the industry. It is important to have a wide swath of of content. So I think forever, you'll see us outsource.

A lot of that but we're going to continue to work on developing our own proprietary games and increasing the amount of traffic that we get to those gain.

Both as a way to differentiate and create unique experiences that others don't have in the market, but also as a way to.

To continue to bring more of that margin to the bottom line. So that's something I think you'll see us do a and we right now do not have any plans to address any sort a you know vertical integration of the other areas I mentioned.

Makes sense and and Jason can you just comment I guess about football and general certainly.

NFL College football I realize you're not put in college football within your 2020 guidance, but you know I guess just level said you know the NFL versus college football what was the split I guess in 2019.

And how you think about.

If that affects a different regions more than others right Big 10, probably bad from Michigan, probably you know that for Indiana into fourth versus other regions of the country can you talk about football in general.

Sure. So NFL orders of magnitude large it in college College, just to give you some context as our fifth largest sport.

That's at College football I should say is our fifth largest sport.

You know I think you're very astute in your <unk> comment that it will probably based on you know potentially different approaches taken by certain conferences.

And also you know this sort of very regional support nature, I mean, that's true of any sport or any any type of sport, but in in college is potentially even the most.

In terms of local loyalty I think that you will see differential impact to certain places that maybe big 10. For example, a you know does not end up having a season.

You could see that differentially affect some of our Midwestern markets.

By you know what we're seeing now is that we are getting enough incremental demand for other sports that you know we do believe are going to to play and you know because of that we felt that the prudent thing to do a was simply not to include college in our guidance.

We are hopeful obviously that Tom are all conferences figure out a way to play there you know in the fall or the spring, but you know we didn't want to given some of the uncertainties surrounding it we felt like the prudent thing to do is to guide without college.

Thanks very much.

You're welcome.

Thank you. Your next question comes from Greg gave US with Northland Securities. You May proceed with your question.

Morning, Jason Jason Thanks for taking the question warnings and rests on the results given the difficult backdrop.

Thank you.

You have to say the promotional efforts are I guess offers that you've put out isn't very good getting you to play a lot of new pools that I'd probably on why wouldn't.

I guess, just wondering with respect to those promotional efforts.

Which will probably continue to ramp like you said in new states as they come online.

I had probably actually represent pretty attractive economics for draftkings too, but how would you expect them to impact gross margins maybe relative to current levels.

Well I think you brought up a great point that you know when you said, it's gotten used to try things really the promotions are aimed at trial. Our hope is that you enjoyed those new sports and products that you tried and that that is ultimately what creates the retention.

You know so I think a lot of what will drive where the promotional spend lands will have to do with what the customer acquisition trajectory looks like which you know there's two pieces to that one is we are still in the very early stages of many existing states that we have you know even in new Jersey, where.

We're going into you know only our second or were entire only our second full year hard to believes it feels like a lot of happened, but just a week and a half ago or almost two weeks ago. At this point was the two year anniversary of us launching a new Jersey, which is of course, our for Sportsbook online Sportsbook market I'm still very early in the IND.

History, and they're still especially we're seeing now potentially due to a lot of stay at home just unbelievable new customer response, and so driving that trial and getting people on the platform.

Yeah, it's really throughout all the existing states were in getting via Big focus for the at least near term and then the second piece that you have is what new states come on so when you kind of put those together, that's ultimately going to be a big factor in driving what the level of promotional investment isn't.

You know, obviously very hard to predict the way that we manage it and its same way we manage all of our marketing efforts is driven by NPV analysis.

Where we will make investments whether its external marketing spend or promotional fan.

Or some combination thereof, we will make investments if they return at acceptable hurdle rates for us if they're NPV positive investments and we will not make them if they're not and you know we will continue to manage the business horizontally that way, we believe that maximizing long term value.

Is the best used a way to deploy our capital. So you know I know that.

Be nice to be able to kind of predict what that exact level looks like but you know I think part of our advantages that we are very fluid and flexible and extraordinarily data driven and how we manage this.

Got it Thats helpful. And then as we think a lot of think about a lot of the new players maybe moving into the first few sports that resumed for the first time with you have seen NASCAR golf E sports some of the ones you mentioned.

Have you seen those sports team continued boosted levels of activity relative to last year. Once the more major league came back like MLB and DBA MLS once those resumed play are there any early data you can share there.

Yes. So you know this is a.

The caveat that you know, we're only a few weeks into MLB NHL and NBA restarting we are continuing to see great take up and numbers on those new things like E sports that we've driven trial of which came back to we're talking about a moment ago really you know helped.

Validate our thesis that yeah, whether its acquiring a new customer are getting somebody to try E sports.

If we can get you to try things through incentives and promotions and really rely on the product itself and the experience retaining.

That that is a winning formula and again with the caveat that were really early only a few weeks into the return of some of those other sports.

We are continuing to see a great response excuse me in great participation in some of those new categories like he sports.

Good to hear thank you.

Thank you.

Thank you. Our next question comes from Nike with Benchmark company negotiated the question.

Hey, Jason Jason Congrats guys.

Following execution obviously.

Credibly difficult environment.

Got a lot done so good job guys.

First question I.

I guess looking at New Jersey, which I think is probably most established date in terms of.

Hi man running it know us the.

Good evening.

Yes, obviously.

A lot has changed since March when you sort of.

Give us sort of a deeper look at that market in your your analyst day deck just curious.

At that time, Youre sort of looking to drive.

Contribution profit by year, two which would be obviously center. This year. Just wondering if you still think you can drive profit there.

In year, two or maybe the accelerates Dan for user acquisitions, given the way or just the pull back and no is the or just curious your thoughts on that specific or.

Yeah, It's a great question and obviously a lot has changed Covina, Andy you know reduction and sport.

Getting volume.

Certainly hit New Jersey.

That said I don't think I would say, we aren't going to be contribution profit positive on what we would like to do is sort of take the next quarter see out things go as you noted investments are there that maybe took us to contribution or you know profit negative, but they were good solid investment.

We would probably make them, but right now we're kind of waiting to see out things shake out with the return of sports and we'll have an update next quarter on whether we think new Jersey will be contribution profit positive this year, not but it certainly trending that way and I think it's very safe to say that without cove. It a absolutely would event and I think it's.

And safe to say that we still have a good shot of driving positive contribution profit in New Jersey, but we also don't want to anchor ourselves to that because if theres. Good solid investment that return at very high or you know the returns for us in that state and we will want to continue to make them.

Thanks for that last question.

From the I think when you look at your sort of competitive differentiation one thing that really stands out in our view.

As the player migration from DSS.

To always be and then two I gaming and I think Guy gaming, particularly as you highlighted is really.

Maybe outperform given the scenario that's unfolded since.

You know this year.

But I'm curious given that migration how sensitive.

Gaming moneys are.

To the return of.

Sports.

I would think that if you aren't that sharing a large portion of your players there that perhaps your I gave you begin to sort of under warm market growth.

Or not.

Wondering that and if any.

The data in terms of the overlap.

Between DFS, LSB, and maybe really Oh, let's be.

Gaming.

I guess broadly speaking just how you think about the sharing of these gains in players insurance longer term attention. Thanks guys.

Yeah, I think so there's a couple pieces to that question I think from you know and overall volume in the market standpoint, it's really hard given how unprecedented.

This whole last several months our to know you know what will happen. This fall in terms of the overall I gaming market.

However, what I can tell you is from the Draftkings side historically, we've seen significant increases to both volume and share. This time of year that were coming into and the reason is our primary source of I gaming revenue is from cross sell of active Sportsbook players and active daily fantasy sports players.

And those customers certainly we worked hard to activate and cross sell when there were no sports on but the cross sell is typically much more effective when they are already active in betting on the platform due to some of the product integration that we've embedded into our sports book.

And the cross sell that can occur with our data science engine in the background I'm. So you know it the caveat that this is a new world for all of US and it's very hard to know given you know the last few months how any you know next few months will compare.

I can tell you historically.

We have seen growth and and both volume and share.

During the time of year, when we had the most activity on sports betting, which is certainly you know the one that we're about to enter.

Thank you.

Thank you.

Thanks for your next question comes from Stephen Grambling Goldman Sachs. You May proceed with your question.

Hi, Thanks for taking the question I think you both mentioned M&A in the opening remarks, what markets are segments do you see is perhaps being the most fertile ground to look in.

Well I think very much the same way we approach any investment we make whether its marketing product or and you know M&A is the same we look at you know the value relative to the investment.

I think a lot of what we think you.

You know could potentially present opportunities is that you know, while we feel we're very well capitalized in can kind of whether anything that happens.

And we don't have much of a brick and mortar presence. So the impact of stay at home is actually you know more of a positive for us as long as sports are being played we think that we could find that now some of the other companies whether you know.

Directly operating in this space or.

You know sorta on you know the kind of partner and vertical integration side, there could be opportunities, where there's good value. There. We don't feel like we need to make a big purchase or any purchase for that matter. We feel that you know after the last transaction.

We have the critical pieces that we need to proceed on at least for now, but I think there could be some opportunities that perhaps would not have otherwise presented themselves, but my given the events of last few months and you know I think the other thing I would say is that we are also Oh, you know very bullish on the.

Overall market and if we can find you know assets that are very complementary that as we grow in our core businesses.

We also see growing alongside it then that that's something that could potentially be attractive as well so.

Thats kind of a a little bit of a a big picture of how we're looking at it but the key point to emphasize is opportunistic, whereas we felt like we needed to as a critical piece of our strategy control our sports betting platform, we feel like the other pieces that we.

Need to ultimately control, we either already have technology in place for or we can build it organically.

Got it that's helpful and as a follow up in sorry to beat a dead horse here, but going back to Igaming, how would you characterize the igaming player you've seen recently versus the core DSS indoor sports betting customer and specifically given the greater confidence we have not giving how might that influence both the LTV and.

Mission cost for the overall business.

So I think that.

Really the launch of our Standalone App part of the goal was to open up to a new audience. It is still very early on you know the app didnt when it at launch like a month ago or so little bit less so.

You know, we with a you know that kinda backdrop that we don't have a ton of data yet we do think that some of our early efforts to onboard customers that may be otherwise would not have been in our database are working on so we're hopeful that if that continues and we can continue to tailor an experience that is you know.

Gaming first that we will reach a some pieces of the market that maybe we weren't reaching before.

You know as far as you know the impact to our metrics and bullishness on the market goes I think the biggest impact is going to be on the LTV front for any state that do choose to do I gaming if the market ends up being larger than we all thought it was.

And we end up being able to take a bigger share of it then maybe we thought a year or two ago.

That could have significant implications on the LTV of the customers in those states and already we utilize a different LTV assumption when we acquire and state the do and don't have I gaming and you could potentially see the gap between that expand even more if the market continues on its growth trajectory.

Sounds great. Thanks, so much.

Steven.

Thank you and I'm not showing any further questions at this time right now like to turn the call back over to Jason Robinson for any further remarks.

Thank you all for joining us on today's call. We appreciate your insightful questions and look forward to continuing our dialogue together.

We are excited for the future Draftkings is well positioned with over $1.2 billion in cash and no debt to enter new state as soon as practical drive continued product innovation take advantage of unique customer acquisition opportunities in the second half of 2020 and beyond and to explore opportunistic M&A major sports or resuming in the.

Early numbers look great for Draftkings, we're cautiously optimistic that the measures. The leaks have implemented to date will allow sporting event to continue in a safe manner I.

I Hope you all stay safe and well during these challenging times and we look forward to speaking with you again soon thank you for your time today.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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