Q4 2020 Draftkings Inc Earnings Call
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Ladies and gentlemen, and thank you for standing by and welcome to the draft Kings Q4, 'twenty and 'twenty earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session. That's a good question. During the session you will need the kind of star one on your telephone please be advised.
Today's conference is being recorded.
You require any further assistance. Please press star zero and I would now like to hand, the conference your speaker today Stanton Dodge Chief Legal Officer. Please go ahead Sir.
Good morning, everyone and thanks for joining us today.
David to make during this call that are not statements of historical fact 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 or 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 the call management will also discuss certain non-GAAP measures that we believe may be useful and evaluating drought King's operating performance. These measures should not be considered in isolation or as a substitute for draft Kings financial results.
Prepared in accordance with GAAP.
A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available and our annual report on form 10-K filed today with the SEC and and our earnings presentation, which is available on our website at investors Dot draft Kings Dot com.
Hosting the call today, we have Jason Robins, co founder and Chief Executive Officer, and Chairman of Draft Kings, who share some opening remarks, and an update on our business and Jason Park, Chief Financial Officer Draft Kings, who will provide a review of our financials. We will then open up the line to questions I'll now turn the call over to Jason.
Robyn.
Good morning, everyone.
Before I begin my remarks, I would like to let everyone know that we published our first ESG report on Monday February 27.
The purpose of this reported to share with our stakeholders, how we think about different environmental social and governance factors and highlight those that are most relevant to our business.
We are committed to creating a long term positive impact for our stakeholders and ensuring that we are aligned with our shareholders. Our board and management team are also committed to further integrate ESG considerations into how we set and reach our goals.
The report discusses the key ESG topics that impact our operations and stakeholders. These topics include among others human capital management and responsible gaming.
Our business success is driven by our highly skilled work force.
We believe it is very important to create and foster a culture of inclusion and belonging and make each of our employees feel engaged empowered and states.
In addition backing became a flagship brand by providing responsible way for gaming and sports enthusiasts to interact with our products and we continue to lead and innovate and all areas of responsible game. Our ESG report is posted on our Investor Relations site. This is the first step of our ESG journey, we look forward to working together to achieve meaningful environmental Soc.
And governance progress.
On today's call we will cover the following topics first I will share some insights into our accomplishments for the full year and fourth quarter.
Next I will provide an update on our recent state launches.
Third I will provide an update on the migration to our in house proprietary sports betting engine as well as updates on some other important marketing and product related initiatives.
'twenty and 'twenty was a remarkable year for drafting I couldn't be more proud of our employees for all their hard work and contributions to our success.
And the excitement and price we have for our company and success over the last year is balanced with the recognition of how fortunate we are to be able to make such statement.
Our priority continues to be the health and safety of our global workforce and their families.
That is a cheap I drafting from 'twenty and 'twenty would not have been possible without our employees all of whom are impacted by COVID-19, including some of the lost family members.
Each and every one of our employee paid incredible fortitude and flexibility.
Our list of accomplishments in 2020th impressive we completed the business combination with SD Tech and became a publicly traded company and April.
We're well on our way to completing the integration and the two companies from a team organization and business standpoint, and are progressing with the migration to our own and having a sports betting engine, which we expect will be complete by the end of the third quarter and 2021.
We also completed capital raises and June and October raising net proceeds of approximately $1 $7 billion.
We launched mobile sports betting and Iowa, and Colorado, Illinois, and Tennessee, and I gaming, and Pennsylvania, and West Virginia.
With the matched to and May we engage with our customers and new ways to broadcast integrations that showcase live odds for event winters and other and gain market.
We continue this innovative approach to the content integration, we did with other events such as the match three and then Mike Tyson vs. Roy Jones Junior a boxing match in November.
We built relationships with major media companies, including ESPN, and Turner sports as well as professional sports team, including the Chicago Cubs, and New York Giants, The Philadelphia Eagles, and Nashville, creditors, and Detroit Pistons, and most recently the Charlotte Hornets.
We also expanded our relationships with major sports League and organizations and 2020, including Major League baseball and the PGA tour.
We strengthened and diversified our board by welcoming Jocelyn more and Valerie Mosley as board members and Michael Jordan as a special adviser to the board and.
And yesterday, we announced the appointment of baseball legend, and entrepreneur and Cal Ripken Junior and additional special adviser to the board of directors.
Earlier this month, we promoted Jennifer and year to be our chief compliance officer reporting directly to me and.
Jennifer joined draft Kings, and 2016 as head of compliance and risk and led the development of our internal compliance program.
Our chief compliance officer, she will be responsible for overseeing corporate compliance and enterprise risk management, and we will continue to play a pivotal role and our growth.
Turning to our financial performance, we exceeded our expectations in 'twenty and 'twenty.
Pro forma revenue grew nearly 50% and $644 million versus $432 million last year.
Both maps and art and not grew 29% in 'twenty and 'twenty.
We had a strong close to the year with Q4 revenue growing almost 100% year over year, and mumps, and art and not growing 44% and 55% respectively and the quarter.
Revenue for the year was almost $95 million higher than the midpoint of our guidance. These results were due to over performance and our core business as well as multiple assumptions on external factors that broke our way such as the sports calendar and the extension of mobile registration and Illinois, and better than expected hold percentage and online sports book.
Looking ahead I remain very confident and the continued growth of the online sports betting and gaming markets and the U S.
Even in a market like New Jersey, where we can buy for two and a half year and substantial growth continue our handle and new Jersey grew over 100% and 2020, and we are profitable and the state despite the impact of the Covid pandemic.
We are raising our revenue outlook for 'twenty and 'twenty, one due to our expectation for continued growth the outperformance of our core business and newly launched states that were not included in the guidance we shared in November.
Keith and park will provide more details and a few minutes.
Turning to new U S States for draft Kings, and legalization and trends in the fourth quarter, we launched sports betting and Tennessee.
And January Iowans, we're able to register via our mobile app rather than in person at our retail casino.
We also launched mobile sports betting and gaming and Michigan, and we launched mobile sports betting and Virginia.
And you can see from the Tennessee Lottery monthly sports gaming and report the state had gotten off to a very strong start the state of Tennessee had the best two months launch and U S sports betting history with over $300 million and handle and its first two months of operation, including 38% month over month growth in December.
As a result of sports betting and it's also generated several million dollars and tax revenue per state.
As you can tell Tennessee is off to a great start and we are pleased with our position and the state.
Well he had been live in Iowa from more than a year now the state began to allow mobile registration on January one 2021 dish.
This change had a significant positive impact in fact more customers registered on our app on their mobile devices by three P. M. On January 5th and we registered through the entirety of 'twenty and 'twenty.
And January we launched mobile sports betting and gaming and Michigan and sports betting and Virginia we.
We continue to be live with mobile sports betting and more states and any other operating.
Our launch and Michigan is going very well early results are consistent with our goal to always maximize overall user engagement and monetization across our product offerings.
Drafts and he's achieved 25 per cent share mobile sports betting handle and G. G R and 24% share and I gaming G. G. R and the first 10 days of a highly competitive market.
And our I gaming handled per capita and Michigan on Super Bowl Sunday with one nine times the average of our I gaming and handled per capita and New Jersey, Pennsylvania, and West Virginia on their first Super Bowl and important to note. These other three states were alive and average and 179 days before their first Super Bowl, while Michigan with life or 17 days.
In addition games created in house by drafting and generated over 75 per cent of our I gaming handle and Michigan.
Our sports betting handle per capita and Michigan on Super Bowl Sunday was one one times the average of our sports betting handle per capita and 2018 and 2019 launch states on their first Super Bowl.
These states, which include New Jersey, Indiana, West, Virginia, Pennsylvania, and New Hampshire, where library and average of 118 days before their first Super Bowl.
In addition, our cross selling efforts are really working with 70% of Michigan Sports book players also engaging with our I gaming product offering.
And Virginia, our sports betting handle per capita and Super Bowl Sunday with 90 per cent of the average of our sports betting and handle per capita and our 2018 and 2019 launch based on their first Super bowls.
And Virginia being live for only 15 days as.
As a reminder, those states rely for 118 days on average prior to their first Super Bowl.
We are proud to have been one and the first five operate yourselves launched and Virginia, and we expect it to be a great state for us.
We are now approaching three years in the past, but what struck down by the U S Supreme Court.
Twenty-three jurisdictions, representing 41 per cent of the population of legalized sports betting and 15 jurisdictions, representing 27 per cent of the population of legalized mobile sports betting all of which are currently live.
Drafting and is now live with online sports betting and 12 states, which is more than any other operator. These 12 states collectively represent 25 per cent of the U S population.
States, representing approximately 11% and U S population of legalized some form of Viking Draft Kings is live and four of these states representing approximately 10 per cent of the U S population.
The outlook for further legalization is also very promising so far and 2021 19 state legislatures have introduced legislation to legalize online sports betting five.
State legislatures and introduced legislation to expand their existing sports wagering framework and one state legislature has introduced legislation to legalize sports betting limited to retail location. In addition, four states are introduced I gave me and legislation and two states have introduced online poker legislation.
I'd now like to comment on our progress with the integration and migration to our own and how that engine technology and discuss our new product and content initiatives as well as some of the recent business relationships we have established.
I continue to be pleased with the progress we are making with our organizational integration and the migration to our proprietary in house backend and trading technology.
Our technology migration is on track to be complete by the end of the third quarter of 2021.
Owning our own technology is important and it'll help with innovation speed to market sites stability and availability of market.
We will also realized gross margin synergies associated with the migration starting in the fourth quarter of this year, we look forward to discussing the migration further at our Investor day.
In December we announced an agreement with income payment and the launch and industry first retail gift card.
Launch expense baskins presence and convenient stores and also enables consumers to gift the drafting and experience to others and $25 50 dollar denomination.
It gives our customers and another way to fund their accounts and engage with our products while at the same time, expanding our brand across retail locations nationwide.
In January we furthered our relationship with Turner sports after the successful broadcast integrations with the match too and match three.
<unk> collaborated with Turner to create a first of its kind show, which streamed on the Bleacher report mobile App Youtube channel and Twitter feed.
Customer engagement was tremendous and shows the strong demand and is developing for sports betting content and price.
And the first 24 hours of streaming the drafting proper meal show received over a million views across the app and social handles.
15000 people make comments on the video during the live stream, placing a second in terms of engagement for videos and this app history.
We also reached an agreement with the NFL and expand our daily fantasy sports and content partnership to Canada previously this marketing and content deal with limited to the United States.
Our announcement earlier this month of and expanded deal further deepens our relationship with the NFL.
Turning to the Super Bowl draft teams offer fans a free to play fourth quarter profitable, we'll call. It the 55 million dollar prediction challenge.
Which was featured during our in game Super Bowl commercials.
This promotion, which is our biggest freeport ever with over 1 million entrants gave the superbowl audience of fun free way to get in on the excitement of the Super Bowl.
We have more people engage with our apps on Super Bowl Sunday by entering a Freeport DFS contest or placing a sports better casino wagering and not any day and draft Kings history. We also acquired more new paying players and Super Bowl Sunday than any previous day and our history.
Our investments in developing and mobile apps that offer a consistent and engaging user experience continue to pay off I am pleased to report that we have maintained the highest the F. S. App store ratings for both iOS and Android as well as the highest iOS rating for casino and sports book at sports betting and I gaming continue to expand across the United States. We are excited that drafting sports book.
And casino apps will soon be available at the download for Android users via the Google play store.
Starting March versus Google is expanding the number of countries, where developers can publish license real money gaming apps to include the United States.
I will now turn the call over to drafting and CFO, Jason Park, who will discuss our fourth quarter results and how we're currently thinking about 2021.
Thank you, Jason and good morning, everyone before I begin I want to remind everyone that we will be discussing our results on a combined company pro forma basis to improve comparability as if the business combinations and close on January one 2019 pro forma means that we are including B to be for the year ended December 31 per boat.
2019 in 2020, rather than just from April 24th through December 31, 2020.
We are pleased to announce that we generated $644 million and revenue for the full year, representing a 49 per cent increase versus fiscal year 2019 revenue of $432 million Q4 revenue was $322 million, representing 98 per cent increase versus Q4 2019 revenue of 100.
And $63 million.
And incredible results, where despite the impact that COVID-19 had on our business in 'twenty and 'twenty in particular and Q2.
Our b to C business, which includes our core product offerings of daily Fantasy Sports online Sports book and I gaming performed extremely well this year as we launch OSB and four new states and I gaming into New States. In addition, as Jason mentioned, we are continuing to see triple digit year over year growth and New Jersey handle even though.
We have been live for two and a half years, which really speaks to the continued adoption of these exciting product offerings.
Our beauty business generated $539 million for the full year, representing a 67% increase versus the prior year and Q4 revenue of 291 million representing 122% growth.
B to C monthly unique payers and the quarter increased 44% year over year to one 5 million. The increase reflects strong unique player retention and acquisition across DFS OSB and I gave you for the full year of 'twenty and 'twenty Mumps increased 29%, which includes the impact of COVID-19 on her mom.
For sports book and DFS, primarily during the second quarter and early in the third quarter.
Average revenue per monthly unique payer or RPM up what $65 and Q4, representing a 55 per cent increase versus the same period and 2019.
Our arm up was positively impacted by increased engagement with our I gave me and online sports book product offerings, and our excellent cross selling capabilities for the full year of 2020 arm up also increased 29 per cent.
Our b to B business generated $105 million for the full year down just $3 million versus the prior year and was flat in Q4 versus prior year, our b to B business and 2020 was heavily impacted by Covid as revenue declined 7 million and Q2 and one sports resumed in Q3, we experienced 5% growth and the second.
Half of the year.
Our revenue exceeded the midpoint of our prior guidance by almost $95 million roughly $50 million of the beat was due to assumptions about market factors that broke our way.
Of this $50 million around $20 million was due to a more favorable than anticipated sports calendar, particularly for the NBA and college sports and the expansion of mobile registration and Illinois, roughly $30 million was due to our OSB whole percentage being higher than we forecast.
The remaining $45 million of the beat was due to over performance and our core business as a result of uniquely productive customer acquisition and great customer engagement and cross selling our Q3 marketing spend paying back more than expected and a strong launch and Tennessee.
We generated $359 million of growth profit dollars on an adjusted EBITDA basis for the entire business and the full year, representing a 15% increase versus fiscal year 2019.
We generated $188 million of gross profit dollars and Q4 59 per cent increase versus the fourth quarter of 2019.
Gross margin rate for the business declined as expected as we have noted in the past our gross margin rate has been impacted and will continue to be impacted by a mix shift out of our more mature and thus higher margin GFS and product offerings and into our higher growth rate and currently lower margin, OSB, and arguing and product offerings in.
In addition, gross margin rate within a period is impacted by promotional intensity typically most intense when a new state launches and at the beginning of a major sports season, as we aim to acquire customers.
Gross margin rates will be positively impacted by the conversion to our wounds that engine and the back half of 'twenty and 'twenty one.
GAAP gross margin rate declined more than our adjusted gross margin rate. This is due to the amortization of acquired intangibles related to the business combination.
Our general and administrative and product and technology costs on an adjusted EBITDA basis were $154 million and 125 billion, respectively. As we invested to achieve scale and our back office functions, such as finance and accounting legal and human resources as well as continuing to Nebraska and her products.
For the quarter, we spent $52 million and $39 million, respectively, which includes bonus accruals and payroll taxes on L tip investing.
Our 2020 sales and marketing expenses were $475 million, which include our external marketing.
External marketing and was higher than prior year, as we launched mobile sports betting and Iowa, Colorado, Illinois, and Tennessee, and I gaming and Pennsylvania, and West Virginia. Additionally, we continue to see accretive LTV to CAC opportunities, which allowed us to invest deeper and marketing in part due to the stay at home and nature of Covid.
And the unique sports calendar and the third quarter in particular.
For Q4, we invested $184 million on sales and marketing versus $63 million and Q4 and 2019, a key driver of the $121 million increase with our external marketing investment and see.
And that's that we're alive for their first full Q4, including Pennsylvania, Iowa, Illinois, Colorado, as well as our launch and Tennessee.
Adjusted EBITDA for the year was negative $396 million adjusted EBITDA does not include onetime and noncash expenses, such as stock based compensation and transaction related expenses adjusted EBITDA for the quarter was negative $88 million as we rolled out our new sleep playbook and multiple jurisdictions and.
We continue to invest and our product technology and G&A functions.
In the quarter, we expense $180 million and items that we exclude from adjusted EBITDA, but are included in GAAP net income, notably 149 million for stock based compensation and 31 million for amortization of acquired intangibles and depreciation and other amortization and transaction related.
And.
Our stock based compensation expense reflects the vesting of our views as a result of our strong stock performance and 2020.
Moving onto our balance sheet and liquidity, we are well capitalized to execute our multi year plan and address our key priorities and taking advantage of this unique time per customer acquisition entering new states as they legalize continuing to lead the market on product innovation and exploring opportunistic and accretive M&A. We ended the year with $1 eight.
$8 billion of cash on our balance sheet and no debt.
Yeah.
Yeah.
Looking forward to 'twenty 'twenty, one on our third quarter earnings call in November we introduced a range for our 2021 revenue of 750 million to $850 million, given our strong finish for 'twenty and 'twenty and the underlying acquisition engagement and retention of our players as well as our recent launches in Michigan and Virginia, we are increasing.
We're guiding to 900 million to $1 billion of revenue for 2021, which equates to year over year growth of 40 to 55 per cent and and 19% increase compared to the midpoint of our previous guidance.
The increase reflects strong performance from Q4, which has continued in Q1 2021 substantial user activation due to our 'twenty and 'twenty marketing spend and the launch of mobile sports betting in Michigan, and Virginia, and high gaming and Michigan.
We assume that all professional and college sports calendar that have been announced to come to fruition and that we continue to operate and the states and which were alive today.
These states collectively represented 25 per cent of the U S population from mobile sports betting and 10 per cent of the U S population per I gave you the.
The range also students at the Governor of Illinois does not extend the suspension of the inputs and registration requirements.
Revenue and marketing spend will be higher per each month, Illinois chooses to extend and the suspension.
We expect both mumps and art from up to grow in 'twenty and 'twenty, one with mumps, increasing at a higher rate than our per month regarding.
Regarding our 'twenty and 'twenty, one quarterly revenue cadence, all things being equal, which means no new states launch beyond Michigan, and Virginia, We expect Q1, and Q2 to be about equal as a percentage of full year revenue in the low 20 per cent range with Q1 and slightly higher than Q2 Q3 is expected to be close to 20 per cent of full year revenue.
We currently expect the fourth quarter to account for slightly more than 35 per cent of our revenue per year.
While we are not providing guidance for 'twenty and 'twenty, one adjusted EBITDA sales and marketing expense and the key input sales and marketing and order vintage seats, we'll begin to moderate, but 'twenty and 'twenty and 'twenty 'twenty, one vintage and seats, we'll have increased sales and marketing as we execute our new state playbook and lap partial years and <unk>.
And 'twenty. The net effect is that we expect to spend more on marketing in 'twenty and 'twenty, one compared to 2020.
From a quarterly perspective, we expect our adjusted EBITDA loss to be widest and Q3, followed by Q1, the first quarter will be impacted by our launches in Michigan, and Virginia, and the third quarter by the start of the NFL season, we.
Our second quarter loss to be better than Q1, and our fourth quarter loss will be the smallest and as we benefit from higher seasonal revenue.
As a reminder, our marketing spend is impacted by the launch of a new suite. Our spend is also highly flexible and can be reduced or pauls altogether, if the sports calendar shift.
That concludes our remarks, and we will now open the lineup for questions.
Yes.
Yeah.
Operator, you can open the lineup for questions.
Bush.
Yeah.
Yes.
Yeah.
Okay.
Okay.
Operator.
Yeah.
Yeah.
And ladies and gentlemen on the phone lines, if you'd like to ask a question at this time. Please press star and then the number one key on your Touchtone telephone.
Good question has been and answer it and you'd like to remove yourself from the queue. Please press the pound key once again to ask a question at this time. Please press star one one moment for questions.
Yeah.
Yeah.
And our first question comes from the line of Ryan said golf from Craig Hallum. Your line is now open.
Great. Good morning, guys and congrats on the strong results and business trends.
Thank you.
Very helpful commentary on guidance for 'twenty and 'twenty, one just high level thinking EBITDA.
You know on a dollar basis, directionally flattish better worse and anything you can come in and comment there and then what kind of back and all the other.
Details between them.
We're not providing guidance for EBITDA and 2021, and just topline guidance.
The reason, we're not providing guidance is it's hard to predict what new states will open up and also we generally are flexible in terms of how we flex up or down our customer acquisition and investment depending on how results are coming and so.
So it's really tough for us to guide to that at this point yeah for.
And for that reason, we are choosing not to.
Gotcha Gotcha, and then I appreciate the book.
Color on New Jersey, I believe my car rates at the level of contribution margin and positive just to confirm that and then secondly, how are you seeing other states ramp similar paths better worse, and Michigan, Tennessee and.
And Virginia, somebody's newer ones expect better than I kind of and New Jersey cadence.
You are correct, New Jersey was contribution positive and 2020 and that was despite.
No sport or no traditional sports that we saw for a few months and Q2 and by Q1 and it would have been even better had we had a full sports calendar for the year, Although we did make some of that back up and the back half of the year with strong performance.
You know additional sports games on NBA, and NHL that wouldn't have otherwise and play at that time and here.
As far as the other states and it's definitely been a variety I think if you look at sort of the average it's quite similar to what we're seeing and new Jersey on a per capita basis, but certainly there's variation state to state, Michigan and particular with very strong on both the sports betting and gaming, Tennessee was pretty strong.
Virginia was close to.
New Jersey, but not quite.
But I think Virginia, and also and with it.
Net of a different setup because it launched launched around the same time as Michigan. It didn't have a gaming sector.
Contribute and Virginia, and unlike Tennessee, It launched for US at least the day of the conference Championship game. So we only got a little bit of a tail end to the NFL and their whereas Tennessee launched in Q4. So we have quite a bit of a ramp to be able to acquire customers and generate revenue during NFL.
Great one more quick one from me and then I'll hop back in the queue just on the SB Tech and and Tech integration.
Are you planning to do a partial conversion and state by state where you're planning to go alive and then have you started this process, where you have anything to point to thanks and good luck congrats on the results again.
Thank you so what we have been doing it and we've done a pilot and Ireland that was not.
Necessarily for any reason other than just to get our team accustomed to the new interface and be able to use the tools and all those sorts of things and.
The next step will be doing is we're going to choose the state and the U S to do a launch and and make sure everything's working and and work out and he came and at that point, we'll be comfortable rolling it out to the rest of the country.
Okay.
Thank you and our next question comes from the line of Jed Kelly from Oppenheimer. Your line is now open.
Great. Thanks for taking my question two if I may just Jason and what one on product I mean, some of your competitors are offering same game parlays and and another one has stopped around lightning and bad. So how do you think about product differentiation and then just on the guidance. If you look back in 2019.
And <unk>.
New Jersey had a pretty significant march around the NCAA tournament, and so how should we be factoring and the NCAA tournament around the cadence between <unk> and <unk>. Thank you.
No question you have some product this underscores exactly why we thought it was so important to have our own and our technology and trading platform, which we acquired a long it's a business combination and back in April of last year.
And this is like you know and you mentioned same game parlayed that that's something that we look to add hopefully you know shortly.
After migrating this NFL season, and maybe at the migration, depending on the timing of it but we want to have that ready for that kind of housekeeping.
That's the point of migration and you know I think one of the reasons that we feel like we've been doing so well and I gaming as we had been actually innovated on product launching their own and game as we mentioned more than three quarters of our team and Michigan I started more than three quarters of our revenue and Michigan were generated off of tracking house created game.
And you know we haven't migrated yet so while we've been very pleased and have only positive things to say about candy or our current partner and we do think that you know and there's just no substitute for a company like ours to take product and technology driven.
And between having a reliance on third party versus having full control over your own product and.
I think what you'll see is you know for a couple of things with the migration, but really it's going to be about what we do over the next year or two or three.
But this is an area I feel very confident that we will we will generate meaningful progress and over the next few years, it's what we do and really core to our DNA. So I'm excited about it and I think it's going to be something that will really start to to be able to talk more about and the back half of the year.
And then on the NCAA tournament.
Oh, sorry can you ask the question one more time.
Just you know if you look back in 2019, New Jersey had a pretty solid month around March madness, and the NCAA tournament. Just how are you figure factoring and the NCAA tournament and <unk> relative to <unk>.
And then let teeth and parked answer and any more granularity, but I would say at a high level.
This is one of the real key times for better if it's a very popular thing to bet on it's actually quite different and fantasy for Fantasy College Basketball College sports and general well certainly theres some activity that spikes during the MPW tournament, it's nothing like bike, we see embedding so with so many new states I think you'll see a lot more there and Jason and I don't.
If you want to add anything specific beyond that but.
I think that that's at a high level, how I would describe it.
Yeah, and Hey, Jed great great to hear voice and I agree I mean, we have certainly thought a lot about March madness.
A part of the tournament will be and Q1 part of it will be and Q2, we've thought about that and when we look back we've only had one state with OSB lives for March madness, given the canceled event last year. So we've incorporated that all into the guidance that we provided today.
Thank you and congrats on the results.
Thank you Jack.
Thank you and our next question comes from Ben Chaiken from Credit Suisse. Your line is now open.
Hey, How's it going I know you went down and March Hey, How's it going and I know I know you mentioned on March 1st is an unique opportunity right with Google play, allowing I gaming and OSB apps, I'm, sorry, not always be up but I gaming and yeah, Oh, yes, I guess with the understanding that you know maybe 40%.
And as smartphones are Android and is there any way to specifically target those customers.
Or do you think that and they were already.
And using some workarounds and.
Got the choice.
So there's a couple of things first Google.
Google play does have and advertising products that if you don't have an apple and Google play obviously, it doesn't make sense to you. So just like we spend and I add and.
The App store, we expect to acquire customers via that channel. Once we're able to launch secondly, we do have people decide low the apps now it's a little bit of a clunky experience.
And saying something along the lines of you know this is not.
Not saying is for non approved and so there's a little bit of a clunky experience. It's not the easiest you I. So.
I think that should improve in terms of more people, having android and that have Android phones, having the app on their phone and even amongst the existing customers. Although I would say probably the majority of customers now have yet have figured out how low the app to some of the life that we built a couple of more points I'd make.
One is you know we talk a lot about our highest rated products and both Iowa and and.
And the Android and the effect and for iOS, and the App store and online sports book and I gaming.
The reason, we don't mention it on Android is it not and the Google play store, so very important to us and deliver a quality product. We think we have one and we look forward to getting feedback and rate and combat, which will hopefully help solidify our reputation and having a strong product.
And secondly.
There will be I think two states I wanted to say and Michigan and Virginia. If it weren't added initially we're hopeful that they'll get added later, but that does create a bit of a clunky experience as well because.
Users and those states will still have to decide about the app and it's actually really hard to.
Create a UI and Thats very state specific on that front. So we're working hard to do it. So that we can get live and the states that were approved from March 1st, but hopeful that Google will approve those additional states and what we'd like to ideally see is you know they just kind of got a policy, where any states that have legal regulated sports betting and I gaming.
It is automatically.
And is automatically included in the policy.
Got you that's Super helpful. And then one more if I may I guess I guess, just talk about what youre doing to prepare for Canada.
And hopefully the next major catalyst or addition to the business I know you mentioned.
And NFL DFS partnership I'm not sure if there's anything else to share or expand on there. Just curious you know how to how you plan to hit the ground running or if there's any stats you can share around penetration and traction in that market right.
Well, you're absolutely right, Canada, and it's going to present, a really exciting opportunity should it open up we see really good progress there, both the federal and province level, and Ontario, Legislatively, Ontario as you probably know is the largest province. They believe it's somewhere in the neighborhood of 45 per cent of the population of Canada. So.
Man could get any problem and that was the one to get first so very excited about that and we're hoping additional provinces followed suit, but haven't really seen you know whether that is the case yet.
I think that you know first and foremost is the legislation had to move along and and and we're seeing that and Theres a lot left up to the regulator.
And it's a little bit different and U S legislation, where theres a lot of detail and the legislation and Ontario, It's really kind of.
A line or two maybe not quite that and you know.
Little but very much left up to the regulator on what the rules and the road are so we are waiting for regulation and say no. Those are being worked on by the Ontario government. So once we get that we'll have a better sense of what timing could be what sort of product could.
Could look like and things like that and as far as preparing and you mentioned the NFL and expansion of our NFL deal and Canada. We're very excited about that we had been doing the marketing and Canada for quite some time, we have a very large daily fantasy sports customer base, Ontario.
And obviously being our biggest problem in terms of the customer base. So.
We feel very well prepared both to convert our existing daily fantasy customer base as well as to expand what we're doing with the existing marketing channels that we utilize and Canada.
Cool I appreciate it thank you.
Thank you.
Thank you and our next question comes from Michael Graham from Canaccord. Your line is now open.
Thanks, and congrats on great numbers and the two questions. The first just on arm up and expansion you mentioned.
Engagement and cross selling just wondering you know it was that is that really just between you and your OSB and I gave me and products are just you know what can you tell us about what really drove that and sort of you mentioned that you expected arm up to expand but more slowly than and players in 'twenty and 'twenty, one, but just maybe touch on that and then I have a follow up.
Thanks.
Thank you. So a few things go into art and one is the cross selling and it's really across all of our products certainly sports book to I gaming, it's one, but we cross sell between all of them. We cross sell DFS certainly the sports book and I gaming and cross sell back to PFS from people, who get acquired on sports book or I gaming and we cross sell people get acquired and I.
And the sports book, So I think that it's really you know the way we think about it is we have a platform we try to target segments of customers to bring them on.
Potential customers to bring them on and the most efficient manner possible and then once they're on the platform, we try to get them to engage with all of our products and.
And you know, it's really about optimizing across all of the things that we offer the other factor and art, which enables what I. Just described is just more states opening up and one of the reasons that we have said that we expect users to expand more than ours is and our guidance. We have not included any new states that we're not already and.
So you know last year, obviously, there were several states that launch and I think if you were to see new states launch in 2021, we would expect faster growth and art month, but right now we don't have any line of sight to that there's obviously a lot of exciting things happening and the legislative front and almost 20, New states and 20 states, considering new sports betting and.
Legislation to open up and.
I think four or five.
I think considering I gaming legislation.
So hopefully we'll get you know and we'll see some of those those get done and I don't know, even if they do get done and I felt locks this year next year.
So once we get more line of sight to that and we'll be able to have more of a view on how that might impact throughout the year, but right now and all of our guidance, including and with your question on arm up where we're not including any new states.
Okay. Thanks, and then I just wanted to ask a quick one on on College sports just you know what.
And what impact do you think college sports had on your performance in Q3, Q4, and you know sort of how important is that relative to the professional sports.
College Sports and sports book, they're big they're not that big and daily Fantasy sports, but they are really important and sports book So.
It certainly was something that we didn't know it happened we were a little bit conservative and there.
And last couple of quarters guidance and thinking through where do we have full college sports calendars.
Calendar is would we have Paul conferences claim at the time for example, we guided and Ah Ah.
Q3 call.
And at least you know two of the conferences and basically said they were shutting down the season and they ended up starting which is great.
And so it's certainly with the boost to see that and you know I wouldn't say it was the number one thing, but it was it was a material factor sure.
Okay. Thank you Jason.
Thank you.
Thank you and our next question comes from Thomas Allen from Morgan Stanley. Your line is now open.
Hi, good morning, So Wednesday morning.
The fourth quarter revenue result that there'd be your guidance, but I think so.
From a as expected and had to happen and given the strength of the state reported data.
But they but revenue beat the street by a considerable amount and do you think we.
We're not appreciating the strength of the DFS business, the Colorado, and Tennessee business, where I day does not like your market share is not disclosed or the decline and promos or are you or can you talk about kind of what that what the strength of those things were.
So.
About half of the beat came from things that were just.
You know that.
Since we made that literally all broke our way obviously, that's not going to happen all the time and now and that included things like flow sports calendar being played with no rescheduling into next year of NFL games. We thought there was a possibility that certain gains and I kept moved from Q4 and Q1 didn't happen. We also saw that you know as was mentioned earlier al.
College Sports replay.
The biggest one was hold came in higher that's obviously something that can swing either way and Q3 as you may recall cold day.
Really bad to start the NFL season and.
And we just barely beat our numbers so that was a pretty big factor I think the biggest factor withhold came in higher than expected and that's just based on sport games outcomes, but not anything we were doing in particular and I think it was higher across the board for the whole industry and the other one was we did not make the assumption that the Illinois.
Executive order and that allowed for mobile registration would get continued obviously, that's something that's not within our control and we don't know so we weren't counting on it that ended up getting continued not just through the end of the year, but through the Super Bowl and we're hopeful it gets extended again.
And there's a lot of things that really broke our way and then the rest of it was business over performance and as far as your question and Tennessee was definitely a big factor, Tennessee, We didn't know before at launch but ended up being one of the strongest start.
Of any state.
That was really great to see and then I think you know, which is why we've been a bit cautious about where.
And where we sort of pegged our are our numbers and thinking through the back half of next year.
A lot of boost I believe it's impossible to quantify how much but you know when I look at our marketing performance and 2020 versus Q4 Q3 of 2019. It was just like off the charts better and I think it was due to this whole stay at home and pack people cutting back on other leisure spend and entertainment and and having you know a lot.
And for share of the overall entertainment and leisure spend wallet.
And I think all of those things you know may or may not continue and.
And when you have and assume that they will and things get back to whatever normal is and the back half hopefully of next of this year, so and we're being a bit cautious there I think that in all likelihood. If there was a benefit it won't last forever. So yeah, probably not just being cautious probably being realistic.
And you know I think it was hard Siemens and I'm, saying, it's hard to say, what's going to happen at the end of this year the back half of this year or whenever you know people kind of start.
Going out to concerts and traveling and all those sorts of things again.
And I think it's also hard to for us to have known.
And even now hard now to quantify what the impact exactly was of that on Q4 as well as Q3 of last year, and so well I can't give you an exact number but what I can tell you and I'm personally very convinced that there is certainly a lot of things and team did well we had a lot of great optimization and things that we figured out on that.
Product and marketing front that led to over perform and so it wasn't entirely that but I'm sure you know a good chunk of it was just.
A moment in time and that's why we were so aggressive on the customer acquisition front once you.
Get the data and and you see it it's working we're very flexible and press the gas quickly and if it's not we'll go the other way and we're very much driven by what the results and the data are.
So you literally could.
Could not.
And if we wanted to hit our cash target on that if we were below our target and Q3 and Q4 I kept telling the team tried to find more places to acquire customers and it was just such great results.
And we were trying to Max out volume and as much as we could but we really couldn't even go any deeper and we are still well below our cash target and I don't know if that'll be the case this year at the end of the year, but and we'll have to see it probably there probably will be some you know factor that are.
And some impact, but really hard to quantify.
Thanks Jayson.
Answered my first of all our question and which was it did look like and <unk> 'twenty. One revenue guidance was conservative about flattish, but I think you gave good color there so just.
Have you seen just just on free play right. So when we think about and.
About the kind of promotional side have you seen some rationalization on free to play around and we can see what you're spending on marketing, but but but it's harder to read into pre book.
Yeah, I think that what we're seeing are you talking about like promotional standard are specifically, yeah promotional spend and promotional spending.
So similar to you know external marketing advertising spend and we're very much data driven on that and it sees it all we're more aggressive promos and periods, where we're more heavily acquiring new customers and <unk>.
If you look at sort of the breakdown between where promo spend goes and much higher percentage of new customer gross revenue is the promos and and existing customer.
Congrats of offers and the new customer offers so what you'll see and you started to see this a little bit and Q4 and that's.
The mix of customers shifting from a more new customers to more existing customers and then you will see a natural decline and the rate of promo.
Right.
Thank you. Our next question comes from Kevin Rippey from Evercore ISI. Your line is now open.
Hey, Thanks for taking the question guys I'm really just to if you could give any more color about the contribution of of I gaming relative to OSB, specifically and the states where we're both are illegal.
So in terms of how many what percentage of players play both of those kind of things that'd be really helpful. And then maybe just a little bit more too on the gross margin benefits of high gaming or I guess gross margin differentials between gaming and sports betting and how we should think about that because we think about the longer term model.
Appreciate it thank you.
Yeah.
So we are cross selling over 50% of our sports betting customers into I gaming and.
And it's a very important product I believe it's probably a larger market. If there were you know and state level. It's a larger market certainly we saw that and Michigan and we're seeing that albeit a ton of different lifecycle timeline and new Jersey.
And I think it's probably safe.
Safe to say that it's a larger market, where and I have more color on that we and we have and analyst and Investor day coming up and early March that we will talk more about how do you decide that each of the relative market.
As far as gross margin impact, it's really hard to.
And to say.
We don't really allocate promotional dollars byproduct because people can use them across the platform.
So it's in and same thing on like things like payment processing fees, you know people made deposit and play one particular product first and then play and others. So it's hard to say this deposits should have been allocated to this product or that that product and <unk>.
And that's not really something where we see a distinction and we view both I gaming and sports betting is having very similar gross margin.
If you kind of you know Don.
English and and as I said sort of impossible to distinguish where deposit payment processing fees and promotional dollars and things like that are coming out and they're actually remarkably similar in terms of their margin profile.
Alright, great and maybe just one more.
One thing I hear a lot about is and iOS like the Iowa 14, DFA changes is there any impact as it relates to that with respect to your app install campaigns or anything on the marketing front and do something about that you guys might have to navigate and like the first half of the year.
Yeah.
Actually don't exactly know the detail on that but what I can say to you is that we knew about this and we've been preparing for it we generally speaking.
Don't view, it as having a massive impact but it will have some impact.
But I think most of what we've done and not really changed based on those regulations.
Great. Thanks, guys.
Thank you and our next question comes from Stephen Grambling from Goldman Sachs. Your line is now open.
Hey, thanks for taking the questions.
Just thinking.
And the App I guess first what is the average number of Bachelor typical customer makes a year and how long is the average time on device per better logging and then second as you look across more mature versus new states. How are those two trends and a frequency and time spent on device evolving.
We haven't disclosed anything around average bet or time, we certainly can consider adding some of that material Karr investor day, but I would be lying to you. If I told you I actually knew the answer right off and anyway. So.
And I'm not discussing and I couldn't tell you, but something we can look into and consider talking about on investor day as far as you know new versus existing states. We're.
We're seeing very similar and media and an average performance.
Obviously, some variation state to state, but virtually across all the metrics we look at whether.
And whether it be revenue.
Active players retention rates, our engagement and time and App.
You know average bad debt expense side, it's actually quite similar and and you know if you look at sort of the average is but there is certainly some variation state to state. Some of it is dependent on which types of products and games are more popular and Michigan. For example, we saw a much wider gap between.
And the amount of engagement and I gaming vs OSB.
As you know some of the other states could have both of those products. It's also differences and what sports people bet College, bedding and much more popular and west Virginia relative to professional expense from professionals and more popular but the relative GAAP. It is quite narrower than you see and.
And certain other states like New Jersey.
So it's definitely variable and state to state, but if you kind of look at the the average is it it's quite similar.
Didn't hear anything.
That's helpful and and perhaps as a follow up you referenced some of the things we're doing on the content side.
With bleach or.
More I guess.
Broadly would you generally how do you evaluate potentially advertising on the app.
Or monetize and user data and another way.
We do take advertising on free to play a game and.
We are not doing that per pay to play a game. We think that if you are paying for a product you should not have to see ads and we feel more comfortable doing it on free to play games. There is some website advertising on the DFS product. That's the one exception, but the vast majority of it and free to play game. So that's the sort of approach that we've taken and.
You know right now we are actually turning down and dollars, we have less inventory between our free to play games and the content that we're producing that and we have demand for advertising. So one of the things. We're looking to do is to figure out ways to expand our content.
Sprint and have both more inventory to take AD dollars, but also content is a very effective way of acquiring and engaging and.
Monetizing our user base as well so one of the nice things about it and it has got great synergy you can make money on the advertising side.
But you can also make money by using content to acquire players and activate players and introduce new products and new forms of debt and to them.
Makes sense. Thanks, so much I'll jump back in the queue.
Thank you.
[laughter].
Thank you and our next question comes from Shaun Kelley from Bank of America Your line and Taliban.
Hi, Good morning, everyone. Thank you for taking my question and <unk>.
Just wanted to go back to the to the promotional allowances from when we kind of try and triangulate into this it seems to us that there's a there there was a pretty big spread between some of the state reported G. G are and what you guys ultimately reported and in net revenues for the quarter. So I'm. Just curious did we see or did you see a meaningful sequential change.
<unk> and promotional allowance just you know and and some of this may be reporting related but.
And what you reported in Q3, and what we are what you actually reported and Q4.
We definitely had a decline and promotional spend largely driven by just the new customer versus existing customer and Mexico Q3 was a huge quarter for customer acquisition for us at the start of the NFL and NBA.
MBA NHL completing their season and going into the playoffs. So between those things. It was a really great time. There's also a lot of pent up demand for for our online sports betting and given that there was a real lack of traditional sports and Q2.
And so that certainly was a big factor just the mix shift between new and existing customers and shifting more towards existing customers and Q4, which as we said, it's going to have and natural downward impact on promotional rate.
Also you mentioned this too there are definitely differences and state recording around how promotional dollars are factored into are not factored into the taxable basis and.
And what we tried to do internally is really work.
Now at the individual state level to be able to grow this day in a way that is both tax efficient and makes sense from a customer and a data perspective in terms of the impact of the promotions, we're running and sometimes they are recording does sort of you know and there's a little bit hard to follow exactly what the promotional spend was from that.
Got it that's helpful and and then maybe like Big picture, Jason just longer term you know if we got some volatility and and when you do have one of these.
Quarters, where you've got big new user acquisition or a new state launches and then things kind of level out just over the long term and is there anything and the data or anything you're seeing right now that would suggest there's any difference and sort of what your estimated long term kind of promotional allowance would be I think we see that number kind of tend to stabilize and like the mid twenty's and in Europe.
And some other markets, but just kind of a.
Long term is there any difference here really to the model or is it you know we're just in a lot of volatility given where we are and our growth curve.
I think it's definitely the latter we're going to talk more about this at our upcoming Investor day and.
Early March but.
The punch line and we don't see any any different and the long term projection there from what we said and the path, they're going to be a lot of optimization, but by far the largest impact will come from just the natural mix shift from new customers to existing customers as it matures and the rates and promotional spending.
And our most aggressive with the customers, we do do promotions for existing customers, but they are far more aggressive with your customers and simply if we didn't change a thing.
And you'd see a significant decline as the business matures now will be interesting is these states will launch and then as we enter those new states and acquire customers youre going to see and increase at state level, which of course, you know depending on the quantity and quantum of states and which states and how big the population bases.
Could create fluctuations, but if you just sort of look at it and an existing state as a unit and an existing state of the unit that natural decline will occur simply from the state maturing and that mix would be and customer existing customer shifting towards this thing.
Very helpful. Thank you.
Thank you.
Thank you and our final question comes from the line of necessarily cash flow from Cannonball Research. Your line is now open.
Thank you good morning, I wanted to ask.
Wanted to ask you to sort of rank the customer.
Customer acquisition channels in terms of.
In terms of.
Cost cuts from acquisition cost so from like high to low of low to high just wanted to see how and also if you could comment on how different those are costs.
Costs are and niche channels that would be super helpful.
And what drives also the difference and that was a competitive action and understand that the lifecycle and the particular state. It's it's it's a driver but also.
And the rest of them what business helpful. Thank you.
Yeah. Good question, we were pretty cautious about how we disclose anything around that because you can imagine it's a real.
<unk> area, you know being able to optimize across a number of different marketing channels at scale. It's something we believe we're really good at and we're very data driven company and.
And you know we've been doing it for a long time. So we have a lot of great historical data to rely on and so we're a little cautious I think where I can probably answer at a high level and this will come as no surprise as you know TV is definitely typically the most expensive channel.
But also the highest reach channel so and certainly from a creative standpoint, TV ads can you know you can say a lot more and a 30 or 60 or even 15 and secondhand and your candidate display AD will typically try to Max out digital first and that's the most efficient and also the easiest to measure.
And then to gain additional reach and scale, we'd go to TV and and now they're supposed to offline channel.
Thank you very much.
Yeah.
Thank you and that concludes our question and answer session for today I'd like to turn the conference back over to Jason Robins for any closing remarks.
Thank you all for joining us on today's call. We appreciate your insightful questions and look forward to continuing our conversations with your 2020 was an outstanding year for drafting filled with many impressive accomplishment, but we also recognized and suffering and challenges that many in our communities have experienced and continue to.
Hey.
We're excited for the future draft Kings is well positioned with over $1 8 billion and cash to enter new states as soon as practicable to drive our continued product innovation and acquire customers and explore opportunistic M&A.
Paul Jason and I are excited to share more insights and information with you at our Investor Day on March nine.
We will explore our latest outlook on pan sources of competitive differentiation unit economics, and EBITDA and maturity I hope all of you stay safe and well and we look forward to speaking with you again soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
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