Q2 2022 DraftKings Inc Earnings Call
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Thank you for standing by all of them see the draft Kings Q2 earnings Conference call. At this time, all participants are in a listen only mode.
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As a reminder, today's conference call is being recorded.
And I like to hand, the conference over to your host Mr. Stanton Dodge Chief Legal officer, Sir you may begin.
Good morning, everyone and thanks for joining us today certain statements we make during this call may constitute forward looking statements.
Subject to risks uncertainties and other factors as discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecast.
No responsibility to update forward looking statements other than as required by law.
During this call management will also discuss certain non-GAAP financial measures that we believe may be useful in evaluating draft Kings operating performance. These.
These measures should not be considered in isolation or as a substitute for <unk> financial results prepared in accordance with GAAP reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings presentation, which can be found on our website and our quarterly report on Form 10-Q filed with the SEC hosting the call.
Today, we have Jason Robins co founder Chief Executive Officer, and Chairman of Draft Kings, who shared some opening remarks and update on our business and Jason Park, Chief Financial Officer graph Kings Who'll provide a review of our financials.
We will then open the lines of questions I will now turn the call over to Jason Roberts.
Good morning, everyone and welcome to drafting Q2 earnings call.
I want to touch on a few topics today.
Let me start off with my thoughts on Q2.
I'm really pleased with how we performed in the quarter, we generated $466 million in revenue, which exceeded the midpoint of the guidance. We provided on our Q1 earnings call by 33 months and.
And we outperformed the midpoint of our adjusted EBITDA guidance by almost 40%.
Our core BDC revenue grew 68% versus Q2 of last year.
Our organization is executing very well, we have struck a great balance of continuing to drive topline growth. While also capturing meaningful efficiencies that are helping our bottom line from a top line perspective, our customers have claimed more frequently than we expected and we're seeing great success, driving parlay mix in our sportswear product and.
In fact, our parlayed that mix increased by 1700 basis points in the quarter compared to Q2 of 2021.
I really love, how we are merchandising our team gained parlays, which I think a great personality.
Hopefully you have seen our new parlay merchandising in the App, which gives our customers find ways to engage with these types of wagering.
We're also making great strides on improving the customer experience such as ease of getting money on and off the platform in many other areas related to overall usability of next year.
We expect to continue to make these investments on an ongoing basis.
And on the cost side, we continued to drive efficiencies. During Q2, we captured $40 million at 2022 cost opportunity on top of the $60 million, we captured in Q1.
These efficiencies are in a variety of non compensation areas and are a great demonstration of how our organization rallied around an important initiative to deliver great results.
Looking forward to the back half of the year, we are geared up and ready to go.
For online sports betting the NFL season is right around the corner in our sports betting App is in fantastic shape with many new features and market enhanced.
Enhancing our parlay offering has been a top priority, we rolled out parlay insurance, which allows customers to avoid an outright loss. It wanted the right net par level.
We developed the capability for customers to avoid an individual's leg of the same game parlayed that without boiling the entire part of that.
Finally, we will be launching a feature that allows multiple team gained parlays to be combined into one.
Turning to new market.
We're seeing the benefits and the migration to our own bet engine, which gives us the speed and flexibility to offer differentiated north American focused market.
We were the first release look ahead lines for all 272 NFL games.
We also introduced new market for mutually baseball such as wages based on speed and pitch count for quite a period and same game correlate for UFC fights.
We will have more market for the NFL that we plan to rollout when the season starts.
Our social functionality is continuing to develop <unk>.
Engagement with our feature that allows the customer to tailor made their friends that it's been growing rapidly.
We also launched betting grid, which makes it easier for grid friends to engage together on our platform.
While our social features are still very early in their lifecycle engagement has been very encouraging and we are continuing to invest in developing this functionality as a differentiator for drafting.
Turning to our I gaming products performance continues to be very strong.
Gross revenue for the drafting brand on a same day basis grew 35% year over year in the quarter.
We are also focused on capturing the marketing gross margin and G&A synergies from the Golden Nugget online gaming transaction that we outlined in the past.
We understand the genome target customer better than ever and have already started tests around cross marketing, the landry's and Golden Nugget online gaming databases, and optimizing marketing mix marketing messages keyword optimization and other tactics to grow our overall EBIT.
In addition, we began our efforts to migrate the <unk> non-GAAP to the drafting platform, which we estimate will be complete in the back half of 2023.
I am also quite excited about how our recent investments in web free technology, and drafting marketplace, a physician to us over the past year to launch major new and disruptive fantasy sports game Rainmakers football.
Preparation for the NFL season kickoff our customers are currently building up their collection that player card NFC, which are officially licensed digital collectibles.
The multiyear agreement with the NFL yet.
As the season starts rainmakers football customers will be able to use their player cards to build fantasy and compete no fee contest for over $1 million in prizes every week, we will even crown a world champion. This evening at the $1 million Rainmakers football World Championship lives.
Beyond our Nflpa licensing agreement. We have also agreed to terms with the UFC to Bel Ray made great UFC featuring officially licensed NFC cards from their active roster. Our USC relationship in this new Rainmaker game have already been announced including the prelaunch heat wave NFC collection, the full rainmaker UFC gain is it.
It to go live in late Q4, this year and we'll continue the momentum we built around the Canadian franchise.
We believe that nobody else in our industry is driving innovation in this way and we think it's a great example of how drafting forward thinking and sports Entertainment, our web III strategy implement use cases for blockchain and NFC technology Theyre endemic to our core business disrupt the sports fan experience and create differentiation for drafting that helps separate us.
In the past, we look forward to deepening our long term customer relationships.
<unk>.
Moving to our outlook.
Most importantly, our online gaming business is very healthy and we are continuing to execute on operating efficiency. As a result, we are improving the midpoint of our full year 2022 guidance for revenue and adjusted EBITDA.
I now want to spend a few minutes discussing Q3 as many of you know our Q3 revenue and adjusted EBITDA would have the potential for high upside or downside volatility for two primary reasons.
First a significant amount of the quarter as expected revenue comes in the final three weeks of September due to the beginning of the NFL season.
<unk> tend to normalize over the course of a full NFL season, but it can vary significantly over the course of a few weeks.
This can have a pronounced impact on Q3, considering July and August are months amongst the lightest months of the year from the sports calendar perspective.
Second the last few weeks in September heavy in terms of promotional activity, which is driven by customer acquisition and reactivation.
While some of the promotions, we ran a predictable numbers behind them. There are others that depend on game outcomes, which amplifies potential volatility and Keith great.
In a few minutes, Jason Park will provide additional color on our guidance as well as more detail on how to estimate drafting financial performance. After game outcome from the first three weeks of the NFL or not.
Looking ahead to the longer term the outlook for new state launches next year and beyond continues to be excellent. We are preparing for OSB launches in Maryland, Ohio, and second quarter repo, which would make our sports book App available for 44% of the U S population pending licensure and regulatory approval.
In Massachusetts, the legislature passed a bill that is now pending executive action that would legalize retail and online wagering professional and collegiate sports Mac.
Massachusetts represents an additional 2% of the U S population.
And California is a huge opportunity with 12% of the U S population.
Sports betting is officially on the ballot proposition number 27 and <unk>.
November eight californians will vote on whether they want regulated online sports betting while simultaneously, helping solve issues such as homelessness mental health and addiction, while providing funding and economic opportunity for all of the states try.
Even assuming all of these states, including California launch in late 'twenty, two or 2023, we have more conviction than ever in our ability to reach positive free cash flow with our current capital return.
Despite that conviction, we're still making a concerted effort this year to drive efficiency opportunities in early gene on synergies and have already identified approximately $100 million of cost reduction for this year.
As I mentioned earlier I am very proud of the team for striking a great balance through the first half of the year by driving strong revenue growth, while also making improvements to our long term cost structure, we look forward to continuing to balance these two objectives.
In addition, we are finalizing our plans for 2023.
We expect our fixed cost growth next year to be much more moderate than over the past few years as we have reached scale across many of our department.
As it pertains to state level economics, we continue to be on track to have at least 10 states there'll be contribution profit positive. This year as these states mature further in 'twenty, three and beyond we expect them to generate meaningful free cash flow.
Even assuming California launch it next year, we expect the 2022 will be the year of peak adjusted EBITA losses, we.
We will share more specifics on our expectations for 2023 from both the revenue and adjusted EBITDA perspective on our next quarterly earnings call.
I am also focused on several other areas that are worth sharing with you.
First we are doubling down on our strategy and cultural approach to customer Centricity.
Drafting the customers at the center of everything we do.
As we have grown our organization, we are actively putting mechanisms in place to ensure that this continues to be a defining element of our culture and how we make decisions.
Second we're focused on strong talent management with an emphasis on retaining and developing our top performance building out World class management and building, a culture, where we manage underperforming efficiently and effectively.
We have slowed hiring we have also used this as an opportunity to reemphasize how critical it is called comp our high I've been very pleased to see our team has rallied around the importance of these areas as well as for the team has rallied around the other cost initiatives that we previously mentioned.
Third responsible gaming remains a big focal point for us as we continue to grow our footprint.
We're laser focused on creating best in class practices through research training and education.
For example, we became the first U S. Operator to provide customers with access to best software software in July <unk>.
<unk> is a leading responsible gaming and safer play not for profit charity.
As a result of this collaboration when drafting these customers that restrictions on our gaming activities those restrictions will apply across thousands of gaming sites, whether regulated or unregulated globally.
Our responsible gaming team is doing a great job and I am very proud to see their efforts being noticed externally as well our RG team to come three awards at this year's National Council and problem gambling conference.
Words recognize the team's outstanding commitment to social responsibility as it relates to problems.
As well as the effort with two of our team members, specifically, who on individual awards at the conference for the work they do at tracking to promote institute strong responsible gaming practices and culture.
I will now turn the call over drafting CFO , Jason Park, who will discuss our second quarter results and updated 2022 guidance.
Thanks, Jason and good morning, everyone I'll start off by providing color on Q2, and then I'll shift into our outlook for the back half of the year and beyond. Please note that all income statement measures discussed below except for revenue are on a non-GAAP adjusted EBITDA basis.
We executed very well in Q2, and our customer activity continued to be very robust with no indication that the macroeconomic environment is impacting engagement.
In Q2, we generated $466 million of revenue and negative $118 million of adjusted EBITDA, both of which outperformed the guidance we provided on our Q1 earnings call.
<unk> segment grew 68% versus Q2 of 2021 compared to Q1s year over year growth of 44% our customers responded well to our improved merchandising of that type in particular, our prepackage themed game Bartlett.
All percentage was in line with our expectations, which was great to see and customers. We are less relying on promotions as Q2 saw a low overall promo reinvestment rates compared to prior quarters.
We had $1 5 million monthly unique payers, which was 30% higher than the prior year period, and our average revenue per monthly unique payer was a record high $103, which is also 30% higher than the prior year period.
Our adjusted EBITDA of negative $118 million was $72 million better than the midpoint of our guidance due to several factors first we had flow through of our higher than expected revenue.
Some expenses shifted out of Q2 into the back half of the year, notably marketing as we continue to optimize our overall marketing approach.
Note that this category of expenses will not improve our 2022 full year EBITDA since it was simply due to timing.
Finally, we have continued to make great progress on driving cost efficiencies throughout the business, including some early wins on achieving genome synergy.
We expect these cost efficiencies that will drive $40 million of savings in 2022 on top of the approximately $60 million. We had previously identified in Q1 I am very proud of our team rally around several internal initiatives, which have now resulted in approximately $100 million of in year savings.
Specifically on the $40 million of opportunities. We identified in Q2 these were across a variety of areas up and down the P&L.
Gross margin rate for Q2 was 41%, which was up roughly 900 basis points compared to the first quarter of this year on a year over year basis.
550 basis point decline was due to continued mix shift out of our DFS product and the inclusion of New York, where gross margin is the rate headwind.
I was pleased that the OSB and I gave you the states, where we were live prior to Q2 2021 default rate improvement of approximately 700 basis points due to reduced promotional intensity.
We continue to expect our gross margin rate to be roughly 40% for 2022, and then improve over the coming years as our promotional intensity naturally declines across our portfolio of states and we continue to improve our cost structure sale.
Sales and marketing was up 18% versus Q2 of 2021 and external marketing spend was down on a year over year basis for the states that have been live for more than a year we.
We are very pleased with our LTV to CAC ratios continue to be on track for three year gross profit payback for our existing and new cohorts.
Product and technology, and general and administrative costs were up 39% and 83% respectively compared to the prior year period. The growth in PMT expenses is primarily the result of the additional engineering and product management resources. We've added over the past year to ensure we are building the best product in the industry and to continuously strengthen our data science capabilities.
<unk>.
For G&A the growth is largely a reflection of the increased investment in our customer experience capabilities, which will continue to grow as we add new customers, but at a slower pace given our current scale.
Going forward, we are planning for meaningfully slower fixed cost growth for 2023, we will have reached staffing scale in many of our departments by the end of this year and our focus now is on delivering more with existing resources.
Moving into guidance, we are pleased to be raising our full year revenue outlook to a range of $2 <unk> billion to $1 8 billion from a range of $2 <unk> 5 billion to $2 175 billion, which increases the midpoint from $2. One 5 billion to $2, one 3 billion the <unk>.
Mid point of our increased revenue guidance implies 64% growth compared to last year and <unk> revenue of one two to $1 3 billion.
We are increasing our revenue guidance due to the strength, we're seeing across our online gaming verticals with no perceivable degradation due to the macroeconomic backdrop. This was partially offset by a decrease in our 2022 outlook for marketplace, primarily due to our updated understanding of how revenue will be recognized across the entire NFL season for our <unk>.
Ts as well as the overall softness in the crypto markets.
Looking at Matson arm up we expect ARPA growth to be modestly higher than market growth for the full year.
In terms of quarterly seasonality if holders as we expect Q3 revenue should grow nearly 100% year over year, assuming no new jurisdictions launch, but if we see favorites are winning consistently and large underdogs rarely winning big parlayed starts hitting or certain promotions paying out in full due to game outcomes that Q3 figure could.
Come down meaningfully the opposite is also true.
I'll provide a few points of reference so that you all can understand the potential revenue volatility for Q3 first we expect approximately $1 billion of OSB handle on NFL games in Q3.
Last season, the average of our bottom three NFL hold weeks was approximately negative 10%.
And third as a rule of thumb you can look at the five wide us money in line spreads per each week of the NFL season, if the <unk> dog loses in each of those gains we would expect to have negative holding that week.
If the underdog wins in one or two of those five games, we would expect to have close to normal hold and if the underdog wins in three four or five of the games. We would expect to have better than expected hold this rule of thumb that simplistic considering that specific spreads over under parlays and relative gave exposure or impact us too, but it sure.
Give you a general sense of how revenue for the quarter is trending for OSB.
Moving onto our adjusted EBITDA guidance, we are pleased to be improving our full year 2022 guidance to a range of negative $765 million to $835 million from a range of negative $810 million to $910 million and improvement of the midpoint from negative 850 to negative 800.
The roughly $60 million improvement in the midpoint, primarily reflects the flow through from our improved revenue outlook from the core business the $40 million of additional cost efficiencies and early synergy wins that we have captured and the timing shifting from Q2 into the back half of the year. These items.
Are partially offset by the higher flow through from lower marketplace revenue.
From a quarterly perspective, we expect our adjusted EBITDA loss in Q3 to be modestly wider than our adjusted EBITDA loss in Q3 of 2021, assuming normal hold.
As a reminder, revenue variance caused by favorable or unfavorable sport sport outcomes would also impact our adjusted EBITDA at a high incremental margin, we expect Q4 to be our best adjusted EBITDA quarter for the year as we benefit from higher seasonal revenue.
Please note that our updated 2022 guidance includes only the jurisdictions in which we are alive today as you think about the rest of 2022.
Since the launch would have minimal negative top line impact initially as we promote in those states and a negative impact on adjusted EBITDA as we spend on external marketing to drive early customer engagement at tax that are consistent with our two to three year gross profit payback period of target.
With $1 5 billion in cash as of June 30, our liquidity position remains strong and we believe we are well capitalized to become free cash flow positive with existing resources.
That concludes our remarks, and we will now open the line for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone again to ask a question. Please press star one line one moment please.
<unk>.
Our first question comes from Michael Graham Your line is open.
Michael Graham Your line is open.
Sorry, you cut out for a second thank you.
Thanks for taking my question and congrats.
Congrats on the quarter and tons of great proof points in there I wanted to focus in on the MLP growth.
Of 30% and just wondering if you could comment a little bit.
On the mix between gross adds and retention sort of what were some of the factors that drove each of those and I thought it was really great.
On your pre 2021 markets.
Promotional intensity is coming down so much can you just talk a little bit about some of the dynamics there and are you.
Are you confident that with less promotional intensity.
Optimizing your customer growth.
Thanks, Mike So first on the <unk>.
<unk> question.
Happy with <unk> growth.
Historically Q2.
Is a relatively slower quarter from a sports calendar perspective. This year. It was actually a tough comp because last year. There were over 200 NBA games in May and June . This year. There are only about 40, something so real big difference there on the schedule side for one of the most popular sports.
So definitely where we're really happy with 30%, which was one of our strongest quarters of growth in NOI.
As far as like looking at how we got there in some of your questions on marketing and promotion, we continue to optimize there and I think that that.
It's just been always an area of focus for the company and the more data that we get the better we can do.
We're also continuing to shift more international marketing as we've said in the past once you get to.
Mid <unk> percent of the population that starts to make more sense.
But yes, a lot of its optimization that has been the result of many years of testing.
Lots of data and analytics. We also started to see some early synergies with <unk>, which is great where we are able to continue to have the same kind of active customer base, while optimizing our marketing across both of those brands.
Yes, I would add.
As Jay Rob just said.
Growth was.
Right on with our expectations the underlying retention rates better are an important part of the LTV outlook for each customer cohort were right on as well and consistent with what we've disclosed in the past during our Investor day. So good retention and we've always said the promotional intensity for existing cohorts decreases over time as those new <unk>.
<unk> offers for brand new customers is different than what what is given to an existing customer and that is all coming to fruition.
Yes.
Alright, Thank you, Jason and Jason.
Thank you.
Thank you. Our next question comes from Shaun Kelley of Bank of America. Your line is open.
Hey, good morning, everyone and thanks for taking my question.
I wanted to ask generally just to kind of probably a little bit clarify, but on the customer acquisition environment. I think it was pretty clear from your comments in the in the outlook that you are actually changing your your external marketing spend a lot of that has to do with timing when it comes to the.
The broader guidance that you provided to just could you sort of clarify that and maybe just talk to us a little bit more broadly because we have heard from some others that have reported thus far that the promotional environment actually is rationalized pretty dramatically in the last couple of in the last couple of months and maybe how that is also playing through your strategic opportunities.
Thanks.
Yes so.
I think it's a bit of both we definitely are finding some marketing optimization, both through the shift into national from local as well as some early wins on the <unk> synergy side.
So those are things that we view as just pure optimization part of also what we look at it the optimization and how we time our spending throughout the year.
And I think that because of that there are also some optimizations that have come from shifts that won't actually lower the overall amount of spend but we'll make it such that the performance is better because we've timed it better. So yes. There is a reduction but there is also some timing shift is a combination of both.
Thank you very much.
Welcome.
Thank you.
Our next question comes from Jason Bazinet at.
Citi. Your line is open.
Jason Bazinet your line is open.
Sorry, I just had a quick question are you guys surprised that the resiliency of the consumer.
And if you are there are there any sort of details that you'd be willing to share about what's happening underneath the hood in other words.
Are there any sort of dynamics that are happening between the customer spending and sort of more loyal customers that have been with you for a while.
Yes, great question.
Thank you.
I wouldn't say, we're surprised I think gaming is always sort of been known to be resilient and there's been a lot of research done on it.
The us in particular on the lottery, but throughout the world and gaming has always been resilient to a variety of macroeconomic condition. So I wouldn't say, we're surprised of course like even despite that.
We're not.
We're not taking that for granted so it's nice to see and we're happy and I think.
So obviously not taking anything for granted but I don't think I would go so far to say, we're surprised because I would say that was our baseline expectation going in and it's consistent with.
With what's been seen through many decades of research across both brick and mortar and online.
As far as what's going on under the Hood, it's really across the board. We're just continuing to see really strong retention numbers. Our average revenue per player as noted went up 30% year over year.
So it's really kind of across the board. There is nothing in particular I can point towards to say this segments outperforming that one yes.
Yes, I would agree.
We had at least three different teams try to unpack any any trends in consumer behavior versus prior year versus expectations looking at frequency average bed size a variety of other factors different teams had different hypotheses and the net result was.
There is no discernible impact.
Well, okay. Thank you very much.
Thank you.
Our next question comes from David Katz of Jefferies.
Your line is open.
Thanks for taking my questions.
Number one I wanted to just.
Unpacked the cost base a little bit.
Obviously done well of trimming some things when we look at.
Advertising in particular can you talk a bit about the.
Our base of advertising contracts, but maybe.
A bit more temporarily fixed or multi year.
Versus those that you can put your hands on the dials.
More immediately and flexion it out as you move forward.
Yes, so thats disclosed in our Q you can look that up we have a list of commitments, we don't break out which ones are marketing versus things like <unk>.
Rent lease agreements and other things but.
You can see what our overall long term commitments are.
What I would tell you is the majority of our spend is flexible.
Certainly have some deals we like those deals for the most part there is a few that will probably optimize out of all of them are relatively short term contracts for the most part.
But the majority of our spend is flexible and we like it that way and.
Certainly with the right strategic deals.
Dan and we think that that can be something that gives us a true differentiator on the marketing front.
But we also like having an opportunity to be flexible and to test and move things around I will note that even within deals we can do that.
Marketing partners that we have deals with we test all sorts of different things. So it's not like the media itself is fixed we can optimize within that partner.
<unk> partners with large footprint there is a lot of different things, we can do and I expect the performance of the dealers to improve as we continue to optimize across the years.
Perfect and if I can follow up quickly.
How are you.
Sort of gauge the targeted parlay mix.
At maturity.
Where we are today.
And what that does to your sort of overall hold rate as you approach it.
Well I think we all don't know what it can get to I mean, it's been increasing rapidly as noted in our call. We had about 700 basis point increase year over year in terms of percentage of that's made it parlays. So.
That's a pretty big gain were obviously not done.
And I think we can hopefully see it continue to go up.
Right now.
I think a good feeling.
Minimum ceiling I would say is we're handle is which you can see and in our reports from some of the states.
But we continue to close that gap and I think that they are continuing to increase too. So it feels like theres, a pretty high feeling there and as far as what that does for hold the way you could think of it as it's not even just parlay mix. It number of legs every leg of our parlay its like its own debt. So.
So the percentage that you would take would be taken off of each leg.
So the more legs, you can get obviously more parlays, but more legs you can get on Parlays is also another really good thing.
It can increase hold quite a bit obviously.
It depends on a number of different factors like the underlying hold to the market but.
Definitely it can increase hold quite a bit if you can get more parlays and more legs on those parlays.
Thank you very much.
Awesome.
Yes.
Thank you. Our next question comes from Carlo Santarelli of Deutsche Bank. Your line is open.
I wanted to talk a little bit about about promotions.
Heard several times that the promotional intensity.
We need a little bit.
When you look at kind of the data that we are too.
From a year over year perspective, and obviously the data is in perfect.
I'll be the first to acknowledge that it doesn't necessarily appear that that's the case, whether you're looking at it as a percentage of total on an absolute dollar basis or whatnot.
Some of the states, where its trackable, so would you guys kind of.
Maybe comment on what Youre actually seeing out there with respect to promotions, there's things within the promotional and the numbers that maybe we can't see in different ways people go about the business.
But given the impression that promotions are kind of tailing.
Numbers that maybe we can't see in different ways people go about the business.
But given the impression that promotions are kind of keybanc.
I think sometimes when people say promotions. They are also talking about advertising and a mix I think is part of what sometimes people are saying as far as actual cuts.
Customer giveaway promotions I think New York is a good case study, where it's pretty clearly come back.
Hard to tell it to your point on the macro side, because depending on the nature of the promotion it can show up in.
Areas of the state reported.
Numbers in different areas of the P&L so it.
It is tough to tell I can tell you on our end.
We've seen in existing states.
A decline each year since launch here.
That's been consistent it hasnt been a recent thing since we since we launched OSB.
And we expect that to continue to be the case and obviously the mix of new states coming in I'm sure for example of California's up and running before next NFL season, and Youre going to see an uptick in promotions in that state and that might drive.
Some overall lifting so it kind of there's a lot of moving variables, but the way we like to look at it is in a state.
One should be the highest promotion year and then it should decline until it reaches a steady state, which we've outlined in our Investor day, we expect that to be and so that's really how we look at it on a state by state basis, and when we look at what competitors are doing to your point, it's hard to tell we obviously have a lot of qualitative evidence from our team going and looking at.
What is in the market, we have a detailed competitive intelligence team that goes through and catalogs everything but the impact on the actual revenue or other metrics in the P&L.
The talc, because theres a lot of moving parts in the state reports as we've noted in the past not.
Not necessarily capturing things consistently operated operator.
Yes.
Thank you Jason Thats helpful. And then if I could just one follow up.
The cash used in the period was about $260 million, obviously, you have the operating loss in there.
And then.
I think it was $96 million of cash paid for acquisitions that kind of bridge. The majority of that gap along with the software cost and the traditional PPE.
The $96 million, what was that related to <unk> or is that something incremental.
No thats absolutely a one time cash usage in the quarter Carlo related to the <unk> acquisition was a pay down.
We took the option to prepay a term loan that came with the <unk> asset.
Okay got it.
The funding of the acquisition was an all cash deal right that was just something separate.
Yes.
Dave I apologize, yes. It was an all stock deal we chose to pay down the term loan.
Just to keep our balance sheet out there.
Understood. Thanks, guys.
Thank you.
Our next question comes from Andy Yeung of Morgan Stanley . Your line is open.
Taking my question.
Which was very strong in the quarter.
Presuming that was on stronghold, but you said the hold was in line with your expectations. What are your expectations that it will be up on.
I guess im referring to you're saying you've got very good trucks to increasing your poly mix. So.
What kind of proportion of the growth was driven by maybe hold and structural guidance from product. Thanks.
Yes, it's a great question.
I'm glad you asked because it gives us a chance to unpack it a little bit so when we say it was in line with expectations. What we mean is based on sport outcome. That's typically what we like to share. It hey, just because those are things that aren't fundamental to their business. They are more just randomness of sport outcome. So if we have a quarter.
Where there was a shift positive negative on the sport outcome side of course Q3 is the one where that's most likely to happen given.
Only three weeks of NFL, having such an outsized impact on the quarter.
However, exactly as you said, we did see parlay mix increase we've been seeing that that was a year over year comparison.
For a couple of quarters now since we.
Launched our own same game parlayed and started promoting it more heavily back in <unk>.
Q3 of last year.
So.
We did expect an increase in hold that would result from that and that was in line with our expectations as well.
I would just add two more components of the unpacking of art first you've got the promotional decline, which is impacting your arm up growth.
Which I alluded to in the script and then.
The other thing is product mix, so Q2, with especially with this year lapping last year's heavy NBA <unk>.
Sport mixed in the quarter and this year the playoffs ending earlier just as a reminder, remember that 2020 to 2021 NBA season started late so it ended late versus this year.
Started more normal so ended early.
Earlier than last year. So what you're seeing also is a little bit of a product mix shift between gaming and OSB in the quarter.
Useful thank you.
Thank you.
Thank you. Our next question comes from Jed Kelly of Oppenheimer. Your line is open.
Question, two if I may one can you just talk about your merchandising strategy around same day parlay and how you think that compares to some of them.
Other competitors and then can you give us any update on how your logic in Canada is going.
Thank you.
Sure. So we reached recently launched a new merchandising zones in the App I think that.
First step for us is to build the product and then I'll.
Obviously as we continue to enhance that product add more markets bring more in house. We also are.
Focusing on how we market it and merchandise it and the better.
Really for us it's about having it feel native not feel like we're pushing something on the customer we use.
Names that are in line with the sorts of things that we would name our daily fantasy contest that.
Sports fans, we think would find.
Enjoyable and at times humorous and just try to give them some personality.
And really it's our database so.
We test things to see what works we are working on updating our data science engine. So that those things become fully personalized theyre not yet, but we're working on that.
So theres a lot of I think behind the scenes work to that really optimizes getting the right thing in front of the right customer at the right time.
As far as Canada goes I think Ontario is kind of what we expected. We always said that we didn't think we'd be able to achieve quite the same share as we believe we will be able to achieve in the U S. We had projected 10% to 20%.
And Ontario, as opposed to 20% to 30% in U S States.
We also always.
Said pretty consistently that we thought it would be more of a slower grind.
Given the nature of the market, where there is just a lot of continuity between the gray market and now versus I think U S States, which.
When they open up it's really more greenfield so.
I think that those are some real key differences.
And for those reasons, we always sort of felt like Canada, we can achieve strong share, but probably wouldn't have quite the same feeling that we believe we have in the U S.
Don't have the same expectation that we would have in the U S.
That said, we've always had a very strong data DFS database there.
You have a brand thats fairly well known in Canada.
And I think for those reasons, we do feel like we can do well there.
Thank you.
Thank you.
Next question comes from Joe Stauff. Your line is open.
Okay.
And then maybe just a follow up on costs.
I wanted to check.
You got cut off at the beginning we missed the first part can you start again.
Yes, sorry about that.
I had a question on users and then maybe a follow up on costs.
In the quarter I wanted to check to see what user growth looked like and some of your.
Your older States, whether it be new Jersey, and so forth and then on the cost side I'm.
I am wondering.
If we look at your historical CAC.
I'm wondering what's the right way to think about your increased use of network advertising and how that could flex it down.
Sure so.
First we continue to see growth across pretty much every state.
I know that.
Some of the Overstates, we've had we've looked and still see growth year over year end users. There. So that's been really encouraging.
It is.
This is really exactly what we'd hope for that we can dial back on promotions and marketing spend and continue to see user growth and Thats what were seeing.
As far as the CAC optimization question I think.
What you're describing is exactly what we've also been talking about for the last couple of years that early on.
There is some inefficiency on the marketing side, because you had to localize everything and the rates are more expensive on a local basis, particularly on things like TV.
So being able to go to national networks.
Certainly will help us optimize.
And the nice thing about that is that it becomes a continuous tailwind because as more and more states get added those same advertisements are reaching people that previously were not able to eligible to play the product.
So you don't have to do I mean, we obviously will do some local heavy ups at the very start of a state launch, but there'll be shorter and burst and less intense because we have such a strong national footprint that we're starting to build.
Understood. Thank you.
Thank you.
Our next question comes from Daniel <unk> of Wells Fargo. Your line is open.
So a two part question on Opex your sales and marketing I know it was meaningfully lower in the quarter with some shift out but is there also an opportunity to benefit from lower media cost just given maybe a softening advertising market or as your competitors, maybe offload some of their supply of traditional media spend.
And then the other part just in terms of.
The engineers in terms of the Ftes, where are you in terms of out and where do you maybe look to get so you continue to ramp there.
Yeah. Good question I think on yes, I break it down a couple of ways first.
When it comes to.
Television.
Particularly things like in game advertising, the Migs and in some cases the networks are still putting limitations on the number of spot that can be featured from our category in a given game for example, so.
Unfortunately.
That doesn't really auto and other sorts of large insurance categories.
Dialing back at all I don't know if they are or not but just as an example that wouldn't really help us as much.
But I think as time evolves, we'll have to see where that goes in.
In other channels, we do benefit a little bit.
But not maybe as much as you would think from things like <unk>.
Because for example on the App side, what we've really seen is a shift away from iOS and into Android or iOS, it's gotten a little cheaper which is good because.
We have more iOS customers, but.
I think that.
Overall, the market Hasnt really changed a whole lot. It's just been more of a shift into Android some softening, but not too much and probably where the biggest softening on the macro side is which is television.
Unfortunately, we're not benefiting from our category is not benefiting from for the reason I described earlier that said, we continue to be able to optimize as you noted on the quarter.
I think that in some ways I'm actually very happy that it wasn't just due to rate reductions because it means we're finding real.
Meaningful synergies with <unk> and real optimization opportunities.
We'll have to see what happens with rates over time.
And then just on the on the.
The fees in terms of the ramp there.
Sorry, say one more time.
As you continue to hire the engineers and ramp your full time employees, there like where are you in terms of that ramp.
We think about that.
Yes, I mean, we're still definitely adding engineers, but as we noted we are meaningfully slowing fixed cost growth in.
In 'twenty, three which means less hiring in 'twenty, two and certainly in 'twenty three.
Obviously heavy hiring in 'twenty, two and lead to meaningful fixed cost growth in 'twenty. Three so we are slowing quite a bit.
And I think that is because we're reaching scale in a number of our different departments, which is great to see.
Engineering, we're still hiring but we've slowed the pace there as well so I think across the board we've slowed down and in some departments are really starting to reach full scale.
Thanks.
Thank you.
Our next question comes from Joe <unk> of Jpmorgan. Your line is open.
Hey, guys.
Jason Park I, just wanted to follow up on your comments about.
Taking out a meaningful.
Amount of fixed costs.
I just have more of a forward your commentary than <unk>.
Elaborating on this year, but.
Of the $2 9 billion of adjusted operating expenses. This year, how much of that would you characterize the states. Obviously G&A is going to be a big component of that you disclosed that and does that comment about cost coming fixed cost coming down next year on an absolute basis is that inclusive of new state launches such as <unk>.
Maryland, Ohio, Kansas, Puerto Rico, Massachusetts.
Essentially California. Thank you.
Yeah, Great question. So yeah, absolutely looking into 2023, we've been consistent in saying that the fixed cost growth will slow down meaningfully into into next year in terms of more specifics. We are working through our detailed budgeting process now and we'll be in a position to provide more color on what on what 2020.
We will look like likely in our November earnings call.
On your question around sort of incorporating new state thinking into our fixed cost growth I would say, we think about new states really down to the contribution profit level gross profit minus dedicated advertising within each new state I would say that new states at this point won't drive additional fixed cost growth.
Yes.
Yes.
Thank you.
Thank you.
Our next question comes from Chad Beynon.
<unk> of Macquarie. Your line is open.
Just in terms of the competition that youre seeing out there I know there were a few competitors that kind of had a half big product last NFL season, and they have at least a strategy in place to attempt to gain market share. This year do you expect that there will be any market share shifts.
This fourth quarter and the NFL or do you think the big three obviously, including you guys will be kind of stable as we see it. Thanks.
I feel very good about our NFL plan and I think that.
We've kind of gotten used to each year for one reason or another we hear chatter.
This or that competitor that are going to make some big moves in.
We feel like we've held pretty well through all of that.
I think what it.
Continuing to focus on our own.
<unk> and making sure that we're being very customer centric and doing the things that we think will help us have the strongest market share over the long term.
I hope certainly that we gained share I can't really speak for others. I know you were asking about some of our competitors.
Whether they hold or gain or not.
No we're not.
<unk>.
Privy to some of the plans they have but I think on our end we feel pretty excited about the plans we have for NFL season, we feel really good about the plans we have for <unk>.
Activating around start as well as continuing to maintain strong engagement, both customer acquisition driving more parlays and better <unk>.
All the key metrics.
And I think if we execute that plan and we're hopeful that we will actually gain some share in the back half of the year.
Thank you very much I appreciate it.
Youre welcome.
Our next question comes from Robin Farley with UBS. Your line is open.
Thanks, I Wonder for California, you could remind us what you're expecting what that could be on a full year basis in terms of potential EBITDA.
EBITDA loss initially.
And then what your expectations are for maybe timing.
Assuming the referendum was passed what timing so that would be.
Thank you. It's a good question, obviously, we're a little ways from away from there we've got a path that first and then.
I think as far as what the potential impact to the P&L could be next year, both top and bottom line.
That's largely dependent on if it passes of course, but then also timing of launch.
So really hard to say I think once we have more clarity.
Hopefully after the ballot initiative passes.
Within a little bit of time to start to be some clarity if it passes on when the launch may occur and at that point I think we will feel comfortable providing some estimates but right now there's just too many moving variables for us to do that yes.
Yes, I would add Robyn.
It's not just California, it's the pipeline, including Kansas, Maryland, Ohio, Puerto Rico.
Knock on wood, Massachusetts, there is a lead time between the formerly utilization that will launch, which is regulation, writing and licensing process, but so it's always a little hard to tell us exactly what the launch date will be in terms of the economics of a new state. We did provide some color in our March 2022 Investor day on.
On what percentage of the population, we would expect to acquire over the first six months and and the effective cap for that at least helps you understand what the marketing investment would be in the early period, where estate to launch sort of in the in the beginning of an NFL season.
Okay, great. Thank you and then just one quick follow up I think you kind of alluded to in your remarks.
It was hold in the quarter.
As expected.
I think it was specifically said in the slides or anything but I guess on your comments is that.
We should conclude on the hold impact in Q2.
Yes, we were very pleased with hold it was as expected in the quarter.
Great. Thank you.
Thank you. Our next question comes from Bernie permanent of Needham Your line is open.
For me first just on <unk>.
Keeping on California.
Jason you sound pretty bullish on the potential for the ballot initiative to past last quarter. Just wanted to give you gauge your temperature to see if anything's changed in your thoughts on the probability there and then for adjacent park can you just put some context around the $100 million of cost reductions. This year is that the run rate. We should expect for the end of the year and how long should it take to get to.
That run rate level, and which line items should we expect to see it in.
So first on California.
I think.
Really nothing has changed we kind of are where we expect it to be.
Right now, we're very focused on educating voters about what the benefits to homelessness mental health.
So having a legal and regulated online sports betting market will help keep customers who are betting through illegal sites right now safe. So I think there's quite a few benefits for California, and we're focused on trying to articulate that to the voters.
So, we'll see where it goes but we feel just as optimistic as we did a quarter ago and they continue to believe that we'll get this over the line, but still a long way to the election, so lots can happen.
We're certainly not celebrating yet and things could swing either way.
Jason do you want to take that.
Yes.
Just to reiterate we had alluded to about $60 million of 2022 opportunity cost opportunity that we talked about back in may and another $40 million in 2022 opportunity that we were able to find in the quarter. So so a couple of things Bernie.
That $100 million not on a full year basis, so going into 2023 that would improve just looking at it on a full year basis I do I do feel like those are permanent improvements in our cost structure.
Some of the some of the items I mean, it was up and down the P&L ranging from vendors that sitting in our Cogs vendors and sales and marketing product and technology and G&A and so to the extent that some of the savings were in Cogs, you would expect the quantum to increases revenue increases too as we negotiate better rates on some of those.
So.
That's a little bit more color in terms of specifically, where the 100 came out from Cogs versus PNT versus G&A versus <unk>. It was really sort of across everything I.
I would say this was a really dedicated initiatives.
That we drove through the company.
It's been a great mindset shift across the employee base to balanced top line growth with finding efficiencies I think there's just a ton of volume companywide that that we can we can do this type of thing without impacting the customer.
So we're really proud of the outcome here and we'll always be looking for more opportunities like that.
Great. Thank you both.
Thank you. Our next question comes from Brian <unk> of Barclays. Your line is open.
Great. Thanks for taking my question. So just on <unk> a few months in now after gaining full control of that asset I'm. Just wondering if you guys have an updated view on where you think your market share can get.
On that on the combined gaming business.
Yes, I think a lot of that obviously.
It remains to be seen but right now we feel it's very consistent with what we've shared in the past in our Investor day presentations in.
Perhaps there's a little upside there, but I think it's too early to for us to sit here and say, it's going to be better than what we've previously shared so I think thats a good number to go off of.
We feel like.
That's the right target for now.
You're right we've had it for a quarter, it's still a very short period of time, we havent migrated the platform yet we haven't really been able to see the realization of some of the revenue synergies that we believe will occur from that.
So we're cautiously optimistic that we can we can improve even beyond what we've said in the past, but we're still too early to be to be saying, we think it's going to be any different than what we said previously.
Great. Thanks, so much.
No problem.
Thank you. Our next question comes from Jason Bender of JMP Securities. Your line is open.
Hey, its Jordan.
Thanks for taking my question.
The guidance range for the full year was slightly less than the beat in the quarter outside of the marketplace revenues is there kind of anything to call out.
In that guidance range.
Well I think Theres a couple of things one.
Really.
OSB in our gaming business are actually up.
So we are increasing the outlook there marketplace. The primary reason that changes as we got closer to launching rainmakers.
We updated our assessment of the way revenue needs to be recognized given that the games are played throughout the quarter excuse me throughout the season.
And so not only did that shift from Q3 into Q4. It also shifts some each two into 2023 importantly, those cash flows received in years. So that is consistent with what we thought in the past.
But from a GAAP accounting standpoint, some of the revenue will need to be recognized at later point in the season that was the primary driver of why we didn't have 100% flow through to be.
Last time, we hadn't quite completed our assessment of revenue recognition an update was baked into this one but I do want to reemphasize that we actually took up the forecast for OSB Ni gaming.
Great. Thank you.
Thank you.
This does conclude the call.
Conference portion of the call I would like to turn the call back over to Jason Robbins CEO for any closing remarks.
Thank you all for joining us on today's call. We had an excellent second quarter. We continue to be excited about 2022, and we look forward to speaking with you over the next few weeks I Hope you all stay safe and well and are enjoying your summer. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect. Thank you all for participating you may now.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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