Q4 2021 DraftKings Inc Earnings Call
And welcome to the jazz Skin's fourth quarter 2021 conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session. If anyone should require assistance. During the conference. Please press Star then two months, which not breaker as a reminder, this call is being recorded.
I'd like to turn the call over to Stanton Dodge Chief Legal Officer, you may begin.
Good morning, everyone and thanks for joining us today statements.
Statements, we make during this call that are not statements of historical fact constitute forward looking statements and they're subject to risks uncertainties and other factors that could cause actual results to differ materially from our historic results from our forecast.
No responsibility for updating forward looking statements.
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.
<unk> may be useful in evaluating droppings operating performance.
These measures should not be considered in isolation or as a substitute for GAAP.
<unk> 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 annual report on Form 10-K that was filed.
Filed today with the SEC and our earnings presentation, both of which are available on our website at investors got dropped kings Dot com hosting the call today, Jason Robins co founder Chief Executive Officer, and Chairman <unk>.
Can you share some opening remarks.
Update on our business adjacent Park, Chief Financial Officer Draft Kings will provide a review of our financials. We will then open up the line to questions I will now turn the call over to Jason Robins.
Good morning, everyone. I Hope you are all doing well.
Before I share my thoughts on the fourth quarter I want to thank everyone at tracking for their tremendous effort and contributions to our success.
<unk> had an incredible 2021, and our dedicated employees continue to deliver during an ongoing and challenging pandemic.
First I want to thank our loyal customers for their continued support.
And tracking we are always striving to put our customers at the center of everything we do.
On today's call I will cover the following topics.
First I'll discuss our financial achievements.
We outperformed our expectations for both revenue and adjusted EBITDA in the fourth quarter capping off a year in which five of our states where contribution profit positive.
Off to a tremendous start in 2022 as well.
Our acquisition of new States, it's been accelerating while continuing to payback on a gross profit basis in the two to three year timeframe.
As of today 10 states are either already contribution profit positive or on track to achieve that milestone in 2020.
Overall, we expect <unk> to be contribution profit positive for FY 'twenty two.
And if we were to have frozen new state launches at the end of 2021, we expect attractive would've been able to achieve EBIT profitability as an enterprise in Q4 this year.
Second we continue to see rapid expansion of the OSB Eni gaming Tam in the U S.
This is being driven by both new jurisdictions legalizing OSB ni gaming as well as continued healthy growth in existing states.
Overall in 2021.
Kevin States enacted legislation for mobile sports betting and we've launched in five states last year with the other two state subsequently launching in 2022.
And I gaming one state enacted legislation in which we subsequently launched we also saw two new states open up for daily Fantasy sports.
Third additional product features and functionality for our mobile sports betting and gaming apps are driving increased customer retention and monetization as well as improved margin.
Many of these benefits are now possible as a result of the migration to our in house sports betting platform, which gives us the ability to diversify our debt type optimize our in game betting features and expand the breadth and depth of our content offering.
We also introduced our new <unk> rewards loyalty program continued to expand our social functionality.
And finally adjacent verticals further increase our Tam with the added benefit of more efficient customer acquisition higher customer LTV.
Our new growth initiatives, such as vaccines marketplace and media are seeing promising early results and we're optimistic about the potential for future growth.
Tracking 47% year over year revenue growth to $473 million in Q4 exceeded our guidance by 8%.
The strong fourth quarter brought our full year revenue to nearly $1 3 billion.
Representing 101% year over year growth.
The EBITDA in the fourth quarter also outperformed our expectations at minus $128 million.
Fourth quarter monthly unique payers increased to about $2 million up 32% versus Q4 of 2020.
Average revenue per monthly unique player increased 19% year over year to $77.
I am very pleased that the market share we achieved in Q4, which reflects the success of our technology migration and the strength of our overall business and brand.
Our handle share for mobile sports betting across all active states with 32% in Q4.
For I gaming gross revenue share was 20% in Q4, including Connecticut, and our market share in New Jersey set a record in each of October November and December .
We look forward to providing more color on a number of topics at our upcoming Investor day, including our Tam market share product innovation unit economics at both the player and state level enterprise, EBITDA and new organic growth factors.
Our key performance metrics, including user acquisition retention and engagement continued to trend well in the fourth quarter and led to strong results across products.
Fourth quarter was a record quarter for mobile sports betting handle on an absolute basis as we are alive and more states compared to the fourth quarter of 2020 as well as kind of a same state basis.
<unk>, where we rely for the entirety of Q4 2021, and Q4 2020, we saw a significant increase in engagement with handle up 65% due to paid assets growing by 37% and handle prepaid active growing by 20%.
Compared to the fourth quarter of 2020, I gaming gross revenue grew 153% year over year, including Allstate and 61% year over year on a same state basis.
Looking at New Jersey, our most mature state, where we launched mobile sports betting and gaming in 2018.
<unk> continued to grow at a healthy rate.
In the fourth quarter of 2021, combined OSB Ni gaming ops grew 18% year over year.
Absent, New Jersey was 78% higher relative to the fourth quarter of 2019.
We had a very strong launch for mobile sports betting and gaming, Connecticut state with only three mobile sports betting operators not only to I gaming operators.
For mobile sports betting in Connecticut, or handle market share was 47% our gross gaming revenue share with 51% and our net gaming revenue share with 57% in the fourth quarter.
<unk> gaming in Connecticut, our gross revenue share was 58%.
Our business momentum has continued into Q1.
On January eight we launched mobile sports betting in New York. It took tracking is less than 24 hours to acquire 100001st time paid betters in New York compared to 17 days for Arizona 170 days for New Jersey, 312 days for Pennsylvania, and 344 days for Indiana.
And our first 30 days, we acquired over 300000 users in New York, which was two three times the average of our other states in their first 30 days on our population adjusted basis.
There is no question that customers are joining our platform faster than they did in the states that we launched in previous years as a result, our tax are fantastic, but overall spending for the first few months is higher than it was far more mature states such as New Jersey.
When the New York market launched there was some aggressive promotional behavior by many operators attractions is committed to maintaining a disciplined approach to customer acquisition and is targeting a two to three year path to profitability for the state.
We believe that product will be the key differentiator between operators over time for example, our technology provides a seamless customer experience through a single integrated signing and wallet across product offerings and jurisdictions.
We are already seeing this play out in the northeast where customers who travel between New York, Connecticut, New Hampshire, and New Jersey, and Pennsylvania are able to play on the draft comes out without having to open a new account.
On January 12, we announced the draft Kings will become the official sports, but provider of the Oregon lottery.
Pursuant to our exclusive agreement with the Oregon Lottery Baskin Sports book replace the scoreboard App on January 18.
The drafting sports book App offers additional bedding market and an overall superior customer experience.
We look forward to serving our sports betters in Oregon.
On January 28, we launched mobile sports betting for eligible customers in Louisiana is permitted parachute.
With several professional franchises in addition to division one collegiate athletic there.
Hometown San basis and opportunities in Louisiana to engage.
And last Sunday and exciting NFL playoff ended with another game that went down to the wire.
It was also a great end to the season for drafting Thats on Super Bowl Sunday are total actives across all products with nearly $1 7 million.
In fact, this year's Super Bowl was our highest everyday for actives and handle both in total and on a same state basis.
Looking ahead, we are raising our revenue guidance to incorporate the impact of New York in Louisiana as well as strong underlying performance in the states. We were already live in last quarter Jason.
Jason Park will provide more detail.
Turning to legalization trend, we've continued to see momentum.
Following our launches in New York in Louisiana in January drafting this live with online sports betting in 17 states collectively represent approximately 36% of the U S population.
Additionally, <unk> is live with I gaming at five states, representing approximately 11% of U S population.
After the governor of Ohio signed into law, a bill authorizing mobile and retail sports wagering.
Now three U S jurisdictions that have legalized, we're preparing to launch on licensure approvals from regulators, Maryland, Puerto Rico and Ohio.
These jurisdictions represent approximately 7% of the U S population or bring the percentage of the population, we're drafting expects to offer legalize mobile sports betting to approximately 43%.
So far in 2022 Penn State legislators have introduced legislation to legalize mobile sports betting and eight state legislators have introduced legislation either to expand their existing sports betting frameworks.
Referendums regarding sports betting legislation or increase in person support spending opportunities. In addition, three states had introduced I gaming legislation in three other states have introduced online poker legislation.
We also made two announcements that position us for mobile and retail sports betting in Kansas and the state of Washington, pending changes in state law licensure and receiving necessary approval from state regulators.
I also want to comment on California, and Florida and.
In California, we continue to work with a number of leading online sports betting operators in support of a campaign to bring regulated safe and responsible online sports betting to the state.
Legal online sports betting is projected to bring hundreds of millions in tax revenue annually to the state to address two of the states most pressing issues homelessness and mental health we.
We are confident that the California solutions to homelessness and mental health support Act will create a competitive market with the best products and experiences for consumers.
In Florida, we were unfortunately, not able to get the required number of signatures and time for inclusion on the ballot. This November .
This is due to a variety of factors, including Covid as well as the compressed timeframe given when signature gathering started.
We are very encouraged however by the over 1 million individuals who signed petitions in less than eight months, which shows the floridian do want the opportunity to vote on a competitive mobile sports betting market in the state.
We are exploring all options to ensure that floridians get that opportunity as soon as possible and if we were to re file we are very confident that given the extended timeframe, we will be able to qualify for the 2024 about.
Ontario has announced that the province will launch the first competitive regulated and licensed online sports betting and gaming market in Canada on April four 2022.
We look forward to launching in Ontario, and competing in that market pending licensure and required approvals for context, Ontario represents about 40% of candidate population and would be the fifth largest USD by population.
Moving on to product and technology, we continue to add breadth and depth to our mobile sports betting and gaming products as we have mentioned in the past we believe that the long term winners in this industry will provide the best product experience to customers.
The completion of the migration to our in house that engine. We are now capturing the acquisition synergies we anticipated in our mobile sports betting cost structure, and I will turn to variable cost into a fixed cost.
For mobile sports betting, we launched parlay in same game parlay insurance promotion capabilities in the fourth quarter for those who are unfamiliar with this feature parlay insurance allows betters to win something even if they lose legs within their parlayed that.
This new capability has had a great response from our users and it is supported growth in our mix of mobile sports betting handle coming from <unk>.
For same game Parlays, we also expanded our sport coverage beyond the NFL College football and the MBA with the launch of college basketball and the NHL in November .
We invested in are in play offering and play experience by introducing a new front end user interface for flash that allows for a more engaging wagering experience.
Flash that it's an immersive live betting experience where users can follow what's going on in the game and get shown our flash markets, which refer to the next occurrence that will happen in the game.
Supported by this functionality include next play a result drive results and drive yardage for the NFL and next team to score and type of score for the MBA.
For I gaming, we continue to benefit from cross selling and the gains we have created in house.
In the fourth quarter, 49% of mobile sports betting users in our I gaming space also engaged with our I gaming products.
When looking at drafting develop games, 56% of I gaming handle in the fourth quarter came from draft peak, developing which is important both for differentiation and from a gross margin rate perspective.
As an example, drafting rocket is now launched in Connecticut and in Michigan. In addition to New Jersey. This game continues to be very popular with our users and the first 14 days following launch 40% of Michigan's die gaming paid active and 41% of Connecticut Die gaming paid active played rocket.
As compared to 33% of New Jersey by game and pay taxes in the first 40 days.
We look forward to updating you on the drafting developed games, we will launch in 2022 on future earnings calls.
Drafting social is an industry first innovation that creates an integrated social community, allowing fans to interact with each other within a peer to peer environment is.
This functionality, which we began rolling out in Q2 of 2021 is now live across our sports betting and daily fantasy sports products and it is driving customer engagement through features such as that share.
The average number of bets for users who have placed at least one bad through our social platform grew 67% from Q3 to Q4, which significantly outpaced quarter over quarter growth for users who have not placed the wage rate through our social platform.
We will continue to add to our social functionality in 2022 for.
For example, we are launching several additional social integration points across our sports book in DFS products in the first part of the year.
We're also building additional features such as betting groups, which allow friends Tibet and private groups. So everyone gets the each other's best in chat as well as chat features for both PFS and our lives okay.
We will also be launching a feature that allows any user to go live with video and audio with broadcast that they make in real time to dealers.
In November we launched dynasty reward our all new cross product loyalty program that rewards players. So they play across all tracking consumer products in all jurisdictions.
Dynasty rewards, it's the most comprehensive drafting royalty program ever featuring a wide spectrum of rewards curated for every kind of customer from free credits to exclusive experiences with.
With the ability to earn on everything drafting and choose how you're rewarded we believe it will take the customers' experience to the next level helped drive retention and cement drafting a top gaming and entertainment brand.
We have tapped into a deep roster lead deals and strategic partnerships to craft. These once in a lifetime exclusive experiences at the launch of dynasty rewards, we partner with the NFL for an exclusive drafting Super Bowl getaway.
For the winter classic with many more experiences to come.
Engagement with the loyalty program, it's been phenomenal approximately 95% of customers in our highest two tiers of actively engaged with the banks the rewards program since launch.
And this is just the beginning over the months ahead, we will continue to enhance dynasty rewards, it's more ways to earn and redeem deeper integrations and utility within our core products new products with partners in retail locations and more.
Vaccines marketplace had another dynamic quarter as interest and demand continues to be strong we sit at the intersection of wet three and sports culture is the only company to offer digital collectibles sports betting daily fantasy and gaming products as.
As the NFC space evolves, the broader drafting ecosystem will create more opportunities for our marketplace around utility gamification and custom offers that only we can provide.
The fourth quarter featured drops from your simple, Rob Gronkowski, Wayne Gretzky, Simone Biles, Tom Brady and Tony Hawk as well as Slam logo passes in the soft film franchise.
We also revealed plans with the NFL players Association and <unk> partners. The group licensing partner of the Nflpa to launch game, if I'd NFC collections that we anticipate day viewing on drafting marketplace. During the 2022 2023 NFL season, yes.
The agreement grants drafting licensing rights for active NFL players, including the authentic use of name image and likeness initial.
Initial anticipated features of tracking Gamify NFL player entities include the ability for customers to use these collectables within games against each other on the platform as well as separate buying and selling functionality.
It is expected that there will be a variety of NFC additions in tears and incorporate different aspects of utility and digital rarity tracking as previously announced the strategic agreement with polygon to provide a scalable eco friendly blockchain solution that enables added throughput lower transaction fees and expanded capabilities.
We continue to add functionality and features to marketplace, we launched options in conjunction with the exclusive drop of Dale Earnhardt Junior NFC and also offer an experiential element with one option featuring NFC, coupled with the chance to do a lap of bail in speedway.
Our media vertical is seeing good momentum with month over month audience growth driven in large part through our Dan Loeb retard and decent assets.
Our goal is to continue to grow our audience and content, which is uniquely positioned across three dynamic industry sports entertainment and technology as.
As part of that we are excited to welcome Mike Bullock senior to our roster of talent and we have also been actively working closely with our partners at Meadowlark to Green light several new shows that we expect will be announced in the coming months.
And finally last month, we announced the addition of two new senior leaders with extensive media experience to bolster our team and add velocity to our efforts.
We continue to invest in adjacent growth vectors like drafting marketplace and media in 2022 with the approach that each of them will continue to drive the LTV to CAC flywheel that we're creating along with our existing core DFS OSB in our gaming offerings.
I'd also like to provide an update on our acquisition of Golden Nugget online gaming.
In Q4, we made significant progress towards closing the acquisition and upon closing we are prepared to integrate the business and capture the synergies we outlined when we announced the transaction in August we're excited to deploy a multi brand strategy, while accessing the millions of loyal Golden Nugget online gaming and for key to entertainment customers, we anticipate multiple channels for cost saves.
Things by among other things recognizing enhanced returns on advertising spend through marketing efficiencies and eliminating platform costs by migrating to track things in house technology.
I also want to provide some recent updates on responsible gaming.
Proud to trafficking is playing the long game and refining the customer experience through a relentless focus on responsible gaming education and by supporting research in this area in December Draft Kings announced the multiyear financial commitment to the Cambridge Institute for New Research program to study the Nexus of veterans and responsible gaming with the ultimate goal of advancing evidenced based research.
In this area and improving the lives of the past effects.
And in January we announced a multiyear financial commitment to assist the 35 state problem gaming councils across the country by providing critical funding, which will support the work of local nonprofit organizations as part of the New initiative entitled The State Council funding program drafting Thats offered each state council of 15000 per year for three years.
Total commitment of $1 $575 million of expanded three year program.
I will now turn the call over to drafting CFO , Jason Park, who will discuss our fourth quarter results and 2022 guidance.
Thank you Jason and good morning, everyone. We are pleased to announce that we generated $473 million in revenue for the quarter, an increase of 47% versus Q4 2020, our revenue performance was significantly better than the midpoint of our guidance for the quarter, which was $437 million.
<unk> business generated $458 million for the quarter, an increase of 58% versus Q4 2020.
OSB hold was not a driver of over performance versus our guidance our guidance on November 4th had included $25 million of poor hold in October and November and December combined were fairly typical.
Given that hold with neutral relative to the guidance, we shared in November $36 million organic outperformance versus our guidance was due to strength across customer acquisition retention and monetization.
In our <unk> business, we continued to drive strong growth through player acquisition and retention as measured through months as well as player engagement and monetization as measured through our model.
But youll see monthly unique payers in the quarter increased 32% year over year to approximately $2 one.
Which brings our full year months to $1 $49 million, which is up 69% versus the prior year. The increase reflects excellent player retention in states, where we were live with our OSB and <unk> product offerings in Q4, 2020, as well as the expansion of our OSB and I gave you a protocol turns into new states.
Results reflected typical intra quarter seasonality with October and November higher from a month's Respecter perspective, followed by a modest decline in December .
As a reminder.
Monthly unique player and therefore, our number of annual active players is higher based on how many months per year a marketplace.
Average revenue per monthly unique payer or RPM up was $77 in Q4, representing a 19% increase versus $65 for the same period in 2020, which brings our full year arm up to $67 up 31% versus prior year.
Our arm up was positively impacted by a continued mix shift into our sports book, an argument product offerings and cross selling our customers into more products.
<unk> generated $15 million a decrease versus prior year due primarily to the termination of our <unk> reseller agreement.
We generated $251 million of gross profit dollars on an adjusted EBITDA basis for the entire business in the quarter, representing a 33% increase versus last year.
Gross margin rate in the quarter on an adjusted EBITDA basis for the business was 53% versus 33% in Q3 and versus 59% last year on a quarter over quarter basis, you can see how the promotional intensity for new customer acquisition impacted our gross margin rate in Q3 versus Q4, where we focus more on monetization.
On a year over year basis more than half of the change in our gross margin rate was due to the reduction in <unk> revenues, resulting from the termination of our Asia reseller agreement. The remaining portion of the change was primarily due to investment in new things and New States launched off for Q4, 2020, including Michigan, Virginia, Wyoming, Arizona in Connecticut.
As Jason mentioned, the migration to our in house that engine has positively impacted our cogs as a percentage of revenue for OSB.
Adjusted EBITDA for the quarter was negative $128 million, which also exceeded our expectations due to the strong underlying performance of our business.
Our sales and marketing expenses were $263 million, which include our external market external marketing was higher in Q4 2021 versus the fourth quarter of 2020 due to the five additional states that went live in 2021 offset by declines in more mature states. The five new states represent 9% of the U S population and we're in there.
First NFL season, we are seeing more customers engaged faster in new states versus states that launched in 2018 through 2020, which which improves our per player acquisition costs.
Celebrating our total marketing investment in our new C. As a reminder, we invest to acquire a player base from two to three year gross profit payback, which we will discuss more at our upcoming Investor day.
Our general and administrative and product and technology costs on an adjusted EBITDA basis were $74 million and $42 million, respectively. As we continue to invest to achieve scale in our back office functions, such as human resources, legal finance and accounting and customer service as well as adding to our technology team principally for new.
Development on the.
Georgia, the combined $23 million a year over year growth needs two expense lines was due to the compensation of new employees.
Our strong Q4 revenue brought our full year to $1 $2 96 billion of revenue $616 million of gross profit at a 48% gross margin rate and negative $676 million of EBITDA taking.
Taking a step back 2021 was a fantastic year of execution and continued learning we will discuss more in our upcoming Investor day, but it is clear that the business model is working we are acquiring customers efficiently with clear two to three year gross profit payback periods and states are turning positive two to three years after launching there.
We have an increasingly clearer line of sight into turning EBITDA positive.
Moving onto our balance sheet and liquidity, we ended the quarter with $2 2 billion of cash on our balance sheet as we look forward through our scenario driven multiyear plan. We continue to feel that we are well capitalized for the legalization path and growth ahead of US as a reminder, our primary use of capital is to fund state launches and under almost all scenarios.
State launch timing, we have sufficient capital to achieve positive free cash flow.
Looking at 2022 on our November earnings call, we introduced annual revenue guidance of $1 7 million to $1 9 billion.
Given new state launches in underlying customer acquisition retention and monetization trends today, we are increasing our 2022 revenue guidance to a range of $1 85 to $2 <unk> billion, representing a 7% increase of the midpoint to 195 billion.
Our revised guidance equates to year over year revenue growth of 43% to 54% and <unk> growth of 57%, we expect both months and <unk> to grow in 2022 with MX, increasing at a rate about 50% higher than the expected rate of increase in ARPA.
This guidance includes New York, Oregon, and Louisiana, as well as the resumption of mobile registration and Illinois. No later than March 5th. It also includes approximately $70 million in draft Kings marketplace revenue in 2022. It does not include additional state launches nor the impact of the Golden Nugget acquisition, which we anticipate.
We'll close this quarter, we will update our guidance following the closing of the transaction.
For <unk>, we expect revenues to be about $40 million with minimal growth going forward.
Regarding our 2022 quarterly revenue cadence.
We expect Q1 to be between 400 $420 million. Please remember that although New York in Louisiana launched in Q1, New States typically start generating positive GAAP revenue after one to two months looking.
Looking at the rest of the year, we expect Q2 to be similar to Q1 Q3 to be modestly lower than Q1, and Q4 to represent the seasonally highest quarter for revenue.
Youll notice as cadence implies a higher percentage of revenue in the second half of this year compared to 2021. This is partly due to new York in Louisiana as well as drought teams marketplace ramping throughout the year. Additionally, revenue distribution is affected by variations in hold.
For example, in 2021, Q1, and Q2 had positive variances, whereas Q3, and Q4 had negative variance for the purposes of our guidance, we're not assuming variances in hole will reflect last year's patterns. As these are primarily driven by support outcomes.
Prior to today, we have not provided guidance for adjusted EBITDA. However over the past few years, we have gained experience in multiple states ran many tests to understand how to optimize our business increase our clarity on organizational requirements and gain scale in marketing, which supports providing EBITDA guidance at this time.
We are focused on growth and on efficiency.
We feel terrific about our customer cohort gross profit payback as well as state profitability and thus our trajectory for revenue and EBITDA.
Three important points on profitability first we expect to be contribution profit positive. This year with contribution profit defined as gross profit minus external marketing.
Number two if we have not launched any additional states. After December 31, 2021, we expect the drag queens would've been able to achieve EBITDA profitability in Q4 of 2022.
And most importantly number three based on all the states. We are currently in and if legalization trends remain consistent with prior years, which has been around 7% to 9% OSB legalization per year, and 3% to 4% I gaming legalization per year, we would expect to be EBITDA positive in Q4 of 2023.
For this year, including the five states representing approximately 11% of the population that we have launched since September and a return to mobile registration in Illinois, We expect our adjusted EBITDA to be between negative $825 million to $925 million. Our business model is based on acquiring customers with 2%.
A three year gross profit payback states turning positive contribution profit after two years to three years, and then positive contribution profit states offsetting negative contribution profit states.
In 2022 the seats, we launched in 2018, 2019, and 2020 will generate significant positive contribution profit. This includes new Jersey, which exceeded the expectations. We laid out at our last Investor day on both the top and bottom line. The positive contribution of profit from these more mature states is partially offset by the <unk>.
Negative contribution profit from newer 2021 states as well as large negative contribution profit from New York.
Our guidance for adjusted EBITDA. Also includes continued continued near term investments in non external marketing expenses, given the high growth stage of our industry. We will see the benefits of the investments, we're making in 2023 as our PMT G&A and fixed marketing expenses will grow at a meaningfully lower annual rate.
Compared to prior years.
From a quarterly perspective for 2022, given our launched in New York on January eight and in Louisiana on January 28, we expect our adjusted EBITDA loss in Q1 to be between 320 and $340 million. We expect Q3, which was impacted by the start of the NFL season to be slightly worse than Q.
One with the second quarter, representing a little less than half of our expected Q1 loss, we expect our fourth quarter loss to be smallest as we benefit from higher seasonal revenue.
As a reminder, as you think about the rest of 2022. Please keep in mind that any decent launch have minimal to negative impact initially on the topline as we promote in a negative impact on adjusted EBITDA as we spend on external marketing to drive early customer engagement at caps that are consistent with our two to three year gross profit payback period.
Our marketing spend is also highly flexible and can be reduced or pauls altogether, if attractive customer acquisition opportunities are not available or the sports calendar shifts.
That concludes our remarks, and we will now open the line for questions.
If you'd like to ask a question. Please press Star then one if your question has been answered.
Yourself from the queue press the pound key.
Our first question comes from Michael Graham with Canaccord. Your line is open.
Hey, thanks, very much and thanks for all the detail.
I just wanted to ask two the first one is just any quick update on in New York, how you're sort of dealing with the high tax rate there.
Passing that along too.
Players and then.
For a more involved question just on the arm up the performance there with some strong maybe just a little more color on that.
The mix of factors from engagement or product or cross selling just little bit more color on sort of what you're seeing under the hood, what's driving such good performance there.
Thanks, Michael two questions. So the first one on New York.
There's been some chatter of AR.
New York considering in this upcoming legislative session adjusting the tax rate down.
I think the approach we're taking is a wait and see on that and I think if that happens depending on where it lands then we'll adjust accordingly, and if it doesn't happen then we'll adjust accordingly, so I think were kind of taken a wait and see approach. This legislative session in New York customer acquisition has been so efficient and the.
Early player cohort results have been so strong.
We're hopeful that with.
An appropriate tax rate it can be a very profitable market for us, but if not we'll make the necessary adjustments to ensure that it meets the two to three year payback and that it is a very profitable market for us in the long run.
<unk> a few things that play there one we continue to see mix shift into OSB ni gaming from legacy DFS Thats been helpful. Second we've improved our product dramatically over the last six months or so after migrating onto our own proprietary tech platform, we've seen an uptick in parlay mix, we've seen an uptick in.
Live betting so lots of good things there.
And then lastly, I think the.
Really the ability for us to cross sell into.
And to engage and activate customers continues to get better as our CRM programs.
More and more test data and we optimize those.
Alright, thanks, so much Jason.
Thank you.
Our next question comes from Joe Stauff with Susquehanna. Your line is open.
Thank you good morning, Jason Good morning, Jason Good morning.
I wanted to ask.
Relative to your EBITDA guidance EBITDA loss guidance in 2022.
What sort of say promotional and advertising.
The underlying environment are you assuming with respect to that guidance and then the.
The second piece of that is.
I guess, it's fair to assume that.
And the handful of states.
Plush province that Youll launch.
Maybe later this year I know you don't like to guide.
Until you are actually in there.
But one would think say the midpoint of that EBITDA loss guidance 875.
Is it likely to be wider.
Is that fair and is there any magnitude you can give us.
So on the first question.
The new states that we've launched.
Recently, including of course in New York in Louisiana. This year, and then a few last year.
We will continue to invest in those and customer acquisition typically the first year, sometimes two years of customer acquisition.
Are the strongest cohorts that you acquire and I think it's really important that we continue to invest there as noted earlier, we're keeping an eye on the New York Legislative session and I think depending on what happens there with the tax rate, we may make some adjustments, but as of now we are basing it on what we know.
And then as far as new States. As you noted, we don't really get into the habit of saying, here's what where you expect to happen because we don't know when new states are going to launch, obviously, Ontario had some clarity around it but.
Most other states that have legalized, namely, Ohio, Puerto Rico and.
Maryland have not yet set dates so I think for now we're going to wait.
Wait and see on that.
And I think Theres, a number of factors that could drive EBITDA better or worse than what we're guiding to right. Now I think there is some upside and there is of course, the possibility of new states, where we'd invest so hard to say with the net impact will be given all the moving parts.
Thank you.
Our next question comes from Shaun Kelly with Bank of America. Your line is open.
Hi, guys good morning.
Jason I, just wanted to dig into some of the.
Some of the comments on the reaching breakeven or profitability in <unk> 'twenty three I guess my key question is.
We already use the same assumptions and youre incorporating some growth.
In these numbers, which we appreciate.
Under the same assumptions would you be full year profitable in 2024 and is that or is that too ambitious and sort of the follow up to that would external marketing expense dollars actually start to decline as we get out into that period, let's call. It <unk> 23, or 2024 or are we just seeing leverage meeting declining.
As a percentage of sales, but not necessarily declining in absolute dollars to get to some of those assumptions. Thanks.
Yeah. Good question so yes.
As we noted we would expect if we had frozen state launches at the end of last year, we'd be profitable by this the tier fourth quarter and.
Given a as you mentioned normal 7% and 9% legalization of the population I know it would be 3% to 4% on gaming, we expect to be profitable by the fourth quarter of 'twenty three as far as the entire year for 'twenty four.
The expectation is we would either be profitable or close to it obviously the further out we go the more moving parts, but based on the assumptions, we're making it would be pretty much in that zone of either profitable or very close to profitable.
And then as far as the question around marketing, we're not providing specific guidance around what marketing will be but certainly there'll be a very strong impact from leverage I think you can expect some slowdown in fixed cost as well.
Obviously, the revenue growth, we expect to continue to be strong. So I think thats really the primary driver, there, but whether or not we make some optimizations to marketing all depend on how our testing goes.
Thank you very much.
Our next question comes from Thomas Allen with Morgan Stanley . Your line is open.
Thanks.
So two questions for me first question fourth quarter revenues were well ahead in EBITDA.
One pushback. We've heard is we're months were a little bit lower at around $2 million versus you guys had talked to on the third quarter call around $2 1 million indicated discuss that a little bit second question, Jason I think I heard you say that you have sufficient capital until you have positive free cash flow.
My concern in the market that you may need to raise capital, but can you just address that thank you.
I'll comment first of all very prescient report by you almost nailing our EBITDA guidance, so that was good but.
As far as the months go.
We had said we had $2 1 million in September last quarters average is actually lower we haven't guided to him up typically so we didn't provide a guide.
But I mean, it was pretty much on target with consensus is only like three or four analysts they think even predicting mops and.
I think we were a couple of points short, but we were right, where we want it to be but we haven't provided guidance there and of course, it's an average of all three months so.
As you get into certain months with different sport mixes and farther into the NFL season. It can vary but if you look at the quarter last quarter, we actually went up and modest quarter over quarter, and we certainly went up year over year.
And then I apologize what was the other question.
Oh on capital and free cash flow. So we have said all along and continue to say that we expect that we have enough capital on the balance sheet to get to free cash flow positive nothing's changed there obviously you know.
We would have to have a meaningful improvement in year over year losses, starting in 'twenty, three which is what we expect very similar type thing what you wrote in your report.
But our plan our multi year plan that we have does not require any additional capital raise.
Alright, thank you.
Welcome.
Due to the main and we ask that you. Please limit yourself to one question. Our next question comes from Stephen gambling with Goldman Sachs. Your line is open.
Grambling, but close.
Follow up on Mumps, I think I heard you reference $1 7 million actives at the Super Bowl. How does this compare to last year is optically. It does look like it's down sequentially from fourth fourth quarter, even if New York opened.
Well it was way up from last year I mean remember that was one day, if you look at the quarterly mobs.
It's going to be higher than any one day would be or at least the monthly would be obviously there is some seasonality in there as football ended in February but that was one data was by far the most we've ever had in one day and it's not even close.
We haven't disclosed specific numbers last year from Super Bowl, but thats something we can consider doing at our upcoming Investor day, but I can tell you is it up extraordinarily extraordinarily higher year over year versus last Super Bowl.
And if I can sneak one other very quick one and I guess on the guidance EBITDA loss guidance I guess, what is the underlying assumption on the broader promotional intensity.
Our assumption is that we continue to run very similar new customer promos to what we've run in the past and that we earn similar.
Our retention based promotions around key moments like the start of NFL season, So nothing's really changed there and I think as we've noted in the past as states mature.
Just based on the fact that a higher percentage of promotion is spent on new customers and repeat you should expect to see natural decline and then of course, the mix of new versus mature more mature I should say states will affect the overall.
But I think that you can you can kind of assume it looks like it will look like what it has looked like in the past.
Helpful. Thanks, so much.
You got it.
Our next question comes from Jed Kelly with Oppenheimer. Your line is open.
Hey, great. Thanks for taking my question.
Just just what is your guide.
Contribution profit neutral it kind of implies youre spending a lot of money on technology G&A how.
How much of these investments are going to revenue channels.
We would consider outside of gaming or gambling and then is there any way you could give us what your total contribution profit was 21.
So on the first question very little is going outside of our DFS OSB in our gaming products.
Our expectation is that the new verticals are breakeven or better. So I don't think you should expect to see any real negative impact to EBITDA from anything new that we're investing inorganically at the moment.
As far as how why.
I think if you kind of take a step back and look at the competitive picture and we've always said that we believe that product is where you win.
We were in a position.
Where our top two competitors have thousands of engineers have much more mature markets in Europe that they've built up a team around for many many years.
So our strategy was to really pull forward a lot of the product and technology hiring that we needed to do as we go forward I think you should expect to see a meaningful slowdown in fixed costs over the next several years because really for us. It was about trying to pull forward and achieve a higher level of scale and maybe a little ahead.
Where the revenue has been knowing we have growth we more than doubled year over year last year, we don't expect it to take more than a year or two to grow into that but it was really a reflection of if we felt like product and technology was going to be the most important thing winning long term.
We had to be on a more level playing field with those we are competing with.
And what was the other question.
Contribution profit for 'twenty one.
We will have more information on that at our upcoming Investor day.
What we said so far that we will be positive contribution profit in 2022, but we will have more information on what 2021 look like in our upcoming Investor day on March 3rd.
Thank you.
Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.
Hey, guys. Thanks.
So guys you provided a lot of color I was just I was just hoping to kind of do two more or less understand the definition and see where.
Kind of the contribution profit if you could bridge.
The commentary around contribution profit for 2022 relative to the EBITDA guidance and just kind of address some of the major buckets. There that maybe we're not appreciating entirely and that kind of a definitional nomenclature that you guys use.
Sure. So contribution profit is gross profit minus the external marketing so the advertising thats oriented towards customer acquisition.
And we include all of it so it's not just the local advertising and the national advertising DFS advertising. We're doing is all included in that number.
And as we've said we expect to be contribution profit positive in 2021 based on the states that we're in today.
2022 excuse me based on the states that we're in today.
I think that the logical assumption is that the remaining costs are fixed costs and.
As I noted in the last question, we felt like in order to be competitive and we feel like we're actually out competing our top rivals right now, but in order to get there.
We added the staff up on the product and technology side, we still have less engineers and some of our top competitors, but I think we've been able to ship product and rapidly evolve our product faster than anyone else in the market and that's partly due to our focus on the U S. We don't have to use some of those engineering some of those engineers to focus on products overseas.
Yes, I think thats been very helpful and I think we feel like now we're in a position where we can moderate fixed cost growth and really allow the revenue scale and the contribution profit from state to kick in and drive.
Improvements to the bottom line, probably starting later this year and certainly into 2023.
Great that's helpful and just longer term the external marketing as a percentage of net revenue you guys still targeting like around 10%.
Yes, that's about right, we will have more information on that in our upcoming Investor day.
That's about right.
Great. Thank you.
Our next question comes from David Katz with Jefferies. Your line is open.
Good morning, everyone. Thanks for taking my question.
If you could just spend a minute on Canada, specifically, because if im correct.
Incremental to the numbers that you've laid out today.
Just wondering if the calculus there in terms of that market entry.
It's not a regular state if the calculus changes there in any way.
Way or the other and how we might work.
Got into our models here.
Definitely it's different there has been a great market there for many years, which a lot of the operators will be competing with have already been operating in and have already had time to build customer basis. So.
Noted in last year's Investor Day, we are not projecting the same level of market share in Ontario in Canada in general that we're projecting in the U S. Just because we don't have that early mover advantage that we have in the U S.
I think the way we'll approach it the same way we approach everything else that we do it's going to be analytically based we're going to target two to three year paybacks and I think depending on what we see in the data we will adjust accordingly, but it should be a good market it as I gaming and sports betting and we already have a decently sized.
Is your base of DFS customers there so.
Pretty excited about Ontario.
Understood. Thank you very much.
Welcome.
Our next question comes from Dan <unk> with Wells Fargo. Your line is open.
Hey, good afternoon, and thanks for taking my questions I just wanted to follow up on Ontario, How do you think about the promotional environment there versus.
Market everything launched such as New York.
What are are there any differences in terms of what you would spend maybe there just given the population and maybe differences in regulatory regulations.
Yes, that's something I think are still evaluating obviously, Ontario is a very large population.
I think it would be the fifth largest state by population if it were in the U S thats pretty meaningful population and.
And of course, it is I gaming, so I think that improves the overall tam available to us so.
Just like we will with external marketing and we're going to do a lot of testing and we're going to base whatever decisions, we make on what the data tells us.
Yes.
And then just a quick clarification on the fourth quarter EBITDA.
Coming positive does that include does that assume a launch in Ontario and Maryland.
Some of the other jurisdictions you having launched in no.
So to be clear, we've said that if we did not launch any states. After the end of 2021, we would have been EBITDA positive in the end of Q4 of 2022 so.
The intent is not to be based on we've launched now in New York in Louisiana, but what we've also said that if you assume a normal legalization.
Trend of 7% and 9% in OSB, and 3% to 4% and non gaming that we would expect to be EBITDA positive by Q4 of 'twenty three.
So I think you can assume that Ontario is included in that and it will obviously depend on any other states or jurisdictions that open up and if that ends up being higher that's a good thing because it means that the Tam is larger, but we probably wouldn't get there on the EBIT positive side, because there'll be more investment if it ends up being a slower pace of legalization, which IRA.
Honestly, it's probably not great because it means that the Tam is not growing as quickly.
Would actually expect to achieve EBITDA profitability.
Faster basis.
Got it thanks, so much.
Our next question comes from Joe Greff with Jpmorgan. Your line is open.
Good morning, everybody.
Sure.
Question is this most of my questions on the business have been asked and answered, but why arent insiders buying the stock will insiders buy the stock.
Well of course, we can talk about what will happen, but we have had several insiders buy the stock many members of our board outside of <unk>.
Directors I'm talking about inside executives.
Well.
I have been exercising options.
Several other members of our executive team, which is in effect buying stock so.
I think as long as there is options to be exercised that would probably be the first stop for most executives, but I can't speak for everyone else.
Also as you know Theres wash rules. So based on can be five programs that have not been active the last few months, but we're active.
Within a six month timeframe, it's not possible for executives to buy shares right now, but we can certainly exercise options and we happen.
Our next question comes from Robert Fishman with Moffett Nathanson Your line is open.
Hi, Good morning, I have a follow up on advertising.
Sports betting advertising is already one of the top local TV categories in the legalized markets and now that New York is live and you continue to scale across the US can you discuss your plans to ramp up on the national advertising piece and how do you think about the balance of local versus national AD spend this year.
It's a great question, we said in the past that we expect to achieve optimal excuse me more.
<unk> on the advertising side because of course advertising at the national level is much less expensive and many channels like TV on a cost per impression basis in local we have already started starting last NFL season shifting some of our spend in the national.
We've crossed that threshold with the launch of New York are about one third so I think youll continue to see more and what's nice is that those national ads that we run with each new state that legalized is it's not like we have to put more national advertising out there. It actually reaches that population and it was always reaching a population the differences now they can sign up for the App.
So I think youll continue to see some tailwind coming from just more state legalization and continued shift international of course was state launches will always have some heavy up on the local side and there are certain channels that will always be local like outdoor and digital but I think the national advertising will continue to grow as a percentage of the portfolio and that should <unk>.
Have a tailwind effect on the overall efficiency.
Got it thank you.
Youre welcome.
Our next question comes from Ben Chaiken with Credit Suisse. Your line is open.
Hey, How's it going.
Kind of along the lines of Carlos question, the implied SG&A bucket as you're bridging from contribution profit to EBITDA, which you can infer from the 22 guide our ballpark is that fixed or does that growth inflation, how should we think about that.
We've already made a number of market adjustments, obviously, it's a tough labor market.
To deal with that I don't expect that we'll have obviously who knows.
I don't have a crystal ball, but I don't expect based on what we know today that will have any more impact.
Labor costs due to inflation.
As I noted earlier, we had to really hire up quickly in order to be competitive with some of the more at scale European competitors that had much larger than we did two years ago product and engineering teams. We feel like now we're in a position where we can be very competitive actually out compete on product and technology.
And we feel like outside of some things like customer service, obviously grows as new states open outside at some of the smaller categories like that we expect much more moderate fixed cross cost growth.
In 2023 forward.
Got you. Okay. That's helpful. And then one more you may have kind of implicitly answered it but you guided overall <unk> 'twenty three EBITDA to be positive, but that included some incremental states. Even after New York I guess, just for illustrative purposes, or how should we think about that timeline if things remain static.
Well, you mean, no more states legalize.
Yes.
Yes, I think it would be faster so really.
As we've talked about in the past with a two to three year path to profitability in states that first year.
And sometimes part at least in the <unk>.
Second year are meaningful investment for us as we ramp up our customer bases in those states. So.
We're there to be more states in rapid succession, I think it would push our profitability a little bit and.
We're there to be less in the example, you gave I think it would accelerate profitability.
Okay. Thanks.
And our last question from Bernie Mcternan with Needham <unk> Company. Your line is open.
Great. Thanks for taking the question it seems like as markets keep launching they're further along the Tam curve, which New York is the latest example of.
With Ontario, and the already very much established gray market.
How far along this curve do you think it could launch relative to the $5 billion market opportunity that you guys called out before to 100% assuming 100% regulation.
Very hard to say, we don't have any experience yet in Canada, so, but I think the.
Terms of quantifying, but I think the effect that you talked about absolutely. We believe to be the case theres already a large built up market to some extent that's true in the U S to weather been illegal operators and bookmakers that are local for many many years.
I think what Youre seeing is that with overall increased awareness and really we think the overall sort of weight of advertising, even though it seems more competitive I actually think it's helped us I.
I think draft Kings.
A differentially better job converting new users and I think one of the reasons you see such a faster pace to a 100000 users in recent states like Arizona, and New York, It's because of the competitive advertising Ironically, So I think a lot of that is actually accelerating our ability to launch faster and to grow faster.
And it might even lead to a faster path to profitability and states will have to see.
Thanks, Jason.
That's all the time, we have for questions I'd like to turn the call back over to Jason Robins for closing remarks.
Thank you all for joining us on today's call. We're very excited about 2022, and we look forward to speaking with you at our virtual Investor Day on March 3rd I Hope all of you stay safe and well. Thank you.
This concludes the program and you may now disconnect everyone have a great day.
Okay.
Okay.
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