Q3 2021 DraftKings Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and walk through the draft. <unk> Q3, 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session will need to press star one on your telephone if you record any further assistance. Please press star Zero I would now like to turn the call over to your host Stanton Dodge Chief Legal Officer, you may begin.
Dan.
Good morning, everyone and thanks for joining us today statements made 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 in evaluating dropped teens 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 in our quarterly report on Form 10-Q filed today with the SEC and in our earnings presentation, both of which are available on our website.
At investors Dot draft Kings Dot com hosting the call today, we have Jason Robins co founder Chief Executive Officer, and Chairman <unk>, who will share some opening remarks, and an update on our business and Jason Park, Chief Financial Officer, <unk>, <unk>, 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 Robins.
Good morning, everyone on today's call I will cover the following topics first we are very pleased with our Q3 performance.
Revenue in the third quarter grew 60% year over year and met our guidance due to continued excellent customer acquisition and engagement.
Lower than expected sports betting hold primarily due to NFL game outcomes impacted revenue and EBITDA in the quarter.
Strong customer acquisition performance and new state launches, particularly Arizona drove additional promotional investment, which also impacted third quarter revenue and EBITDA.
In addition to mobile sports betting launches in Arizona in Wyoming in Q3, we also launched mobile sports betting and gaming in Connecticut in October.
Second looking forward the pipeline of new States and Canadian provinces continues to be healthy.
Xena, Maryland, New York, and Ontario have all authorized mobile sports betting in Ontario had authorized.
We expect each jurisdiction to launch in the coming months.
Third the migration to our in house that engine and proprietary sports betting technology is complete.
We are thrilled with the early performance in our new ability to rapidly add innovative features and functionality to our top ranked mobile sports betting App I'm also very proud of the team for delivering ahead of our scheduled deadline.
Fourth our new growth initiatives, which include droppings marketplace, and our content and media business are seeing promising early results.
Fifth we are very excited about the pending acquisition of Golden Nugget online gaming and are working towards closing in early 2022.
I will also comment on the discussions we had with <unk>.
And before turning it over to Jason Park I will also provide an update on our ongoing responsible gaming and corporate and social responsibility initiatives.
We delivered strong revenue growth of 60% in the third quarter of 2021, which met our guidance on our Q2 earnings call.
On a same state basis, as well as adjusting for lower than expected hold primarily due to NFL game outcomes revenue would've been $40 million higher than our guidance.
I'm very pleased with our market share in Q3, as well, which reflects the success of our technology migration and the strength of our overall business.
Our handle share for mobile sports betting across all active states improved from an average of 31% in July and August at 33% in September for.
For I gaming, our GTR share improved from an average of 15% in July and August 17% in September.
Third quarter monthly unique payers increased 31% versus Q3 2020 to $1 3 million, which includes a record mopped up more than $2 1 million in September.
Average revenue per monthly unique payer increased 38% to $47.
We're particularly proud of the growth in <unk> given.
Given that Q3 of 2020 had a jam packed sports schedule with two months of basketball and hockey that did not occur in this year's third quarter.
Fundamental user acquisition retention and engagement trends are all tracking better than we had projected last quarter, which sets us up well for the rest of the year in 2022.
This is true across all of our products.
And week one of the NFL season, we had more than two times the number of mobile sports betting paid active and we had for NFL week, one last year and in the third quarter of 2021 OSB paid actually is on a same state basis increased 50% compared to the third quarter of 2020.
I gaming gross revenue has grown sequentially on a same day basis in each quarter of 2021, and we expect that sequential growth to accelerate in the fourth quarter I gaming gross revenue grew 154% year over year in Q3, 2021, including Allstate and 82% on a same state basis.
In DFS, we set a single day record for paid entries on September 12, and NFL Sundays for weeks, two and three were our second and third largest days reinforcing that our DFS product continues to grow and provide an ongoing cash advantage at new states much.
Looking at New Jersey, our most mature state, where we launched mobile sports betting and gaming in 2018.
<unk> continued to grow at an impressive rate in the third quarter of 2021, despite not having basketball and hockey combined OSB in gaming ops grew 23% year over year, Matson, New Jersey increased 124% versus the third quarter of 2019.
We had very successful OSB launches in Arizona in Wyoming in Q3, amongst OSB Eni gaming, Connecticut in early Q4 of.
Our launch in Arizona went extremely well and exceeded our internal underwriting case are data driven and highly disciplined marketing approach resulted in much higher than expected new user acquisition in September which has given us the confidence to continue to invest in acquiring new customers.
The result is that we are set up very well to be a leader in the state. We are also very excited about Wyoming, which is a smaller state but offers a meaningful opportunity with visitors to the state.
To put the ramp up of Arizona in perspective, it took drafting as just 17 days to acquire a 100001st time paid betters compared to 170 days for New Jersey, 312 dates or Pennsylvania, and 344 days for Indiana. This is despite the fact that drafting did not have the FF in Arizona until August 28.
Only 12 days before we launched mobile sports betting.
In New Jersey, Pennsylvania, and Indiana, Dfs's operational for more than six years prior to launching mobile sports betting in those states, which makes our customer acquisition success in Arizona, even more impressive.
Our business momentum has continued into Q4 for DFS October 3rd which is the NFL Sunday feature in the Tampa Bay versus New England game with the highest gross revenue day in our history.
For OSB in New Jersey, the October 5th wildcard playoff game between the Yankees. The Red Sox has the highest MLB handle game in our history, beating the previous all time high by 12%.
For I gaming October was our strongest CJR months of the year by more than 10%, even when excluding the launch of gaming in Connecticut.
We announced on October 13th debt as the exclusive supplier draft Kings will provide sports betting information and daily fantasy content across Turner sports telecast and Bleacher report digital channels, including the BR at related to Turner's NHL content.
On October 18th we continued to lay the groundwork for our vision of drafting marketplace by announcing a blockchain collaboration with polygon, which provides us a scalable eco friendly blockchain solution that enabled added throughput and expanded capabilities.
So <unk> now has the option to potentially contribute polygons governance and help secure the network is a validated node.
On October 19th we launched mobile sports betting and I gaming in Connecticut, and Connecticut Draft teams is one of only three sports book operators and to I gaming operators authorized in the state.
And on November 4th we announced an expanded multi year relationship with the NBA to make drafting co official sports betting partner I believe this agreement grants drafting expansive NBA rights and assets to integrate within its sports betting daily fantasy.
Gaming and free to play product and promotional offerings.
As has been widely publicized NFL game outcome has been favorable to players this year for a number of reasons.
Time, NFL games played on Thursday, Sunday, and Monday nights, typically have high viewership and therefore high handle through week, 771% of NFL primetime favorites, and 57% of NFL primetime overs of one and 2021.
They also have not been as many big upsets across all NFL games before week eight there was not a single upset by an underdog of at least seven five points. Additionally.
Additionally, we have had four NFL weeks or more than 66% of the favorites won.
A very popular parlayed that is to pair a large david on the money lined with other bet. Therefore in large favorites win consistently parlays hit more frequently.
Of course gain outcomes can also swing the other way the last week of October had very favorable results for the house between last Thursday, and this Monday alone.
<unk> generated a positive variance of more than $25 million of revenue compared to our forecast due to favorable outcomes.
While we had a great finish to the month, we still ended October close to $25 million below our forecast due to lower than expected hold resulting from player friendly event outcomes.
Despite these outcomes and due to the continued momentum of our business. We are increasing the midpoint of our 2021 revenue guidance, which Jason Park will cover in more detail later on the call.
Turning to legalization trend, we've continued to see momentum in mobile sports betting and <unk>.
In 2021, 25 state legislators have introduced legislation to legalize mobile sports betting five state legislatures have introduced legislation to expand their existing sports betting frameworks and two state legislatures have introduced legislation to legalize sports betting limited to retail locations.
In addition, four states are introduced I gaming legislation in three states are introduced online poker legislation.
In total nearly 13% of the U S population felt laws passed in their state legalizing competitive online sports betting market in 2021, demonstrating continued momentum three years after the overturn of pasta.
Following our launches in Wyoming, Arizona, Connecticut, drafting this live and online sports betting in 15 states that collectively represent 29% of the U S population.
Additionally, <unk> is now live with five hiking states, representing approximately 11% of the U S population.
Three of the states, we're drafting has the potential opportunity to participate the market access agreement a direct license.
<unk>, Maryland, and Louisiana authorized mobile sports betting this year.
These three states represent 9% of the U S population and bringing the percentage of the population with legalize mobile sports betting to 39%.
We are actively preparing to be able to launch in these jurisdictions pending the necessary licensing and regulatory approvals to do so.
I also want to comment on California, and Florida.
In California, we are working with a number of leading online sports betting operators in support of a campaign to bring a well regulated safe and responsible online sports betting market to the state.
Legal online sports betting will bring hundreds of millions of dollars in tax revenue annually to the state directly final two of its biggest challenges homelessness and mental health by providing permanent shelter in housing as well as addiction services for those in need.
California solution to homelessness and mental health support Act ensures a comprehensive licensing process. One that requires extensive vetting of experienced operators and create the competitive marketplace. There's competition for market share will ensure the best product and experience for consumers.
In Florida, we continue to work with <unk> and the Florida Education champions to collect signatures required to have a mobile sports betting question on the ballot in November 2022.
We are excited for the potential prospects of Florida voters deciding to have a safe legal regulated and competitive market for online sports betting in the state with a market, leading and technologically advanced product offering <unk>.
If enacted all tax revenues from mobile sports betting conducted pursuant to this referendum will be dedicated to the funding state public education system.
Turning to Canada, Ontario continues to establish parameters to the launch of the online gaming market and the products.
We look forward to further progress in Ontario in Canada as a whole for context, Ontario represents about 40% of the candidates population it would be the fifth largest U S state by population where it in America.
Moving on to product and technology I am very proud of all that our team accomplished in the third quarter for mobile sports betting we completed the full online and retail migration to our own in house that engine in the third quarter.
<unk> went very smoothly and was completed ahead of schedule.
This is the largest technology project we've ever undertaken.
Consumed resources that are now free to focus more on innovation and we are already experiencing benefits from the transition to our own technology.
To provide context for our recent product improvement over the first three weeks of the NFL season, new users that nearly 20% more on average than needs or stayed during the same period in 2020 and their mix of handle on any type of parlay as opposed to single event that increased to 23% from 15%.
We now price approximately 80% of our combined pre match in lifeboat handled in house and into increase that percentage over time.
In August we announced the launch of micro betting across the drafting sports book integrating micro betting technology allows our customers to engage even further with the sports they love by betting in play by play throughout sporting events.
We are particularly proud of the depth of the futures markets and player crops that we now offer for example, an MBA. We are now offering micro bets on approximately 40 different players covering statistics, such as points assistant rebounds for each.
For I gaming, we continue to benefit from the gains we have developed internally.
79% of our I gaming users that played in the third quarter at some point platelet drafting developed game.
We also added Drapkin rocket to our mobile gaming suite in New Jersey on September one.
Built entirely in house tracking rocket at the latest game that our team has developed and follows. The addition of both Spanish 'twenty one in Dk crafts earlier this year.
In New Jersey rockets that are new launch month record for most gross revenue by addressing developed game improving on the debut of drafting blackjack in New Jersey by 46%.
Tracking is the only provider of rocket in the United States and developing this game is further evidence of us, bringing ongoing innovation to our consumers.
Following our April acquisition of Blue Ribbon software Jackpots are now live in New Jersey, Pennsylvania, West, Virginia and Michigan.
We are continuing to add to this functionality, including launching a feature that allows multiple games to be attached to a jackpot.
In the third quarter research firm Eilers, and Krajicek test at 34 sports betting apps and ranked each on user experience getting interface features core anesthetics.
As part of the survey Eilers <unk> <unk> evaluated the new draft Kings out post migration based on our own in house technology.
I am pleased to say that we ranked number one overall and we were also ranked in the top three across four of the five criteria, including user experience betting interface features and aesthetics.
We are continuing to make significant progress with several exciting new organic growth factors. The launch of draft Kings marketplace has been amazing and I'm proud of the highly accessible and easy to use experience that we've built which combined with compelling content has driven positive user engagement marketplaces, a large opportunity given our ability to cross sell existing customers.
And acquire new ones by offering a new way for fans to interact with their favorite athletes and sports moments.
The 70 dropdown drapkin marketplace provided by our partner autograph were oversubscribed 14 to one on average and the secondary transaction market has seen strong engagement by users seeking to collect their favorite NFL.
In the third quarter more than one third of marketplace users were new to drafting these.
These users completed over 120000 primary and secondary transactions totaling approximately $20 million of gross merchandise volume.
Since the initial drops which featured Tom Brady Wayne Gretzky, Tony Hawk Derek Jeter.
And Tiger Woods', we've added drops by you've seen bolt and Rob Kankowski Reese.
Recently autograph teamed up with Lionsgate and twisted pictures to release on drafting marketplace exclusive digital collectibles from saw one of the most successful horror franchises in history.
Our media business continues to grow as sports betting content is in demand and we recognize the importance of reaching a wider audience through our own channels.
Since we acquired <unk>. It has expanded its talent lineup and broadcasting footprint in September we scaled up production to offer a full 24 seven lineup. We also landed our first nationwide content distribution deal with Youtube TV that deliver decent leading sports betting news and insights to subscribers as part of Youtube TV sports plus add on package and when introduced.
Subscribers to <unk> premium content.
Recent podcast on I Heart radio are also experiencing incredible successes, we surpassed 4 million downloads in the month of September.
We will continue to invest in these exciting and differentiating growth factored into 2022 with the approach to each of them will continue to drive the LTV to CAC flywheel that we are creating along with our existing DFS OSB and <unk> offerings.
I'd also like to provide an update on our acquisition of Golden Nugget online gaming.
In Q3, we made significant progress towards closing the acquisition of Golden Nugget online gaming and have strong plans in place to integrate the business and capture the synergies we outlined in the presentation materials market.
For more information on the strategic rationale for this deal. Please refer to the materials on our Investor Relations website, and our filings with the Securities and Exchange Commission.
I also want to make a few comments on the discussions we recently concluded with <unk> we are.
Continuously looking at multiple organic and inorganic growth opportunities that are accretive to our shareholders most of which never come to fruition, but offer great learning opportunities for me and the team.
This situation was unique because there was a leak pursuant to the UK takeover code. It had to be disclosed that we are in discussions even though the discussions were very early.
We had the chance to meet with the leadership of maintained in order to explore the merits of the combination and pain is a very impressive team and we have a great deal of respect for the business day itself. However, after carefully assessing a potential transaction and weighing various considerations, including our own organic growth plans as well as other deal flow, we decided not to make an offer.
We continue to be very excited about the vision, we have for growing traffic, we have the industry, leading brand a vertically integrated technology stack top ranked apps across our verticals, our robust and innovative product roadmap and the best team in the world.
We're very well positioned to maintain and grow our leadership position in North America and beyond.
We recognize that we were very fortunate and have worked very hard to get to where we are a company with a strong balance sheet and a clear path to many years of very high growth in a market with tens of billions of dollars, it's still unrealized Tam.
The bar for changing that trajectory is incredibly high and it would take a lot for us to decide to pursue any large asset with a slower growth profile at the same time, we felt obligated to look at this deal, but just because we look at something doesn't mean, we will decide to do it.
Turning to corporate social responsibility tracking serves as a catalyst to facilitate meaningful relationships between our employees and customers and the communities and causes they feel passionate about in order to create a better world for everyone.
Keeping with our focus on responsibility we integrated the American Gaming Association have a game plan that responsibly public service campaign across our retail sports books and into our team partners Stadium, along with our own responsible gaming tax it's more fun when it's for fun.
Last month, our partners at the NFL announced new responsible gaming initiatives in collaboration with the National Council on problem gambling, we commend the NFL its commitment to this important work and look forward to our future collaborations to advance state play.
We quickly mobilized our customers to raise funds for feeding Louisiana in the aftermath of hurricane either we raised funds for the Larry Fitzgerald Foundation supported breast cancer research and we supported three mission driven organizations for Hispanic heritage month, with total donations to $625000 to further our commitment to equity and entrepreneurship.
This week, we also announced the relationship with the Pat Tillman Foundation, which honors NFL, Great turn military hero, Pat Tillman and.
A foundation carries on Pat Tillman legacy by giving military service members veterans and their spouses, the educational tools and community support to reach their fullest potential as leaders. We are proud to support the foundation work and all military personnel veterans and their families.
I will now turn the call over to drafting CFO, Jason Park, who will discuss our third quarter results and revised 2021 guidance.
Thank you Jason and good morning, everyone. We are pleased to announce that we generated $213 million in revenue for the quarter, representing a six 2% increase versus Q3, 2020 revenue of $133 million or <unk> business generated $189 million for the quarter, representing an 82% increase versus the prior year offset by <unk>, which declined <unk> <unk>.
19% versus the prior year to $24 million a year over year decline in <unk> reflects the impact of the termination of our ease of reseller agreement, which we ended on April one 2021 with a transition period that has already ended.
In terms of the <unk> business, we continue to drive strong growth in player acquisition and retention is measured through months as well as the player engagement and monetization as measured through our <unk>.
Monthly unique payers in the quarter increased 31% year over year to $1 3 million.
<unk> reflects the expansion of our OSB and I gaming product offerings into new states and superb retention of existing players.
Results reflect typical intra quarter seasonality with July and August lower from a mumps perspective, while in September we had a record $2 1 million months due to the start of the NFL season.
Average revenue per monthly unique payer or art.
Was $47 in Q3, representing a 38% increase versus the same period in 2020, our art mop was positively impacted by strong customer engagement, a continued mix shift into our sports book and <unk> product offerings and cross selling our customers into more products.
We guided to $213 million at the midpoint and delivered $213 million revenue would've been $40 million higher were it not for lower than forecast hold rates and investment in new state launches.
Lower than forecasted hold cost us roughly $25 million of revenue in the third quarter, while hold was higher than Q3. Prior year. It was lower than we expected with NFL outcomes being the largest contributor for context in September 67% of primetime favorites won outright and 89% of primetime over kit.
As we've mentioned in the past Q3 is uniquely exposed as a whole vary because of the concentration of just three weeks of NFL games in the quarter. So support outcomes kind of impact Q3 results meaningfully.
In addition to hold we launched two new states in Q3, which were not included in our prior guidance.
These states resulted in negative $15 million of net revenue due to new customer promotional investment driven by much better than expected customer acquisition in Arizona. For example over the first 30 days, we acquired eight times the number of customers that we acquired in New Jersey on a population adjusted basis customer response has exceeded our own expectations, which we attribute to.
Broader awareness of sports betting and the continuous improvement of our state launched playbook.
Net revenue investment was due to promotional contra revenue in the final weeks of Q3 period, which has already begun to pay back in Q4.
Please note we are breaking out the impact of lower than forecast hold a new state launches because these factors were material to third quarter results relative to our guidance.
We generated $71 million of gross profit dollars on an adjusted EBITDA basis for the entire business in the quarter, representing a 17% increase versus last year gross margin rate on an adjusted EBITDA basis for the business was 33% in the quarter versus 46% last year very importantly on a year over year basis, our gross margin rate was <unk>.
<unk> heavily by the aforementioned investment of net revenue in New States launched in Q3 as well as three additional seats tenancy in Michigan and Virginia that launched after Q3 of 2020 be Blue States together accounted for more than three quarters of the year over year decrease in gross margin rate outside of this we saw improvement in our cost structure across.
Our product offerings offset by the ongoing mix shift out of our more mature and thus higher margin DFS product offering and into OSB demand game.
As a reminder, our Cogs as a percentage of revenue for OSB will improve starting in Q4 due to the migration to our in house financial.
Adjusted EBITDA for the quarter was negative $314 million, which includes approximately $60 million and the impact from lower than forecasted hold percentage in the investment we made in new states, excluding the $60 million impact of these items adjusted EBITDA would have been significantly better than the same state perhaps expectations. We provided under Q2 earnings call.
As a reminder, the investment in new state launches includes promotional expense cost of revenue and external marketing.
Our sales and marketing expenses were $289 million, which include our external marketing external marketing was higher than the third quarter of 2020 as we were live in 14 total speeds versus nine last year.
The five new states represent 10% of the U S population and are in their first full NFL season, we continue to see very attractive <unk> opportunities that support this investment in marketing.
Our general and administrative and product and technology costs on an adjusted EBITDA basis were $58 million and $38 million, respectively. As we continue to invest to achieve scale in our back office functions, such as customer service, finding some accounting legal and human resources as well as adding to our technology team principally for new product development.
A majority of the combined $29 million a year over year growth needs to the expense lines was from compensation for new employees.
Of the head count growth was in our customer experience Department, where we are focused on providing best in the industry customer experience and it's impacted by our rapid growth in months.
In the quarter.
We expensed $233 million of items that we exclude from adjusted EBITDA, but are included in GAAP operating income, including 176 million for stock based comp and $57 million for amortization of acquired intangibles depreciation and other amortization and other nonrecurring expenses.
Moving on to our balance sheet and liquidity, we ended the quarter with $2 4 billion of cash on our balance sheet, we are well capitalized to execute our multi year plan and address our key priorities of customer acquisition entering new spaces. They legalized continuing to lead the market on product innovation and pursuing accretive M&A.
Looking at the rest of 2021 on our August earnings call. We increased the midpoint of our revenue guidance from $1 1 billion to $1 two 5 billion.
Today, we are increasing the midpoint to 126 billion narrowing the range to $1 two 4 billion to $1 two 8 billion.
Our increasing our guidance because of the broad strength in fundamental customer acquisition engagement and monetization trends as well as modest contribution from our three newest states. These.
These factors are offset by close to $25 million and lower than forecast hold in October, which we assume we do not make up for during the rest of the quarter October has been an exciting months to say the least with two very challenging hold weekends, only partially offset by last weekend, which was very positive. Thank you Justin.
Our revised guidance equates to year over year revenue growth of 93% to 99%, we expect both maps and arm up to grow in 2021 with mops, increasing at more than twice the rate of <unk>.
This guidance assumes no new states, we expect Q4 EBITDA loss to be a little less than half of our Q3 2021 loss. This is a wider loss and what we communicated in August primarily because our August guidance did not include new states, we are acquiring customers faster than we expected in our new state, but still attractive cap.
With our two to three year payback period.
And on that note I want to affirm our conviction in our state level path to profitability.
A reminder, we have discussed the two to three year timeframe for new space to become profitable and at our Investor Day earlier. This year, we confirm that New Jersey had already reached the threshold on the earlier side of that two to three year window I look forward to providing an update on new Jersey as well as more detail on our path to profitability in additional states early next year. Once we have full 2021.
<unk>.
As we look beyond 2021, we have completed our multi year and annual planning processes and have high confidence that our 2022 revenue will be in the range of one 7% to $1 9 billion.
We are only including the states in which we are currently live and we are utilizing empirical data on cohort performance, along with new product functionality and its expected impact. We are also including expected growth from our media and content business as well as drive Key's marketplace, we are not including the impact of the Golden Nugget acquisition, which we anticipate will close in Q1 of <unk>.
'twenty two.
We are very excited about our growth prospects underpinned by an exciting team sustainable differentiation due to our brand and product and technology capabilities, which drive very attractive unit economics, and LTV to CAC ratios.
That concludes our remarks, and we will now open the line for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key and we also ask that you limit yourself to one question.
First question comes from Bernie Mcternan with Needham <unk> company.
Great. Good morning, Thanks for taking the questions sorry. The question I was just wondering.
On the <unk> offer.
Is there a reason why it would be advantageous to go global now I know, it's obviously still pretty early days in the U S opportunity and then within that how unique is contained as a potential global asset.
As you evaluate other M&A framework.
Thank you Bernie so.
We've laid out a few areas that we would potentially look to.
And in terms of M&A, one is global expansion.
So product expansion also things that we think would help us further improve our position in the U S market. So all of those are areas we look at.
As opportunities come along it's hard to sort of say, hey, I'm going to do this one first this one second and this one third it's kind of like here's the list and we will look at things that come along I think that we were.
Certainly very impressed with the <unk> team and the company they've built I think theyre a great asset there are other international assets that I think are of interest as well.
But <unk> is a great company so.
In this case, we just decided it wasn't the right thing for us at this time to pursue them and I.
I think we will continue to kind of look at things out there most of the things. We look at we don't end up pursuing in this was a unique one because due to the U K takeover code very early discussion had to kind of get publicized when normally we would just never have to see the light of day.
Understood. Thanks for taking the question.
Youre welcome.
Our next question comes from Jed Kelly from Oppenheimer.
Hey, great. Thanks for taking my question just just on the guidance for next year I think you mentioned <unk>.
<unk>.
Some of the products so how much of that factors in.
Migrating SB tech and closing the.
The yield gap and then Jason just a longer term one on media a lot of it seems commoditize between all the different providers you see it all on Twitter every Sunday.
How do you think about differentiating your media strategy is it going to be getting tier one sports content on your platform. Thanks.
So on the first topic.
I think that we have really exciting plans and a great product roadmap for next year.
<unk> <unk>.
Recently launched 10 game parlays, pushing that and continuing to make that a best in class offering and driving additional user adoption I think will be very helpful. We already saw overall parlays move from I think 15% to 23% in just a couple of months. So I think with a full year next year under our belt. We think we can really move that percentage up and get a lot more adoption of.
The same game Carlisle and <unk> in general and we have a number of other features including our social features and other things that we think are going to have really exciting developments next year. So we do expect that to contribute.
What we would say about that whole question is we're not always really we don't really look to optimize the rate of whole, we look to optimize gross profit.
In some cases that might mean that you actually drive more volume through having promotions and other things that can drive downhole percentage, but ended up being gross profit positive and then of course, we look to maximize long term LTV of our customers. So that's really our primary focus but I do think some of the things such as the continued adoption of saying game Parlays will.
<unk> drive that rate of hold up as well on the media question.
I agree that there is a lot of commoditized media and content out there.
We will have more to say I don't want to.
Tip, our hand, but I actually I'm very excited about the strategy that our new Chief Media Officer, Brian has put together and I think it's going to allow us to pursue this unique and differentiated way.
So beyond that I think there's also just really strong synergies with the things that we have planned along with the core areas of our business now in the DFS OSB in our gaming side. So.
We'll have more to say on that in the coming quarters.
Thank you.
Okay.
Our next question comes from Joe Greff with Jpmorgan.
Thank you for taking my question, Jason Thanks for providing 2000 into revenue guidance I was hoping you could speak a little bit maybe directionally on up on cost of revenue and sales and marketing in 2022 relative to what you have.
What you would anticipate and then incorporate it for 2021.
I think the big wildcard with 2022 is of course, what new state launches look like we didnt include that in our revenue guidance, but by the time, we actually and publishing results I'm expecting there will be additional states in there and that's going to move the needle quite a bit on.
Our external marketing investment.
And that I think right now, we really like the flexibility of being able to spend deeper when the results are there we had tremendous <unk> in Arizona.
Absolutely blew away our expectations at the volume.
We were able to acquire and keeping that CAC as low as we did so I think we like the flexibility of being able to spend deeper and not having an external commitment to what sales and marketing would look like.
Thank you.
Our next question comes from Shaun Kelly with Bank of America.
Hey, good morning, everyone I, just wanted to ask a little bit more maybe on the CAC environment Jason.
There has been some discussion out there that maybe the marketing and promotional environment has actually slowed a little bit.
Just given some really aggressive tactics very early on in the NFL launch is.
That consistent with the behavior, you've seen and sort of how do you think that trends as we move across the.
Broker in particular.
It's hard for me to say, what others are doing we certainly monitor the marketplace, but it's not totally precise that said I do think you're right I do think youre right that theres been a little bit of a pullback from our perspective, we just follow the data. So we're going to spend when the results are coming in and we're going to pull back if they're not and we're seeing.
<unk> is still really really strong <unk> and really really good volume coming not just in new states, but in some of our more tenured states as well so that's.
That's really our approach obviously, the overall media environment has an effect on that but it cuts both ways.
Yes, there's competition for customers, but also more overall spend from the entire industry drives more people into the market, which I think benefits those that which we feel we do have the best in class products and experiences. So I think that's actually an interesting way to look at it that yes of course, there's more competition for customers, but it's also growing the market fat.
Arizona is a great example of that where we just.
Way way ahead of the pace that we've seen in other states like New Jersey, Pennsylvania, and Indiana and despite the fact that we didn't really have a DFS database there like we did in those other states.
Thank you very much.
Thank you.
Our next question comes from Thomas Allen with Morgan Stanley.
Thanks, I'm going to try and stay true and her first off there are news reports this week about you.
You're likely getting a license in New York can you just talk about how you're going to approach that market and if you think there could be long term profitability. There was such a high tax rate.
Just on the <unk> guide.
How much are you thinking about how much are you embedding NFC is in that guidance.
Thanks, Tom it so.
I think we obviously.
Want to wait and see what the regulator and what the state of New York says.
About whether we're able to achieve getting that license certainly we would love that.
Hopefully those rumors are true, but we'll find out when we find out and will be respectful of that process.
That said, if we were to be awarded a license I think we feel just like we do in other states that we can achieve the same long term profit margins in New York, There's a lot of levers we can pull.
Such as cutting back on rate of promotion and spending less on external marketing.
Those are things I would expect everyone in the industry would do because I don't think anyone's going to want to run at a long term unprofitable right in any state.
Certainly early on and we'll approach it just like we do other states, where we will invest into it and look for that two to three year path to profitability.
But I think over the long term, we feel we can achieve something in a similar range in a similar range to what we're achieving in other states from a long term margin perspective, and then on the second question.
It's not insignificant but.
Not super meaningful either we have less than $100 million in the plan for that for the FTE. So.
We're pretty excited about it we think it's going to be a growth for product but.
We're also taking a measured approach and not putting too much in there and really relying on the strength of the core business to carry in next year in our guidance.
Thank you.
Our next question comes from Michael Graham with Canaccord.
Thank you a quick one just can you remind us on the magnitude of the gross margin benefit you are expecting to see from the in house technology switch and then more broadly.
I'm wondering if you can comment like going back and looking at a more mature state like in New Jersey.
What are you seeing in terms of player behavior, where youre not as focused on gaining new players in terms of like what is driving loyalty or what is driving switching just any learnings you have there and some of those more mature states that you can apply to the newer states.
I'll answer the second one first and then I'm going to turn it to Jason Park to answer the first one so.
New Jersey, and its almost funny to call. It a more mature state it's still only a little over three years in and we're still seeing really strong user growth there.
That is in part driven by strong loyalty, we're seeing great retention numbers, but we're also still acquiring customers as well.
So really excited about new Jersey really excited about our more tenured states I think that what we're proving out that that two to three year payback on the customer in two to three year path to profitability in the state really will hold and we're going to talk more about that once we have full year results and the Q1 timeframe.
And I think similar to Av.
How we approach everything we're just going to follow the data as long as customer acquisition is continuing to work we're going to invest there certainly we expect some of the earlier cohorts to have stronger LTV. So were keeping a close eye on that but new Jersey is still only three year and three years in and I think if you obviously, a little bit of a different ramp, but if you look at the <unk> gaming market.
Which is I think in its seventh or eighth year at this point, it's still growing 30 plus percent, we're growing more than that.
I think new Jersey, Youre going to see grow for many years to come.
And then Jason do you want to take yes, sure Hey, good morning, Mike the gross margin rate impact from being vertically integrated does commence in Q4 as.
As a reminder, some roughly high single digits of revenue for the OSB product offering only so please don't apply that to the entire business for the OSB product offering that essentially goes away in Q4.
Okay. Thanks, a lot.
The next question comes from Stephen Grambling with Goldman Sachs.
Hi, Thanks.
You made a comment that nobody wants to run an unprofitable business and it seems like some peers from piecing together public disclosures, maybe running sports betting at NEER I would say even close to zero revenue, let alone profit to feed and die gaming are you seeing any of this dynamic playing out and how do you think about your strategy in that context. Thanks.
I think.
It is still very early in the market and.
I am not so sure that that's going to continue long term as far as how it interplay between products.
We're always looking at total value so.
Right now that doesn't seem like an approach that we think based on what we see makes sense, but could it ever be something that us or others think makes sense perhaps.
But I don't see that as a likely outcome I think sports betting on its own is going to be a very profitable business for us we're already seeing that in new Jersey. As an example, so I expect that to be the case across states also most states don't have I gaming at this point there is about 39% of the population with legalized sports betting and only I think 11%.
When I say with I gaming so.
We really have to feel like we can run the sports betting vertical at a profit even just to make it work from that perspective.
Great. Thanks, so much.
Thank you.
Our next question comes from Joe Stauff with Susquehanna.
Good morning.
Just.
A question on user growth 2.1 million mumps in September.
The MBA launching in October I would imagine that number.
Directionally is going to go up whats the right way to think about.
How that.
Is going to say evolve both going into November as well as December and then New Jersey <unk> growth of 23% in the third quarter, which you said Jason.
<unk> is interesting I'm curious to see is it fair to assume most of that growth is really sourcing from the sports side of the product offering. Thank you.
Sorry can you say the second question, one more time I'm sorry.
Sure and New Jersey, Youre much growth up 23% in third quarter.
Most of those new users really coming from the sports side of your product offering.
So on your first question overall.
I think Q4 will be in a similar range to what September was yes, you are right NBA, starting but also at the NFL season continues there is less activity.
Right now I think that we're still seeing really strong month over month going into both October and early November but historically, we've seen that turn down a bit and then it tends to pick back up again, once the playoffs and going into the Super Bowl.
Sure.
In terms of New Jersey.
It's really a combination of customer acquisition and also really strong retention that's driving that.
And our sports offering is certainly a big driver of what gets people. There once we have them on the platform. They are playing across products. So it's really hard to say.
Sports driving more active or is it I gaming, but.
Our goal of course is to get as much crossover as possible and we've been able to cross sell over 50% of our online sports book customers into gaming.
So I think typically sports is where we acquire the players but in a state that's a few years and like New Jersey, where theres, so much being driven off of existing cohorts, it's really hard to say.
Thank you.
Our next question comes from Karl centrally with Deutsche Bank.
Hey, guys. Thanks.
Jason If you could when you guys think about how it kind of the hold percentage of Directionally. When you think about the whole percentage. We all look at obviously state data and Theres a lot thats in there that we don't necessarily have four.
Transparency, but when you look at like kind of average blended holds that get reported 8%. How would you say that that number compares to what the reality is when you kind of take out the.
Promo aspect of what drags those holds lower.
Hey, Carlo this is Jay as the park I'll try to tackle that one I totally agree with you.
The state tax report so I think it's really important to remind everyone. Those are regular regulatory and tax reports and trying to bridge those to GAAP can be difficult not to mention that every state has a slightly different definition of hold and <unk>.
Handle so I think that's the most important thing it is difficult.
Having said that we do see though.
And we noticed I think what you are noticing which is.
Draft Kings is sort of at parity with the broad swath of the industry. There is a couple of outliers I think the right way to think about it is what would drive those state tax report hold numbers hold percentages higher for certain competitors and it really just comes down to a couple of different vectors I think product mix is a big one and certain.
Operators is likely have a higher parlay mix as a percentage of their total handle which would which would drive hold percentage up.
As you know we've launched dream game Parlay, and we're really excited about the traction there. So I think that will change over time, and then and then another potential reason is just promotional mix, which really does get obfuscated in the state tax reports and to the extent that an operator uses more free bets.
That can that can really sort of make the state tax reports look like they have a higher hold percentage of Lewis <unk> come through at a very high hold percentage, yes, just to add to that last point the free bet doesn't pay out the stake so it inflates the hold rate.
Versus todd's booths or other sorts of things that are.
Directly affecting the odds that takes it down the promotional impact from a GAAP perspective might be similar but the state hold rate looks higher than the tax basis looks higher and.
And that's one of the factors, we consider in deciding what types of promotions to run.
Obviously, we want to do what's best for the customer, but we're also looking at how we optimize for taxes.
Great. Thank you guys.
Thank you.
Our next question comes from Daniel Adam with loop capital markets.
Hi, good morning, guys.
Regarding the $25 million hold impact to revenues in the quarter, what was the EBITDA impact from hold in Q3, and then separately yesterday Penn called out the $12 $5 million lobbying expense in California. I was just wondering where you guys are part of that lobbying consortium as well and if so did that.
Flow through the P&L in Q3.
Yes, so the flow through on the Q3 $25 million and this would apply to Q4 as well as very high flow through there are it is not 100% flow through because there are certain elements of Cogs that you still have to pay regardless of what the <unk>.
So on the second question, we are part of the consortium in California. There are seven operators that have contributed to it and we've raised about $100 million so far.
So I think we're really well positioned there as far as how it impacted the P&L I think it does does it included.
It's adjusted out so it is not part of our adjusted EBITDA.
Okay, great. Thanks, guys.
Our next question comes from Robin Farley with UBS.
Great. Thanks, just wanted to understand some of the puts and takes for the change in your full year guidance you mentioned that.
Place to contribute about $100 million for next year. So.
Thank you, Matt maybe 25 million.
221 change in guidance and you highlighted the hold issues.
Thank you. Thank you for how much for new states because your previous guidance Didnt include new states that have since come online too.
How much is that piece.
So.
Place I know you said less than 100, it's in the seventies and we launched it in August of this year. So.
Think that this year, it's going to be closer to 10 15 versus 25, but we don't really know yet its still sort of a very new products. So we've actually been I think quite conservative with how we've looked at that in the guidance as far as the.
New state impact to next year, we have not included any new states. We estimate next year sorry this year.
So the new states this year.
I know thats the net change in your 'twenty, one guidance and just what piece of it was a new states.
Okay.
<unk> New states are pretty modest in terms of their contribution in Q4, and they are actually close to zero in terms of the year. So as we noted in our earnings call.
We had about $14 $15 million investment in Arizona in particular that hit Q3 on a negative revenue side.
We're going to make back less than that in the Q4 timeframe. So really there's really no impact from new states on the guide this year.
In fact, if anything it's slightly negative.
Okay.
And I appreciate that you guys are now breaking out the hold impact is there anything when we think about next year did you talked about the negative holding between Q4 is there anything that was above average hold that benefited in the first half that we should.
Think about it it will be a tougher comp for you or.
Make your guidance next year actually currently better.
Yes, we actually mentioned in our Q2 call that we held above what we were forecasting. So we had a positive variance in Q2 I can we can go back and look and see I think we quantified that are we quantified it but happy to offline.
Our team point you towards the materials and then Q1, Jason do you remember if that was it was also above was also a good guide in Q1, yeah. So we added another positive variance in Q1. So you are right. The first half of the year did benefit it swings both ways of course, but.
We can point you towards some of the specific numbers as you think about next year offline.
Yes, I appreciate that I don't think you had quantified the first half completely so thanks.
Welcome.
Our next question comes from David Katz with Jefferies.
Hi, Good morning, everyone. Thanks for taking my question.
You've started to roll in micro betting in game, wagering, which I've understood historically has higher hold.
Considerably so.
Number one has that performed the way you would expected it to so far and second should that be accretive to hold percentages, you roll more and more of it.
So definitely have seen an increase in parlay mix as we noted we're not already in just a couple of short months from 15% of our hold or excuse me of our revenue our handling of our handle to 2023%.
Interestingly, because so many favorites hit and so many moneyline favorite pit.
It swings both ways overall, it can be a positive but when you have a lot of favorites Winnie and can actually go the other way.
Parlays just tend to have higher variance in general even though the average is higher we do expect over a longer period of time, which hopefully Q4 will be and certainly we expect for 2022 to see those continue to increase both as a percentage of handle and then also have a positive impact on our hold rate in our revenue overall some of that is built into the guide for next.
Year.
Perfect. Thank you.
Our next question comes from Dan <unk> with Wells Fargo.
Hey, Thanks for taking my question I, just wanted to drill a bit more into <unk> can you talk a bit more about your rationale there for approaching them was at global technology or cash flow.
And then just on your rationale for walking away. It was it more of a function of price deal complexity or something else altogether.
So.
As we noted earlier one of our pillars, we think for long term growth will be global expansion.
That could happen soon it could happen years from now we don't have a set timetable we kind of look at different things as they come about as long as they fit our long term strategy.
So this is one that we thought potentially it could have been a good route for global expansion.
As far as why we walked away I think there are a variety of factors and certainly value is one of them but.
There are a variety of factors that lead us to feel like it just wasn't the right thing for us to do at this time.
I think deal complexity was probably a smaller part of it although not entirely on meaningful factor.
It's really more about our confidence in our current trajectory in the U S. Our desire to focus on the U S and ultimately the value that we felt like we would be shedding by pursuing that asset.
Understood. Thanks, so much.
Yeah.
Our next question comes from Chad Beynon with Macquarie.
Hi, good morning, Thanks for taking my question.
With respect to your $25 million stock investment and vivid how should we think about what the intention was for this if you will.
If you have more access to.
The industry and youll be able to learn more and kind of what.