Q3 2020 Draftkings Inc Earnings Call

Ladies and gentlemen, please standby for your conference call with the good momentarily once again, ladies and gentlemen, please the other large.

[music].

Ladies and gentlemen, thank you for standing by the work for the Draftkings Q3, 2020 earnings call. At this time of all participants are in the listen only mode. After the speakers presentation. There will be a question and answer session to ask the question burden, especially the need to press star one on your telephone if your current.

Any further assistance. Please press Star then zero I would now like to do for all sort of scrap is called Mr said documented the good.

Good morning.

Hi, everyone and thanks for joining us today statements. We make during this call that are not statements of historical fact constitute forward looking statements the subject to risks uncertainties and other factors that could cause <unk> actual results to differ materially from our historical results for from our 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 SEC filings during.

During the call manageable also discuss certain non-GAAP measures, which we believe 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 filed today with the FCC and in our earnings presentation, which is available on our website at investors got Draftkings dotcom.

Hosting the call today, we of Jason Robbins Co founder Chief Executive Officer, and Chairman of Draftkings, who will share some opening remarks, and an update on our business.

And Jason Park, Chief Financial Officer Draftkings.

Provide a review of our financials.

Then open up the line for questions.

I will now turn the call over to Draftkings coupon under Chief Executive Officer, and Chairman Jason Robinson.

Good morning, everyone before I begin my remarks in recognition of veterans day. This week I would like to thank our country's veterans for their sacrifices and service in.

In order to more directly support our veterans and their families Draftkings launch tech for here other than 2018, a companywide initiative to provide the veterans the military spouses, it's free comprehensive high tech job skills training and connects veterans the Draftkings employees, who provide metrics.

Since launching the tech for Heroes program, we have invested over a million dollars in providing free a credit in training to veterans in the south of the across the country.

I'm proud to announce that in 2021, we'll be expanding the reach of our tech for here as programming of committing to training approximately 250 veterans in 2021 double the number we trained this year.

We want to get veterans and their spouses the tools they need to start a new career intact or advanced in their current condition.

Every one of tracking proud to do our part the bank veterans and their families for the sacrifices they make on our behalf.

I would also like the thank our investors for their continued support and welcome to the investors who joined US with our follow on equity offering in October.

On today's call we'll cover the following topics first I want to share some insight into our third quarter accomplishing net.

Next I will provide an update on our recent launches in the pipeline of new state.

The third I will discuss our product and technology investments as well of the migration to our in house proprietary sports betting technology then.

Then before turning it over to Jason Park.

The share some insights into our sales and marketing approach and our recent equity offering.

Draftkings had a very productive third quarter on the number of different fronts for.

First our Q3 performance concerns, but we foreshadowed on our previous earnings call. The return of major sports has generated tremendous customer engagement there.

Third quarter revenue of $133 million was at the high end of the range, we outlined in our recent S. One and growth 42% year over year in.

In Q3, we also had more than 1 million monthly unique payers, which means the average for the month of July August and September was greater than one volume.

Given the impact Cobot had in July monthly unique payers in August and September were higher than in July.

We expect the positive trends to continue as shown by the very encouraging outlook for the fourth quarter that our 2020 kind of in the job.

As noted last quarter, there has been and May continue to be disruptions in the sports calendar due to Kobe.

We are optimistic the fourth we'll continue to be played and believe any disruptions will be short term in nature and not impact the long term prospects of the sports gaming industry for our competitive positioning.

Looking ahead, the 2021, we're likely to see another unique sports calendar with the M.B.A. in NHL expected to kick off their season either later this year early next year as compared to their typical start dates in October.

Second we continue to build the smart and effective relationships of media companies, including ESPN and Turner sports as well as with professional sports team, including the Chicago Cubs, The New York Giants in the Philadelphia equal.

These commercial non strategic agreements provide us with access to unique and valuable content intellectual property and marketing assets as well as highly relevant target audiences in markets, where sports betting has recently been legalized.

We evaluate these opportunities of the theme data driven approach we use the guide other areas of our business.

We also strengthened our corporate foundation by appointing two new board members Joslin more and Valerie mostly and we also added Michael Jordan to our team at the special advisor on our board.

I am excited to welcome Joslin of validates our board of the each bring unique skills experiences and ideas and the <unk>. Each play an important role in shaping the future of Draftkings in helping us achieve our long term goals.

Johnson's former roles, which includes serving as executive price Vice President of Communications and public affairs for the National Football League equipped for with valuable insights into our customers as well as with respect to government and regulatory affairs.

Salaries experience in the investment management industry, which includes 20 years plus the Wellington provides us with an important voice on the capital markets for him.

The addition of Michael Jordan to the Draftkings team is also a great fit both Michael and Draftkings live and love to compete Mike.

Michael will provide input on a variety of dimensions, including a focus on brand strategy product development inclusion equity and belonging marketing activities and other key initiatives.

Turning to the U.S. states for Draftkings and Legalisation trends in the third quarter, we launch I gaming in West, Virginia, and sports betting in Illinois.

The Illinois, given its size and passionate sports fan base for the large and important market. This.

For the state with the focus of our keep the marketing effort and the key reasons for the increase in third quarter sales and marketing expense.

The governor suspension of the state in person registration requirement has enabled us to acquire players directly onto our mobile products.

Our investments in technology regulatory affairs, and compliance put us in a great position to market to customers and launch mobile registration quickly.

We are pleased to have launched mobile sports betting and kind of see on November Onest. We are excited about entering another state with passionate sports fans in highly competitive teams, both the collegiate and professional level.

With our launch in Tennessee, Draftkings is now live in 10 states for mobile sports betting in light of in three states for I'd.

As you also know Virginia has legalized sports betting in Michigan as legal I suppose the sports betting and I get those.

Those two state the account for approximately 6% of the U.S. population.

We are working together with state officials in Virginia in Michigan on regulations in licensing for hopeful that we will launch in each state at the earliest practical law for change.

Last week.

On election day, Maryland, South Dakota in the majority of parish in Louisiana past referendum in favor of sports betting.

These three states in total account for approximately three and a half per cent of the U.S. population.

The margin of the proving the referendums for decisive showing the public support for sports betting the strong and we're hopeful that this will help the momentum continue across the world.

As a reminder, launching a new state of the multi step process.

Legislatures need the past bills regulation the need to be written enlighten can be the grant it.

Last week's votes for certainly a good for stat, though it is probably at the states will not have the material impact on our financials and 2021, it may not even much until 2022.

In addition, Ontarios government recently presented at the annual budget, which included language that would modify the longstanding statutory internet gaming framework to allow private operators offering sports betting and gaming products to operate in the profit.

This is exciting because Ontario, a day large market for us if it were a U.S. state it would rank at fifth largest state by population and we have offered our DFS product in Canada since 2012.

We are now two and a half years things in the past, but what struck down by the U.S. Supreme Court 21 states, representing about 40% of the population of the legal I sports betting 14 states, representing 26% of the population of legal like mobile sports betting.

12 of which represented 21% of the population currently have operators lie.

Draftkings is now live with mobile sports betting and 10 of those states, which is more than any other operating.

He's 10 states collectively represent about 20% of the U.S. population.

We continue to be very excited with the product and technology investments, we are making as well as with our progress on the technology migration of bit integration of EPS beat that.

We anticipate completing the technology migration by the third quarter of 2021, and once we do so our vertically integrated proprietary sports betting technology will create a sustainable and differentiated advantage for draftkings.

We also expect the benefit from a long term improvement in our gross margin percentage once the migration is complete.

As a reminder, with the acquisition of the task. We now have almost 1100 engineers worldwide dedicated to creating the best in class technology and games and experiences for our users.

During the third quarter, we launched our Standalone casino at for I gaming in Pennsylvania, and West Virginia, We also launched basketball, which is our for Stephen long product for DFS.

In addition, we introduced several new Draftkings created gains for online casino, including new versions of Black Jack was that in the background.

Beyond our customer facing investments, we continue to prioritize our internal capabilities around data science, which drive our cross selling LTV to CAC true.

With our technology talent and resources as well as with our proprietary bedding engine, we will be able to clearly differentiate our offering in the United States from any other gaming provider and create a sustainable advantage for draftkings, both at the BDC and B to B company.

Regarding b to B, we continue to obtain new business in international market in October we announced the launch of palace debt and mobile and online Sportsbook powered by Draftkings B to B technology through our relationship with pure mocked in South Africa.

We also announced the renewal and extension of our relationship with mansion debt. The Gibraltar based sports betting the brand of mansion growth, which is the leading provider of online gaming with the portfolio well known online casino brands and a sportsbook.

In the third quarter, we saw a significant increase in customer activity as evidenced by a 64% year over year increase in Macau for the quarter.

On average more than a million monthly unique paying customers engaged for draftkings each month during Q3.

A number of the factors, we have discussed including the unique Q3 sports calendar pent up demand the earlier than expected mobile registration opportunity in Illinois, and the stay at home nature of Kobe that meet the unique and valuable time for customer acquisition and our cash came in better than our expectations.

We have confidence that our cash levels are appropriate given our insight into our customers and revenue retention, which of the bedrock of our LTV calculation.

Our sales and marketing approach of data driven we base our decisions on the return on AD spend we are seeing non on what our competitors the dealer and leverage our data to optimize customer acquisition spending based on player profiles and preferences the.

The approach means that we'll spend more of the data indicate that we should as was the case in Q3.

We will take the same data driven approach always to our commercial and strategic agreement.

For example states the sports betting and I gaming generate higher customer LTV, which informed our agreement with the Philadelphia equal.

And our agreement with the Chicago Cubs, we considered the value associated with the potential to open a world class drafting sportsbook at Wrigley field.

The agreements with sports media organizations like the S.P.N. and Turner allow us to integrate our content and the programming and collaborate on new content, which we believe will improve our overall marketing performance, while advancing mainstream adoption of sports day.

Finally, our relationship with price in December the World six strength golf for in 2020, you at the open champion underscores the significance of golf within the gaming industry.

Golf remains Draftkings fourth most popular daily fantasy sports, while our golf Sportsbook handle has grown over 10 times year over year.

I would also like to talk about our recent equity offering which is the second one we've completed since going public including the rationale behind it and how I see things going forward.

We conducted the October offering for two primary reasons.

First the process, we are going to as part of the reality of transitioning from the VC backed company to a publicly traded company.

It is only natural for early private investors to exit the investment and realize the return for the investors.

The offering allowed us to smoothed this process out by facilitating an organized an orderly process in anticipation of the lockup restrictions on many shareholders that were set to come up on October twentyth.

In fact now 80% of our common shares are unlocked at this point in all of our shares will be unlocked at the beginning of January after January for it.

We have provided more specific information regarding the unlocking of our shares in the earnings presentation, which can be found on our investor website.

Secondly, draftkings has always been proactive with ensuring we are well financed the pursue our growth objective we.

We see a number of attractive avenues to deploy the capital we raised in ways. The will create long term value for our shareholders. This.

This may include continued investment in customer acquisition, especially while the cash remains very efficient as well as positioning the business for the hope for acceleration of state of equalization.

In addition, while we have no specific M&A targets at this time, we're always considering companies that may help fuel our growth and bring more excitement to the skin in the game fan.

As I look to the future I am very confident and the continued growth of the online sports betting and I gaming market in the U.S. the.

Nice proxy for revenue the handle growth figures, we disclosed in our S. One support Oh, it's being Igaming Tan estimates as to the number of new users, we are adding and the data to the states are reported.

Draftkings is well positioned to capitalize on the U.S. market growth as we extend our leadership position with live operations of more seats than any competitor.

I will now turn the call over to Draftkings CFO, Jason Park, who will discuss our third quarter results and how we are currently thinking about the rest of 2020 and 2021.

Thank you, Jason and good morning, everyone before I begin I want to remind everyone that we will be discussing our results of the combined company pro forma basis to improve comparability as if the business combination had closed on January 1st 2019.

Pro forma means that we are including B to b for the nine months ended September Thirtyth for both 2019 and 2020, rather than just for April 20 for through September Thirtyth 2020.

In Q3, 2020, we delivered $133 million of revenue the 42% year over year increase these results for fantastic and would have been roughly $15 million stronger for non for the unusually low hold for NFL games. During the first for three weeks of the season.

On a year to date basis, we have generated 321 million of pro forma revenue, representing 19% year over year growth, which obviously includes several months that were deeply impacted by kobin.

Our beat the C segment, which represents our U.S. product offerings of daily Fantasy sports Sportsbook and I gaming generated $104 million of revenue in Q3 up 55 per cent compared to the same period in the 2019.

We launched I gave me the West Virginia in online sports betting, Illinois during the third quarter, we were light in the seven new states for NFL week, one versus Q3 2000 the team.

These factors combined with the pack the sports calendar for the major drivers of our growth on a year to date basis, our b to C segment has grown 29%.

Eat up the monthly unique payers in the quarter increased 64% year over year to 1.2 million of the increase reflects strong unique payer retention and the acquisition across DFS LSB and I gave him on a year to date for years is mops of increased 20%.

Mumps also grew at an impressive year over year rate in October as we continue to realize the positive impact of our external marketing spend.

Average revenue per monthly unique payer for RPM up was $34 in Q3, representing a 6% decrease versus the same period in 2019.

Our ARPU up was impacted by the aforementioned low NFL hold and promotional activity offset by increased engagement with our I gaming and online sportsbook product offerings on.

On a year to date basis, ARLP has increased 7% for us in 2019.

Turning to our B to B results, our PDP business generated 29 million of revenue in the quarter of very solid 11% growth rate compared to the same period in 2019.

Adjusted EBITDA for the quarter widens to negative 197 million as we rolled out our newest think playbook in multiple jurisdictions and continue to invest in the product technology and the gene a function growth.

Gross margin rate for the business declined as we shifted our business away from higher margin DFS as well as increased promotional activity GAAP.

Non-GAAP gross margin rate decline more due to the amortization of acquired intangibles related to the business combination.

Our sales and marketing spend was $203 million on a GAAP basis, and 191 million after excluding stock based compensation and depreciation and amortization the.

The year over year increase in marketing investment had a positive impact as you can see from the increase of UBS.

The majority of the 191 million in Q3 sales and marketing spend was for external marketing the primary driver for our year over year increase in external marketing because that we had seven states, where we realized for the first time for NFL, We've won including Illinois. In addition, the pent up demand and unique sports kind of under combined for strong engagement and Rick.

Turning on the advertising spend.

Product and technology in general and administrative expenses were 54 million and 127 million on a GAAP basis, respectively, and 31 million of $36 million, respectively. After excluding stock based compensation transaction expenses and other non cash and nonrecurring charges the.

The year over year growth of needs cost categories was primarily from headcount increases, including the annualization of hires we made in 2019.

Moving onto our balance sheet and liquidity, we are well capitalized to execute our multiyear plan and address our key priorities of taking advantage of this unique time for customer acquisition entering new states of the legalized continuing to lead the market on product innovation and exploring opportunistic.

The accretive M&A.

We ended the third quarter with $1.1 billion of cash on our balance sheet no debt taking into account for follow on equity offering in October as well as a $295 million use of cash to net settled restricted stock units, we expect our cash balance to be approximately 1.7 billion at year end.

Regarding the net share settlement of the argues that vested on October Twentyth resulted in the requirements of the company to with hold times. The company held back shares to satisfy the withholding obligation delivered only of the net share to the participants and paid the taxes as a result, we reduced our diluted share count by about 2%.

I want to reiterate that no shares of class a common stock were transferred were sold by our office or in connection with the best of these are used for the October offering other than the shares withheld by the company, which are reported as a disposition of the shares.

Having now generated 321 million of pro forma revenue in the first nine months of 2020, we are increasing of our guidance from 500 of 540 million to $540 million to $560 million of pro forma revenue for the full year, which equates to year over year growth of 25% of 30%.

This increase reflects strong performance in October and substantial user activation due largely to our Q3 marketing spend we assume that all sports calendars will continue as of now and that we continue to operate in the states in which we are live today.

The range also the students of the Governor of Illinois does not extend the suspension of the in person registration requirements for future revenues and marketing spend will be higher for each month, Illinois, the would choose to extend the suspension.

In terms of mobs, an arm up we expect modest growth for the full year 2020 to exceed 29 teams growth rate, while our firm up growth for 2020 is expected to be below the 2000, nineteens growth rate, but slightly higher than our year to date growth rate.

Turning to pro forma adjusted EBITDA, we are continuing to invest in marketing given the strong marketing spend efficacy, we are seeing as well as our investment in the launch of sports betting in Tennessee as a result, we expect our adjusted EBITDA loss in Q4 to be a little more than half of the loss recorded in Q3 again based on.

The states in which we are live today.

As a reminder, our marketing spend is highly flexible and can be reduced for Paul's altogether, if the sport calendar shifts.

In the future, we expect to provide full year guidance only once annually on our year end call. However, since we provided the 2021 revenue outlook of 700 million. During the day you spec process. Because we are seeing strong results for the recent marketing investments we want to provide an update on our 2021 revenue outlook on this call.

Paul.

Though we are still in the process of finalizing our 2021 plans. We believe that our 2021 revenues will likely be in the range from 750 million to 850.

This range is based on the same assumptions, we use for our 2020 guidance in particular, the all professional and college sports calendar instead of an announced come to fruition, including the commencement of their 2020 to 2021 seasons and that we continue to operate in the states in which we are lot of today, which collectively represent 20% of the U.S. population.

For mobile sports betting and seven for some of the U.S. population for I guess.

We will continue to refine and update our internal budgets as we move through Q4 and the will issue formal 2021 revenue guidance on our Q4 and full year earnings call.

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

Ladies and gentlemen, if you have a question or comment at the time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered you were sitting with yourself from the queue. Please press the pound key.

Our first question comes from Michael Berman with Canaccord.

Hey, Thanks, so much for the trust and the.

And impressive numbers can you just please talk about your 2021 guidance for a second and thanks for giving us that and just you know maybe at a high level you know talk about the relative contribution from for Mumps and art bumps and then Jason did you say.

That that only includes stage, where you are live today. So should we expect that you know as you can add more seats potentially that could you know drift higher.

Thanks for the great.

Great question. So yeah. The only include we have continued to fall philosophy of only including states, where we are either live or have a certain launch day.

And while we are hopeful that we will be able to add states like Michigan and Virginia next year, we don't know yet. So that's not included the states are not included in those numbers.

You know the results were really.

Driven by or the excuse me the increased guidance is really driven by the results. We have seen in the last quarter, particularly on the customer acquisition side, which is going to give us more revenue and hopefully continue to have more UBS as well into next year.

Okay. Thanks, a lot.

Our next question comes from venture Chamber of Credit Suisse.

The.

Hey, How's it going thanks for taking my question, Ontario seems like a great opportunity I don't know if you have any color on steps or timing and then with regard to.

Yes, the versus Igaming I'm not sure of either segment has momentum or if it's an all or nothing dynamics.

So, Ontario for those who are not familiar added to their budget.

A basically allowing for private operators to offer both sports betting and gaming in the province, Ontario previously had only had a single.

Single, operator of the province, a lottery that with operating the Board's book and I gaming although.

You know some had been operating in the gray there for quite some time as well on Ontario is you know a very large provinces of Canada. The largest pravin. If it were a U.S. state it would be a top five day Draftkings had been present in Canada, including of course, Ontario I'm from of the decade now. So we have a very nice side user base, there and we think it could be a really great opportunity.

As far as timing you know I think similar to some of the other profit did you see with U.S. day, Didnt always not not always very clear exactly what the timing of process will be the.

But we think of the degree that to the Ontario of put forth a day debt and you know we're very hopeful that we will be able to have the sports betting and gaming and Ontario sometime next year.

Gotcha and just the just a quick one is that something you anticipate needing a partner like most states in the U.S. are just going to be more similar to maybe out of Tennessee is structured or the UK. The indications. We have been given is it will be a direct life and obviously anything could change, but that's what we've been so for a total so that's our expectation that we'd be.

Well it seems like Tennessee obtain our own life.

Got you I appreciate it thanks.

I will say, though that a lot of on had been left to the regulator. It was the very you know sort of brief no change in terms of the budget and the law on zone.

So lot of its still left up to the discretion the regulator, including questions like that.

Got you.

Your next question comes from true they non with Macquarie.

Good morning, Thanks for taking my question.

From a product standpoint on your sports wagers in the quarter can you kind of help us think about what you learned about your database of meaning are your customers skewing more towards football. Then then what you were originally thinking just because of the DFS or were there any surprises just in terms of.

Kind of how the the proportion split out with different sports. Thanks.

Great question, you know one of the challenges and even answering that is the score for the schedule itself has been the strange. This year. So you know looking at things like year over year comparisons or even comparing fourth the board has been challenging you know to draw conclusions from.

From what we can the the balance of the board is quite similar to what we've seen in the past and left in the sports betting skewed towards NFL than in daily Fantasy Sports. However, NFL is definitely the largest for both in daily fantasy sports and sports betting I share. The GAAP is a little bit smaller you know.

Part because of things like College board make up a little bit more of the room on sports betting and you know they're not at the popular on the daily fantasy sports side, but really tough to tell if anything the kind of change this year as more states of done sports betting from what we can tell it happen, but you know that's with the caveat day.

You know typically when we look at things we look at year over year comparison, the control for seasonality and that obviously was not very possible. This year.

Okay, Great and then can you elaborate a little bit more on the U.S.P.N. Sportsbook link of the timing of that and when the full integration.

We will be in place.

Yeah, we're very excited about that we have a great relationship with the S.P.N. Disney continued to be one of our largest shareholders.

So you know, we think Theres a great long term relationship that we hope to build upon there as far as timing of any individual features we plan to announce anything that we do want to and now you know in sort of our normal course, a as things roll out on the we don't have at this time anything that were publicly saying about timing of any sort of direct integrations or other.

The thing, but you know teams are working very hard on it. So we hopefully will start to the some of the things very soon.

Thank you Jay the best of luck.

Thank you.

Our next question comes from Kevin Reevey with Evercore ISI.

Hey, good morning, guys. Thanks for taking the question that's the.

One on sort of marketing spend of the efficiencies you are seeing there looks like you know marketing spend per per Mcfe addition came down quite a bit how wondering if you could help us parse out how much of that comes by way of pent up demand given the the unique sports calendar and how much of it is coming by way of internal efficiencies.

The year driving thanks.

Yeah. That's a great question you know the that is the million dollar question that I don't know I that I do have an answer for you. It's hard to quantify how much of pent up demand is driving increased respawn, how much the day at home nature of Covidiens driving increases of on how much of the overlap and bought the calendar is affecting thing all of those are new data points for us.

So very tough the compare to other period overall, we are seeing great performing the efficiency of the CAC is actually better than what we expected and we were able to spend deeper at the lower cap I'm still you know it's hard to pinpoint exactly how much of a you know sort of relative or not a relative but as a function of the current environment.

The you know just better optimization, while that's tough to tell 'em.

We do know it better and I'm certain it's some combination of the two just hard to kind of parse apart how much of the range, but the team is always the optimizing the marketing. So I would always expect continued improvement and then also you know we're getting close for not quite there yet, but we're getting close to that 30 plus percent level of.

Population, having a of the U.S. population, having sports betting, which then will allow those national marketing efficiency the start to kick in and get the part of why you're seeing the start to do some of these more national media deal.

Great. Thank you.

Thank you.

Our next question comes from Stephen Grambling with Goldman Sachs.

Hey, this is this the Stephen Grambling I guess, one just just following up on on the EPS began deal and maybe I missed the but are there any potential implications as you think about the impact of customer acquisition cost and then also if you can just touch on more broadly how you think about content and media.

The future area of growth.

The so our expectation when we do any strategic deal is that it will have a positive effect on our customer acquisition costs and you know the true win win it's when you're able to actually spend more at better efficiencies that benefit of both the media company. The you know on the other side of the deal as well.

Yes, and I think the U.S.P.N. deal is the perfect example of that where there are allowing us access the inventory like link out and integration that normally you can't buy on the open market.

Those are very high performing from past experience that we've had in similar deals as well as deals weve done in the daily fantasy die with the S.P.N. in the past the we have a high degree of confidence that this is a win win deal that should improve our customer acquisition efficiency over time and certainly we're excited about partnering with the piano as well as you know other great media partners like Turner.

We form relationships with over the last quarter.

Great maybe one quick follow up on marketing and promotion can you just remind us of where you're kind of targeting the win rate and does your of flexible marketing approach try to manage around that.

I'm sorry can you repeat the question one more time.

It's a question on marketing and promotions and where are you kind of target win rate and does your flexible marketing and promotion approach effect of enable you to manage around that for should we be generally thinking that the win rate. If the tire you maybe you promote a little more and if lower promotional the less.

Yes, that's the great question I think in fact, it sort of works that way, it's not exactly how we manage it we look at promotion much like external marketing based on you know and LTV analysis in the cost on the other side and we look at whether we think that you know whatever value were generating on an MPV base the 16th.

Whatever cost the promotion has been you know.

The five very similarly, like our external media to new customer promotions as well as promotions designed to reactivate or generate new sport play and things like that.

I think the effect, though just you know practically is similar probably to what you're saying because of promotions will certainly work better.

In times, where you know maybe the company is holding more and players are seeing you know less wins come for versus in times, where they are winning a lot, but that's not really the the driving force behind how we manage it net just more of kind of a correlated output.

That's helpful. Thanks, so much.

Thank you.

The next question comes from Jed Kelly with Oppenheimer.

Hey, great.

Great. Thanks for taking my question just a couple of them can you sort of share how October is trending right now relative to your overall guidance and then just with the Illinois on the immediately launched there you put some promotions is that state now starting to move the needle it revenue wise or does it still.

Not as much with some of the promotions and then I have a follow up.

So.

The first question I see the I got Illinois, what was the first question again.

Just how is October how is October trending relative to your overall for Q guidance.

Yeah.

I don't.

We haven't really said much about October but as you see we raised our Q4 guidance. So prior to today, we had been guiding two of midpoint that would represent 22% year over year growth. We're now guiding to a midpoint that would represent 40% year over year growth so fairly substantial increase of the Q.

For guidance, so without commenting specifically on October I can tell you we feel very good about the way Q4 is trending and as far as the Illinois goes, Illinois has now become our second largest state by handle behind New Jersey. It's also our fastest growing the the we're pretty excited about it I think you'll start to see some contribution on.

On the revenue side in Q4, usually the first couple of months of the new state launch, we don't see a whole lot of contribution on the revenue side on kind of he is a great example of that where we just launched kind of the but we don't actually expected to have a ton of any impact on revenue. This year, Illinois, I think we'll start tabs on the impact on Q4 and that is part of why.

We think that were going to be better than where we thought we were previously in Q4 this year.

Great and then just a longer term question for you Jason.

You know you mentioned product development on your integration with SP Tech as we kind of get into next year. What do you think the ultimately going to drive the customer stickiness sticking yes.

And in this industry is it going to be more product development, where you can actually generate or drive product differentiation among lie betting or is it going to be more CRM management, where you know how to manage the customer provided the bonuses just how do you see the long term stickiness with the consumer.

Well, we definitely try to have best in class product, the and CRM programs, we have a great data science team and a lot of what we do is model driven but I think if you want to kind of simplify it we believe that promotions to drive trial and activation product drives long term sticky net.

And you know monetization and you know I think really we feel the it's also a stage of the industry thing. We are just starting I haven't even you know migrated yet we are just starting to put the investment behind building out the best live betting on new forms of Teaser's process other thing.

The you're going to see of develop in the coming years and so on the I also think of the industry Progressive and we have more time and more energy that will have been able to put behind that we feel will be able to put more and more distance between our product and customer experience and you know what else is out there and I think that will increase the effect of that on the.

The next overtime right.

Right now it's very much so many new state the opening up its customer acquisition mode for everybody and that's an important part of it too, but you know people, we believe ultimately stick with the best experience and that's what we're working hard to build.

Thank you.

Our next question comes from Thomas Allen of mortgage debt.

Hey, good morning, I'm, there's a lot of investor focus on the gross and net when margin is and concerns of Dolby impaired long term because of how competitive the market is right now can you discuss your thoughts on the topic. Thanks.

Yeah, I mean, we're two years into the industry the to put in perspective, we had exactly to state New Jersey in West Virginia alive of start of last NFL season, where intends day now.

So you know I think the long term margin and other aspects of the industry are going to shake out over time and you know we saw this in the fat. So it doesn't surprise me that those questions are coming up in the early days of daily Fantasy Sports. We ran at much lower margin than what we did longer term and it ended up you know.

Once we move to more of the you know harvesting stage pretty quick mean, a pretty easy change.

And then the last point I make is the margins are actually pretty good right now even when you factor in a lot of the promotional activity and free bag that all comes out of our net revenue and net revenue is up significantly 42% in Q3 regarding to 40% growth in Q for 45% growth next year.

So you know if there isn't any upside on the margin it should be on top of what is already a very healthy growing net revenue number.

Like the as a follow up on the similar topic, where are you in terms of profitability of the more mature markets.

You know we are planning so.

More mature markets are really new Jersey in West Virginia.

Those are the only two that we are even president last year. The start NFL. So you know we have in the past provided some projections multiyear projections on New Jersey, obviously Kobe through things for a loop, but you know we actually think were pretty similar spot to where we had hoped to be that said, we still have you know among their month and a half of the year so were per.

I need to do is in our next earnings call in Q1.

We will provide an update on new Jersey, specifically and we'll talk about how that is tracking versus what we had previously talked about.

Helpful. Thank you.

Good day.

Our next question comes from Shaun Kelley with Bank of America.

Hi, good morning, everyone.

Jason just to follow up on that last question about the the promotional piece because you know I just should we think about modeling Miss a lot like you know the way the day cadence of the way that external marketing spend work. So obviously as you're in the early phases of launch you know there's those numbers are going to accelerate a lot of email and then and then it comes.

Down over time or will the promotional piece and I'm really thinking about this net versus growth well that actually come down faster just given that it really applies more to sort of initial bonusing of like you said activation.

I think that they really I wish I had thought of that but the great way to describe it it's very correlated to the acquisition certainly some promotions are aimed at activation or getting people to try new sports or new products, but the bulk of the promotional dollars are aimed at acquisition. So as acquisition in any given day becomes less of the focus.

And even if we do continue to spend their adjusted.

The kind of rebuild our user base naturally a new customers will be a smaller percentage of the total user base.

Absolutely would expect promotional dollars to follow a similar trend and it's really as you kind of alluded to a new repeat next thing that's driving it it's not us deliberately doing anything differently.

Obviously, if we see things and the data suggests something's not working or working we'll alter but.

You know, even if that doesn't happen just the simple shift between you know new customers being a very high percentage of our current active and eventually repeating the much higher percentage for new Sportsbook state.

That'll that'll obviously changed the promotional dollars as well as the external marketing expense.

Very helpful. And then just as a follow up on the in.

In some of these more mature markets and really it's pretty much probably a case study around new Jersey or are you seeing any change in retention rates one direction for another how does this all kind of you know how is the cohort you know trend you know a like for like working relative to the some of the guidance and initial things the.

You laid out you know, let's call it the aback back in March and April.

We're seeing positive news on retention across the board on virtually every state that we were present in the last year again with the caveat that it was the small number.

For Sportsbook, we're seeing growth on New Jersey is way up year over year, even just.

The Masters, which yesterday started new Jersey had a 181% increase in handle year over year for the masters, So really tremendous growth in existing state and retention has been strong.

Some of that might be due to cove, it and people staying home and so many sports on the calendar, but you know a lot of it I think is also due to us having optimized for you know having another year of have optimized our CRM efforts.

Thank you very much.

Our next question comes from the sale the curse of Cannonball of research.

Thank you good morning.

So back early this year at the Analyst day, you are good that a good proxy of for us to model stays the that you are rolling out in his new Jersey and debt or.

The revenue and the and.

Gross profit than marketing spend index of 1% of the population should.

It should be more or less similar so I was wondering if you could give us an update of if that is cold and true right now in the in the states and for comparable period, the compared to comparable period in New Jersey, and if it's still a good assumption on the average going forward and if not where the.

It's the thing driven by the sports calendar or it's just something on the systemic down the thank you.

Yeah, I mean, I think you mentioned the sports calendar, it's hard to compare this year. This has been such an unusual year you know and we had only two state New Jersey in West Virginia alive at the start of last NFL. So most of the data. We have is from a co of it impacted 2020 and really.

The top I think you know there is a difference obviously in new Jersey and that it had I gaming. So some of the states that had sports betting only the fell off a cliff in Q2.

You know very different story in New Jersey, where I gaming was still there to carry a lot of the way during that period.

So very hard to compare we are planning if we can and we're certainly working hard analytically to do so to have a more definitive viewpoint on that at our next day analyst day, which will be in Q1 of of next year.

The hopefully we'll have enough data and enough things sort of back to you know or I guess normal as far as you can call anything normal.

To be able to do that but right now we don't feel that we have enough data to really be able to compare state to state effectively and we don't want to put anything out there that were not very confident.

Thank you very much.

Our next question comes from Brad Erickson with leading the company.

Yes.

Hi, Thanks.

And just talking about the relative profitability levels, you expect between sports betting and gaming and other.

They are different and then I guess just philosophically when you're looking at your.

CNL for I gaming next the sports betting in a particular state you run them together more or less given the cross sell synergies the the.

They can drive and see where it kind of less about one of the other being more profitable.

For our they just looked at separately just maybe talk about your philosophy on the.

We look at everything together. So you know we view it as we have a platform. The user has an account and the wallet and we want to maximize the amount of value that we can generate over the lifetime of that user and we direct the team to do that in whatever way the data, suggesting is going to accomplish that goal. So.

In doing so we don't really view product level economics as something the relevant to how we analyze the are something you know.

You can attribute directly to a particular product, but a lot of things like promotion dollars marketing spend on things like that are very hard to attribute to a particular product and we don't want to unnecessarily you know and falsely attribute into one or the other and make something look misleading or different that really isn't the all represent.

Additive at all representative of how we think about it internally if you take only the things. The you can directly attribute the sports betting and gaming and take some of those other things out the products actually have almost identical margin you know I think there could be some evidence growing that I gaming might be a larger tam ultimately, but I don't think aside for.

And that there will be a difference in profitability at least in the things that you can directly attribute to each product which of course is not the entire piano.

Got it the that's really helpful. And then maybe just a follow up of the can recognize the most sports betting and gaming are huge contributors to the growth right now can.

Can you just talking about DFS and just what the growth trajectory looks like there and sort of any any sort of help on magnitudes. We're seeing both in the results as well as the outlook for for the best growth. Thanks.

Yeah, DFS has had a great year, obviously, you know cove it impacted the sports calendar. So Q2, you know we didn't see as much DFS activity as we typically do but it really came roaring back in Q3 in particular, you know the August and September timeframe after an MBA NHL and other.

Force eventually college football and professional football the came live just as an example of the Masters was up way your way up year over year for DFS and right. Now you know its new the team is trying to kind of parse apart how much of that is true growth and how much of that is you know the masters came on a different in the different part of the calendar this year and.

Oftentimes that we see is when we have more activity everything goes up.

You know it's interesting because a lot of people have asked us not to deviate from your question, but it's related a lot of people. It asked the hey, do you expect I gaming just really grew in Q2, because there weren't a lot of sports and is it kind of go down in Q3, and it's actually been the opposite because we've had more activity on the platform that just lift everything.

The DFS I think similarly, when you have so much sporting event overlap like the Masters for example, and you know the.

Part of the NFL season.

I'm not surprised the saw growth of the team's working now to try to parse the part how much of that is natural growth that we feel.

Feel will continue into future years, and how much of it is really a function of just the very unique sports calendar this year.

That's great. Thanks.

Your next question comes from David Katz of Jefferies.

Hi, good morning, and thank you.

I wanted to ask about in game wagering.

In sports and.

I hope you can accept the sports references for what inning would you say that the we're in one in terms of educating your customer base and in terms of the breadth of offering you know that you you are at today and where you expect to be in are there any of it particularly interesting learning. So far you know with the NFL season today.

Continuing with your sports analogy or based on out here the growth in spring training I don't think or even in the first inning yet it is super early we have not even rolled out.

A lot of what we are developing on our own platform because we haven't migrated over to.

Our owned and operated a platform yet so.

There is a lot it's going to take years to build and then you know it will obviously also be alongside just the customers naturally finding and gain better for the two things were working together, whereas the product offering improved more customers will adopt it but I think even if you just froze the product offering I did you see more adoption over time.

Time as well so both those things we think will have a very positive effect on each other and create a flywheel that will increase the adoption of endgame bedding at a rapid pace once we're able to migrate over into our own platform.

And if you don't mind I'd like to follow that up.

Which you know which is do you expect or do you have any intelligence for about the degree to which the that brings new players in ore expenses wallets on existing players or some combination there of just you know I I.

I guess prevent me from getting carried away prevent us from getting carried away as to how.

How big of.

How it ultimately could be.

You know I think it will have a combination you'll see a combination of both of those things and there's other parts of the ecosystem that will affect that too you know our hope is that the sports league become increasingly comfortable with integrating fun little prop that's an endgame debt into their actual sports broadcast and you know I think the more things like.

That you see the piano fact, it makes the thing mainstream you know the more adoption that you'll see in the more it will have an effect on new customers I'm very confident that its an increased.

The retention of monetization play and I think that can have an impact on new customers as well, but a lot of that will depend on you know to what degree the rest of the ecosystem evolves the alongside and you know how quickly that happens.

Understood Thanks very much.

Thank you.

Our next question comes for might kick me with the rich for our company.

Hey, good morning, Jason Jason Joe Congrats on your quarter guys Awesome, Great guide to the.

Uh huh.

Curious if you could I guess pullback of layer on Tennessee, They had a sort of a rather barbaric 10 per cent hold the mandate.

Within the regulatory constructs I'm just curious of no.

How about the sort of shapes your success of or not in that market and sort of moving over.

Players from the Black Mark I'm guessing you have some.

Some work around there and then related when you look at Michigan and for.

Jamie and you get a sense of.

The regulatory construct how much cleaner is that for.

The players and the operators and what you've seen in total seat.

Thanks.

In Tennessee will be an interesting one because you know I think our ingoing belief is that by having a higher mandated hold percentage it will be harder as you noted to compete with the illegal market and we might not see as much adoption there for and we've factored that into our numbers next year.

For assuming Tennessee for that reason doesn't perform as well as it otherwise would have you know as the comparison to state. The don't have that that said it could go the other way it could be because you know there is an increased total percentage of could be that that you know enough to offset whatever drop you see in adoption and migration from the illegal market and we just don't know.

So it will be an interesting experiment.

You know like I said, our ingoing view is that it will have a negative effect and that's why we've assumed that in our numbers for next year, but you know could go the other way and we'll have the C and.

I think thats one of the interesting aspects of this industry going state by state different states are going to try different models. They are going to have different mixes of the products and our belief is that that will lead to you know much faster and much more obvious determination of what the optimal model isn't it will lead to other states kind of gravitating.

In that direction and you know certainly I think Virginia in Michigan or more approaching it the way the other states across the U.S. of done, but I'm actually kind of excited the tendencies.

You know, we we loved the test here, we love data, though you know the an opportunity that we have to see how the different model can work and use that to inform you know what we think is appropriate going forward.

The.

The second one for me just an update if you would maybe on the EPS the tech integration I think.

The launch the out of Europe, and Ireland in combination with the.

SB tech of sort of the test market I remember that correctly curious sort of how that simple thing for you.

And I know your deal the can be I think is third quarter 21, but when you look at new markets.

Coming alive here, hopefully early 21, Michigan, Virginia, you sort of at the moment now where you think of launch in those mark.

Markets with us the tech for Skandi.

So everything is on track Weve previously said that we believe we will migrate in the second half of next year and as you noted our camby contract goes through end of September. So as of now you know we are we're still feeling good about committing to that time.

Moving on.

There might be an opportunity to accelerate it and we certainly look at that and you know that then kind of leading to your question on Michigan, Virginia. It really depends on the timing of those if they launch early next year as expected I would expect that we will utilize the camby if they launch much later in the year than it might be a that we go on the platform.

That we now own and operate the EPS be tech platform.

The we'll just have to see what the timing is on that but we do feel like we continue to be on track for our migration commitment for the second half of next year, and we feel very good about either being able to meet that or exceed that expectation.

All right. Thanks, guys.

Oh of question comes from Carl of search early would push price.

[noise] Hey, guys.

And there's a lot of ambiguity.

Outlook for the 750 800 million revenue guidance, you guys talk a little bit about kind of what defines the yen post the best guidance and.

What are some of the key things that that would put you towards the high end and or towards the lower end the acknowledging that the states like Michigan in Virginia are not in there at this point.

Yeah. So you get an important point it is not a you know any assumption around any new state that's all upside so.

You know that isn't day I think it's just you know us being generally still at an early stage of the industry. We have several state you know that we've only recently launched.

There are things like right now, Illinois has you know the governor has temporarily suspended a requirement to register in person of the casino that is taken the Illinois from barely a market that registers for us to our second largest market behind New Jersey in our fastest growing so and pretty big deal whether that continues to be.

Extended for for several months and that could have a significant impact on our customer acquisition in there for on our revenue for next year.

So it's really a function of just some of those types of variables and just being so new and so many dates and not having you know the confidence in the precision yet to be able to pinpoint the tighter range.

Great Jason if I could just ask one follow up as it pertains to your customer acquisition. One thing that I think has stood out with you guys relative to peers is that as the kind of your aggressiveness towards the higher end more VIP type of of of sports betting customers specifically.

Have you seen any of your current start to change their strategy at all around kind of keep that type of action or those types of players, especially in some of the newer markets like in Illinois for example.

No I think right now, we're seeing a pretty competitive market overall and that includes you know the VIP a higher end segment of customers. I. Appreciate you, saying that we're doing a good job. There I think a lot of that comes from the very very strong analytics and discipline around using that data to.

Make determinations on where we invest and where we don't and you.

You know I don't necessarily think we're being that much more aggressive. The then any competitors and I think we're just hopefully being a little bit smarter about where we would choose to push and where we don't and you know as we get more data, we should get better and better at that and we feel like time is our friend and we should be able to widen that much. The same as we feel like we should be able to continually put distance.

Between ourselves and the competitors on the actual experience we can give those customers once they do join the platform.

Great. Thank you very much.

Thank you.

Ladies and gentle this does conclude the QNX portion of todays conference electrode because of this rubbish for any closing remarks.

Thank you all for joining us on todays call. We really appreciate your insightful questions and look forward for continuing our conversations with you at.

The Draftkings, we're excited about the future we continue to build the quintessential sports brand in the line with well known media organizations, such as ESPN and Turner sports as well as many major professional sports leagues and iconic franchises.

We are well positioned with the strong debt free balance sheet to capitalize on unique customer acquisition opportunities enter new states as soon as practicable drive continued product innovation to stay ahead of the competition and explore opportunities to nitpick, an accretive M&A I hope all of you stay safe and well and we look forward to speaking with everyone again soon thank you.

Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.

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