Q1 2023 DraftKings Inc Earnings Call

May 5, 2023

Yeah.

Good day and thank you for standing by welcome to the drafting Q1 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you wasn't he.

[noise], an automated message advising that your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.

Dodge you may begin.

Good morning, everyone and thanks for joining us today certain statements. We make during this call may constitute forward looking statements that are subject to risks uncertainties and other factors as discussed further in our SEC filings that could cause our app.

<unk> results to differ materially from our historical results or from our forecast.

We assume 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 drop King's operating performance. These measures should not be considered in isolation or as a substitute for draft Kings financial results prepared in accordance with GAAP.

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 in our quarterly report.

Form 10-Q filed with the SEC.

Hosting the call today, we have Jason Robins co founder and Chief Executive Officer, <unk>, <unk>, who will share some opening remarks, and then update on our business and Jason Park, Chief Financial Officer Draft Kings, who will provide a review of our financials we.

We will then open the line to questions I will now turn the call over to Jason Robins.

Good morning, and thank you all for joining I'm excited to be with you today and share that draft Kings is off to an excellent start in 2023.

Revenue growth has been outstanding supported by strong customer retention acquisition and engagement as well as better structural hold percentage than anticipated.

First quarter revenue increased 84% year over year, and we are increasing our full year revenue guidance to a range of $3 $135 billion Q3 to three 5 billion.

Implying growth of 42% year over year at the midpoint, which is pretty remarkable off of a revenue base of $2 $2 billion in full year 2022.

At the same time, achieving efficiency remains a relentless focus our mantra of revenue growth and cost efficiency is gaining even more momentum throughout the organization.

Due to both our strong revenue growth and our ongoing effort to capture efficiencies, primarily with an external marketing of our fixed costs. We are in the <unk>.

ASP of achieving profitability on an adjusted EBITDA basis.

We expect to be approximately breakeven on an adjusted EBITDA basis in the second quarter, and we expect to achieve nearly $150 million of positive adjusted EBITDA in the fourth quarter.

Full year, we are improving our adjusted EBITDA guidance to a range of negative $290 million to negative $340 million or an increase of 21% at the midpoint versus our February full year guidance.

Turning to our product offerings <unk> is continue to introduce unique sports wagering opportunities by most recently launching live think gain partly for MLP supported by our in house trading platform. We continue to invest in our in house training capabilities and technology in advance of the NFL season. This fall.

And I came in we estimate that we achieved number one GTR spare in the U S at 26% in the first quarter, our homegrown gains continue to function as a key differentiator for example, our exclusive tracking jackpot product is now live in three states across more than 100 slots and table games.

We also launched Dk horse, our Standalone Horseracing App at the end of March which offers wagering on races from hundreds of domestic and international tracks, including all free Triple Crown races, beginning with this weekend, Kentucky Derby.

I'm proud of the team and culture, we have in place in particular I am proud of our team for their relentless focus on efficiency and expense management over the past 12 months.

Our work on achieving and is not done and we feel great about the trajectory of our business.

With that I will turn it over to Jason Park, Chief Financial Officer.

Thank you, Jason I'll hit on the highlights, including our Q1 performance and our new and improved 2023 guidance. Please note that all income statement measures discussed except for revenue non-GAAP adjusted EBITDA basis.

As Jason mentioned the organization is executing very well and that is showing up in our results. We achieved $770 million of revenue in the quarter, which is 84% higher than our first quarter 2022 revenue and our adjusted EBITDA of negative $222 million in Q1 significantly outperformed our expectations.

Sure a whole percentage was better than anticipated with parlay handle met up 400 basis points year over year, while promotional intensity declined together supporting our more than 600 basis point improvement in our adjusted gross margin rate.

We were particularly pleased with the results in our order state vintages in each of our 2018 to 2019 and 2000 22021 vintages first quarter 2023 handle grew more than 25% compared to the same period in 2020 to GAAP revenue grew at least 80% year over year adjusted gross margin rate.

At least 200 basis points year over year, and external marketing spend declined at least 10% year over year. These.

These strong results and our visibility into continued improvement have enabled us to raise our full year 2023 revenue guidance range to three <unk> three 5 billion to three to three 5 billion from $2 85 billion to $3 5 billion.

We are also improving our full year 2023, adjusted EBITDA guidance range to negative $290 million to $340 million from negative $350 million to $450 million or by $85 million at the midpoint.

The bridge from early February full year 2023 guidance to our May full year 2023 guidance includes increases due to stronger customer retention and acquisition and engagement structural sports book code improvement and favorable sport outcomes in the first quarter, which were partially offset by the timing of our recognition of a loyalty program.

<unk> expense.

Customer retention acquisition and engagement are exceeding expectations and account for approximately $195 million of the revenue improvement and approximately $80 million of the adjusted EBITDA improvement.

Our structural sports book hold percentage Port counts is also higher supported by our introduction of in house team game, partly capabilities. This trend accounts for approximately $20 million of the revenue improvement and approximately $15 million of the adjusted EBITDA improvement.

Favorable support outcomes in the first quarter contribute approximately $20 million to the revenue improvement and approximately $15 million to the adjusted EBITDA increase.

Last expense recognition timing is a $25 million headwind to our improved full year adjusted EBITDA guidance as a result of greater visibility into our new loyalty program costs that were originally expected to be expensed in the first quarter of 2024 are now expected to be expense throughout 2023. This additional expense accrual in <unk>.

2023 will not result in additional cash outflow.

In terms of our full year 2023, adjusted gross margin percentage, we continue to expect to land in the range of 42% to 45%.

With regard to our balance sheet. We ended the first quarter with $1 1 billion of cash and now plan to end the year with more than $800 million of cash before our expected inflection to generating positive adjusted EBITDA for the full year 2024 under any reasonable new state launch scenario.

In sum, we had a strong first quarter and underlying drivers are improving our outlook for 2023 and beyond that concludes our remarks, and we will now open the line for questions.

Certainly ladies and gentlemen, if you do have a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster and one moment for your first question.

And our first question will come from Shaun Kelly of Bank of America. Your line is open.

Hi, Good morning, everyone. Thank you for taking my question.

For either Jason Jason just obviously wanted to talk about the revenue performance excellent in the quarter.

Wanted to get your sense on is to see if the thesis here is around improved customer retention and engagement.

What products or product changes in your suite are continuing that and kind of how does this play out through through the first quarter I think.

From what we understand it sounds like March was just an exceptional pickup for Josh. Thanks. So can you talk a little bit about both at cadence and your product mix, there, maybe helping continue engagement beyond traditional NFL season.

Yes.

Thank you John I appreciate it.

Youre right and really the theme on the revenue side has been customer retention monetization also we've had tremendous acquisition results. We acquired 57% more first time players year over year on a 27% lower cost of acquisition. So really pleased on that front too.

It's been our OSB ni gaming products that have been carrying the load for us we've been seeing.

Really the big trend different year over year is last year, we saw a bigger drop off after the NFL season ended after the Super Bowl and this year I think due to some CRM optimizations and product enhancements on sports betting side as well as some similar things that we've been doing on the gaming side, we've just seen much stronger return.

<unk> flowing into at least fab in March.

Seems to be continuing into Q2 as well.

Great and maybe just as a quick follow up.

As we think about the revenue outlook and the increase in the quarter.

Our faster paybacks contemplated in that as well as we think about just kind of what youre seeing on the individual state level I think thats been our thesis around particularly the Ohio, and Massachusetts launches, but.

Is that contemplated in the revenue outlook increase here or is that an opportunity going forward.

Absolutely I mean really the way to think about it is the strong acquisition, we've been seeing and it had been continuing to see in those new state launches and the speed with which we penetrated into the mid to high single digits and population adult population.

I think Thats fair.

For both a faster payback.

What used to be a two to three year time to profitability is being pulled in.

And also.

We think that there will be more revenue contribution from those states in here as well. So it's absolutely a driver of the increased revenue forecast I would add Sean is we as we indicated.

Increase in our Q4, EBITDA I think that a big part of that improvement is exactly what you are referring to.

Thank you Ross.

And one moment for our next question.

And our next question will come from Bernie Mcternan of Needham <unk> Company. Your line is open.

Great. Good morning, Thanks for taking the questions maybe to start just a reiteration of the 42% to 45% gross margin guide for the year just given the strong performance of <unk>, just any puts and takes we should be thinking about for the remainder of the year here.

I think the biggest thing is the increased acquisition that we have seen customer acquisition.

As we've noted in the past new users are aware a lot of promotion dollars are spent and therefore drives up the promotion dollars.

That said, we are reiterating the same guide at 42% to 45%, we don't see that being any different on the year.

Certainly youll see some fluctuations quarter to quarter Youll see some thing some of that show up in our floating rate. So.

That's probably the biggest moving part, but overall, we don't expect it to change.

Outside of that range this year for gross margin percentage.

Understood.

Step on the toes of any maybe future potential investor day, but now that you've posted back to back quarters of really strong results and profitability.

Any changes to thoughts on long term profitability or maybe getting to those long term targets sooner.

Well, you're right we are planning on covering that at the Investor day. So I'll hold off on comment on that until then but we will certainly have more to say about that later this year.

Fair enough. Thank you.

Okay.

Our next question.

And our next question will come from Ed Young with Morgan Stanley . Your line is open.

Hi, My question relates to slide six about the increasing pace of.

Customer acquisition, 6% you've achieved in Massachusetts in the first I guess 50 to 60 days suggest that the pace has continued to improve even further with the 23 cohort.

The drivers of this how much of that is related to your playbook, how much of that at this stage in terms of the market and particularly I Wonder if you could comment on to what extent any of that is reflective of the competitive situation and the actions of others that are informing those thoughts the paybacks.

I mean, I do think it's all of the above I think.

All of the factors you just mentioned are three factors are contributing in our tail winds right now so.

Yeah.

One I think we very much optimized our go to market. We now are.

Two dozen state at this point so.

I think we've had a lot of time to really optimize that and feel very good about our new state playbook.

Secondly, you are seeing the effects of national advertising and that really I think especially in the case of Ohio, Massachusetts, and Maryland, which came late or shortly following in the case of Massachusetts, The NFL season.

A lot of that probably quick ramp was at least in part the result of.

Switch to national advertising, which made it more.

These states that in the past maybe for a new state launch hadn't seen as much of.

The advertising during an NFL season, Ohio, and Maryland, and Massachusetts saw advertising on our national advertising all year on if all season long.

Think also there is a lot of momentum in the industry people travel to different state their friends playing.

That has helped but faster ramp and I do think that.

Competitively youre right that theres been a lot more consolidation in the last few state launches to the top two players in the sports book market and I think that that's also driving it as well.

Great. Thanks.

Quick follow up.

You talked about some of the internal.

Improvements in terms of retention through the end of it.

The NFL season in March, but I Wonder if you could just.

Again broadened the.

Competitive environment question.

Same thing.

Particularly different.

Environment is that improving the market share I was wondering what do you think it's sort of primarily sort.

Sort of internal actions.

Earnings per share increase thanks.

Yes, I think it's again a mix of both I think that.

Youre certainly seeing both.

I also think that because of the cross sell is so strong between sports betting and gaming.

As we gained share in sports betting, we're naturally going to gain some share in gaming as well if we continue to do a good job with the cross sell which we have been doing so I think thats a big factor to consider also.

Great. Thank you.

Our next question.

And our next question will come from Carlo Santarelli of Deutsche Bank. Your line is open.

Hey, guys. Good morning, and thanks for taking my question.

Jason.

You mentioned in your prepared remarks that that was up about 400 basis points year over year.

Could you maybe put some parameters around a kind of be the influence that had on hold on a stabilized basis, maybe not not in the quarter, but maybe some sensitivity around that and b.

Could you, perhaps give us kind of an estimate of what that number looks like at an absolute level.

The hold rate.

Yes, sorry that the mix the partly mix.

Sure.

Yes, we haven't disclosed that.

Pink.

We are looking right now at least for Q1, our hold rate that was in the mid <unk>.

Roughly a 250 basis point year over year increase and that was.

Combination of outcomes, which were unfavorable last year and a little bit favorable this year as well as that increased parlay mix that drove the increase.

Great. Okay, and then as a follow up I believe last year, your marketing was a little bit over $800 million.

In steady state how do you guys think about that number relative to revenue as a percentage of revenue.

And I'm talking post.

Post launch et cetera.

Yes, I think you're right. It does depend on the short term of course on state launches, but long term in our Investor day.

Think we what do we say about 7% to 8% of revenue a little bit more about 10% I believe of revenue in our Investor day, So I think for now.

Noted on an earlier question will be.

Updating some of those metrics later this year at our new Investor day, but for now I think we're comfortable saying, we think that that's the right number.

I think that potentially as revenue grows it doesn't mean that marketing would need to continue up from there. So I think if you sort of take the snapshot that we put in our last Investor day, I think at that level of scale. It looks about right, but I also think that to the extent that revenue continues to grow from there I don't think marketing has to grow linearly either yes, Carlo I think.

Marketing as a percentage of sales is a perfectly good sort of outside metric internally. We'll just continue to look at LTV to CAC as a state is in that fifth seventh year and adjust the marketing.

Total marketing expense dollars to reflect the adults that are left to be acquired and as we've provided those statistics on our order states you can see that there was the absolute marketing dollars.

Our declining in the order statements.

Got it. Thank you guys I appreciate it.

And one moment our next question.

Okay.

Our next question will come from Barry Jonas.

Securities Your line is open.

Oh, great. Thanks, we've seen some deals across the space recently curious how youre thinking about M&A here.

No right now, it's not really a focus of ours.

We feel like we had really strong organic growth, we're executing very well competitively, we're seeing natural consolidation of market share happen in the U S. So I think right now.

That's our focus and it doesn't mean that down the road M&A couldnt become more interesting, but at the moment, we're very focused on execution.

Great and just as a follow up curious where you think from a state legalization perspective, where the biggest opportunities for OSB and maybe I gaming expansion exist today. Thanks.

Yes, it's a great question I think right now the <unk>.

Rates that we are seeing active bills.

And then kind of a shot at moving taxes, which.

We'll see.

By the day, what I hear their.

North Carolina, Minnesota.

And I think Vermont are the ones that have the best shot to moving <unk>.

Kentucky of course already passed this year, we don't have any update yet on the timing of launch, but we expect by our August call, we'll have a little bit more clarity there and can can factor that into any future guidance to the extent that it's relevant.

For this year and then on the gaming side I think there's a lot of bills right now I don't know that most of them have a good shot of moving this year, but.

The state that I think probably has the best chance on the gaming front this year would be Illinois.

Thank you so much.

Our next question.

And our next question will come from Daniel Pulitzer Wells Fargo. Your line's open.

Hey, good morning, everyone I, just wanted to dive a little bit more into the gross margin. Obviously came in nicely above I'm wondering if you could maybe unpack this a bit and talk to the puts and takes here in terms of gaming taxes platform costs processing costs and then the Rev share.

Each of these pieces are tied to DDR versus handle and what kind of moves around quarter over quarter because.

Obviously, it was a big source of the upside and we've already talked about that a little bit, but but any more color there would be great.

Yeah. Good question I mean, I think gross margin rate was was obviously higher on a year over year basis by 600 basis points underneath of that is a bunch of state complexion, Dan So you've got you've got <unk>.

Investment.

Through promo dollars, which is a headwind to gross margin rate in Ohio, and Massachusetts at the same time, we are lapping a heavy promotional Q1 with the New York and Louisiana launches in Q1 of 2022, that's probably.

One of the largest factors that impact gross margin rate in any given period in a bigger picture of the other elements taxes.

Those are fairly well known from our statutory tax rate.

<unk> platform cost, we continue to be very thoughtful about vendors that sit within our platform costs and you hear us talking about bringing in house more of our.

Of our game offerings, both on the OSB and I gave him side and then in terms of market access as a scale operator, we believe we get fantastic rates in states that do require market access fees. So I think.

Our.

The biggest levers and elements of our gross margin rate.

Got it thanks, and just one quick follow up if.

If I may on.

Third quarter.

I think expectations really changed much there is there an expectation that you have.

Maybe for Massachusetts, Ohio, maybe even Maryland, you have the first football season.

We should expect an uptick in promotions there or is there some element that I'm missing that maybe you should be aware of.

Yes.

Youre right in the sense that we expect that given some of the early acquisition trends, we've seen in those days and knowing that Massachusetts, Hasnt, even had any football yet.

March madness, but there is still probably a significant audience out there we are.

Our baking in an increased acquisition assumption.

<unk> results in Q3.

Even though there might be.

It's fairly similar to what Jason was saying on the gross margin side, there's a lot of puts and takes there too.

It will probably net out.

Slightly better than we thought, but I think thats really going to depend on how strong the customer acquisition is in.

Overall H two should definitely be better. So it's really just a question of it depending on acquisition trends, which are a little hard to predict in these states at that early stage of the NFL season, how much falls in Q4 versus how much falls in Q3.

Got it thanks, so much nice quarter.

Thank you so much thanks, Dave.

Our next question.

And our next question will come from Benjamin Chaiken with Credit Suisse. Your line's open.

Hey, How's it going thanks for taking my questions.

I think in the in your previous comments last quarter, you've targeted fixed cost for 'twenty three to be up 10% to 15% year over year.

I know Jason in a letter in the prepared remarks, you talked about low single digit cadence in <unk>. How are you thinking about the full year fixed cost guidance, it's still about 10 years to 15% or has that moved around at all.

Okay.

Yes, absolutely maintaining the 10% to 15% on a full year basis, and we called out single digit for Q2.

As you can see that the fixed costs in Q1 were higher than that so yes, maintaining the 10% to 15% full year fixed cost growth.

Okay, and then I'm kind of doing this on the fly but that implies roughly low single digit flat to low single digit decline in external marketing year over year.

To Carlos question, you have some new state launches in there, which implies that the legacy states. If you will external marketing is coming down pretty dramatically as this national advertising better product.

How do you think about it and then are you pleasantly surprised or is this all kind of according to plan.

No I think this is according to plan.

And certainly I think the speed with which we're seeing it happen, it's a pleasant surprise, but.

The trends are what we expected.

Where we land on the year will be roughly flat I believe I think.

There is some.

Plus or minus that could occur based on results as Jason noted earlier, we very much.

Treat this fluid.

At the data in real time and so.

As we see how especially Q2 I think is pretty.

We're pretty certain where it will be there I think Q3 is a little bit of flexibility depending on results, but I think we expect to be in the flattish range year over year in FY.

If we spend a little more I think that would also probably come with an incremental revenue expectation in Q4. So I don't think anything would change on the adjusted EBITDA front.

Understood. Thank you.

Our next question.

And our next question will come from Jed Kelly of Oppenheimer and company.

Hey, great. Thanks for taking my question.

Two if I may one longer term Jason.

How do you think about the right approach in terms terms of managing the optimal hold percentage you want to generate with the maximum number of users and then my follow up is you saw very strong growth in embedded states. I think you said, 10% unique user growth where are those unique users come.

<unk> from is that more consumers being of legal age or are you actually getting new users and does that include Golden nugget or is that all organic thank you.

Yes, I think so on the first question I think the answer is we don't know yet.

If you look around the world those markets that have significantly higher hold rate than any anyone in the U S. I've heard is targeting simply due to some of the legal frameworks there and.

Yes.

The point is there's a variety of data points I know theres a lot of moving parts. If one were to want to try to put that puzzle together, but I think we're very much going to treat it iteratively and the key for us is really product market fit so.

Driving a hold up by increasing take meaning making worse odds are players is not something that I think is really being considered right now.

Creating products.

We want and that they retain well on and that they continue to use and get enjoyment out of.

As the method, so I think to the extent that we're able to keep doing that and I think we have a lot of ideas. Obviously, we've talked a lot about parlay in driving that but there's other products like cash out and things like that where there is certainly opportunity.

So these are the way we think about it internally is not let's drive holdup, it's how do we get more adoption and how do we make sure we're retaining and getting satisfaction from customers on these products and the outcome. The consequence of that is higher hold rate and so I think if we continue to approach it that way.

There is probably a good deal of still upside there and where it ends is anyone's guess, we're going to watch the data and continue to be very data driven as a company and then I'm sorry, what was the second question population, whereas the 10% unique user growth coming from in vintage States.

There's always new people coming into the market. We still haven't reached we think the ultimate Tam so.

Meaning in a given order.

Our vintage state.

We have to remember we're still even in the August of state less than five years into this thing so.

Gaming as guests in New Jersey has been around longer but for OSB.

And outside of New Jersey gaming hasn't been around for more than four or five years anywhere either I think four years as the most so.

Really.

It's still early innings, and I think that.

At this stage of most any market you would expect to see continued user growth.

And continued penetration of the population so.

There are.

Under the covers Youre right. There is always people that are reaching legal avs always people moving in and out of state. There are moving parts, but I think a lot of it is just like.

With any product you don't get 100% of the adoption on day one.

You get some of the most.

Avid and excited users and Thats something we consider when we're setting our cash target that you do get more casual customers as time goes on.

There's still a lot of market out there and I think a lot of this is product driven to the more that we create products that can appeal to the mainstream and that can be.

Easier and less intimidating I think for the average customer and understand the more of that user growth will continue.

Thank you.

Our next question.

Okay.

And our next question will come from Robert Fishman.

Moffett Nathan Nathan Your line is open.

Hi, good morning.

Given the current weak AD market backdrop can you just discuss how that is helping with your additional AD buying efficiencies both on the national and local basis, maybe I don't know if possible to compare how much youre paying for an ads, but in the play out this year compared to last year.

Yes, no doubt that there has been.

A reduction in market rate for advertising it's Ben.

Different in different channels, but if you look at it kind of from a macro perspective, it's definitely happening.

Across the board.

There is some offset in certain channels of that because there are limits placed on inventory specifically for our category. So as an example, the NFL has put a restriction on I believe its five spots per game.

Don't quote me on the number but.

There are some I think it's $5 per game, so naturally that changes things. It doesn't have the same effect maybe in other forms of media ware.

Hi.

Auto and insurance and others are competing and driving the market but.

No doubt if you look at it on a macro basis. There has been a reduction in that rate and thats part of alongside optimization why we've been able to have such a significant increase in cat excuse me in customers, but actually to get that with a decrease in cap you usually don't see that usually when you have.

A 50 plus percent increase in customers of Cat goes up a little bit and we saw 27% year over year decline in Q1.

That makes sense. Thank you.

Maybe a big picture with the current competitive landscape it seems clear to us.

Cemented jackings as the winner for this long term opportunity can you just talk about plans to keep growing your market share from here and maybe even potentially close the gap with Vandal.

Yes, I mean first we don't take anything for granted so we assume that there is always going to be a very competitive market and that.

We don't assume we want anything or that we have anything that we can bank on yet.

And I think that keeps a lot of the edge and the competitive drive at the company no doubt, having a big competitor in <unk>.

Also is helpful. It gives us somebody on the OSB side to feel like we can chase down and I think Sam.

Similarly on the gaming side, we've been chasing down bet MGM and for the first time in Q1, we were able to pass them for a number one market share in gaming, which we're very proud of.

So definitely I think having that competitive.

Land Scape is helpful in keeping our employees focused on who we need to beat and at the same time. We also understand that new competitors can enter the market at any time and we can't take anything for granted and have to assume that we always have to be serving the customer and innovating and creating new products and new features.

Over time, we believe that Thats the key to driving loyalty is just best product best customer experience.

Got it.

I would add if you look at the market shares relative to trend on a year over year basis, our handle ship both of our handle share increases are fairly comparable and ill just reiterate that.

Hold rate is continues to be a very large focus area of draft kings and again order rates through product mix and bringing customers.

Additional products that they enjoy so I think as we continue to make progress on hold right.

That's going to help with relative market share reasonably vandal.

Thank you Bob.

Our next question.

And our next question will come from Joseph <unk>.

Your line is open.

Okay.

And Jason.

Asked about just.

Frame how much wider is say your product depth is this year versus last.

Especially in the second quarter so.

I don't know how you can frame for us how much wider.

NBA product is.

For the especially the second quarter versus last.

Especially as I see it kind of going into may.

Implied states still in play.

I can see Knicks, and Celtics, which.

Huge.

And probably betting handle.

Yes.

No I think I mean.

First youre right that the product is really night and day.

Year over year, I think particularly as you look at the sports book product not that we haven't made as much progress in gaming but.

Starting from our standpoint, where last Q2.

We're.

About six seven months removed going into the quarter from our migration and now we've had a full extra year under our belt.

We've introduced micro markets for NBA baseball and several other sports that are really a unique feature that nobody else has we're the only company in this space now with live same game parlay, we even have same game parlay, a year and a half ago.

Now we have the only live NBA same game parlay.

Also the only live MLP same game parlay in the market.

And we're continually innovating on a number of features we added partly insurance and just many many other markets that didn't exist.

Last year, so I think youre exactly right the depth and not just in terms of the markets. Although certainly there has been a tremendous amount of breadth and depth of increase in the market, but of the features and the capabilities as well as been very transformational in terms of our ability to compete for market share until when the customer.

And then you.

Just remind us on.

And your efforts and your initiatives too.

<unk> in particular, and just remind us of maybe.

Yeah.

To be fully implemented in the market.

Yes Gena is.

Still.

Focusing on the migration there and believe that we are on track I think that.

Gina.

Certainly been a good addition in terms of.

It's part of the story of why we've been able to get to number one market share I will say that I think that the best is really still ahead there because.

As long as it's not on our platform, we're not realizing the vast majority of the synergies that we put out when we did the deal and I think those are all still on the comm.

We're very excited about the migration and I think when I say finished not just the cost obviously there is cost savings, but also just having a superior product with better revenue and monetization on the players.

Smooth their customer experience easier to use superior merchandising driving more cross sell between games I think all of that.

Easier flows on the customer acquisition side, we know for a fact that our Tam is converting at a better rate on new users in the genome.

Conversion rate so lots of good things there, but we haven't realized yet so very excited about that and hope to start to see some of that materialize in the back half of the year.

Really impressive results.

Thank you so much.

And our next question.

And our next question will come from Clark Landbank of PT <unk> your lines have been.

Hi, good morning, Thanks very much.

Jason given a lot of the positive things that are happening now with the U S business that we've covered already on the call. So far I am curious, whether we're at a point where either near or medium term you would feel more comfortable entertaining opportunities to expand the business, maybe a little bit more broadly in overseas markets.

For US right now the opportunity in the U S is so significant and we are so well positioned here that that has to be the focus.

At some point down the road international will become of interest, but right now we're very focused on the U S and.

At the same time, obviously, we understand that the capabilities that we're building on the product side. The technology side. These will be things that will give us high leverage.

Create really strong EBITDA margins, where we need to expand into international markets because a lot of the same tech and product is usable without having to add ton of incremental cost. So it's something down the road, we consider but right now we think the U S is still in the very infancy stages. We are so strongly position, we're growing our market share we're growing.

At a faster clip.

<unk>, we're making are working and we want to continue to fuel that as much as possible.

Understood and then maybe coming back to product we've seen some of your peers of late looking to bolster their first party offering so I'm curious.

Understanding that the priority is really building in house, there is sort of bigger picture a widening gap between <unk> and the rest of the sports betting market would you consider additional acquisitions as a means of sort of both improving the offering and magnifying that trend or is there one market, whether it's OSB or gaming where that makes more sense.

At this point I don't think that Thats really a focus either.

We're seeing market share consolidate organically.

And I think at a certain point down the road.

That will reach some sort of ceiling and then we'll evaluate that at that point, but.

Right now I think we feel like the similar answer to your prior question that what we're doing is working and companies all the time make mistakes by getting distracted when they have something that's really working and instead of just focusing and I think thats something that we feel is really important to just continue to keep the.

Team focused on enterprise right now.

Thanks very much.

One moment for our next question.

And our next question will come from Chad Beynon of Macquarie. Your line is open.

Good morning, Thanks for taking my question.

We think about the revenue guidance Q1 was 24% of that which I believe is slightly higher than normal and you called out.

All of the items that led to that strong performance, but as we think about normal seasonality understanding that.

It's a moving target with these structural hold changes is there anything that.

That you are comfortable with providing to us just in terms of how that could look whats really hinged on that fourth quarter or what the middle of the year could look like thanks.

Yes, it's great question, I mean, I think that.

If youre comparing to last year, we had unusually low hold last Q1 because of unfavorable support outcome. So in any given quarter that can swing and thats part of why we really focus more on annual guidance and giving some color around relatively how much we.

Expect to fall in different halves or quarters, but.

It does vary a little bit based on that although over the course of the year. It tends to even out. So you will see some fluctuations in terms of the revenue distribution.

Also youll see some changes depending on timing of state launches and other things like that so I think thats really why why it was a bit different is that last year, we had really low hold still.

Outcome driven.

And there have been some structural changes that have improved too.

But we did see really poor sport outcomes in Q1 last year relative to this year and Thats been a big difference as far as anything baked into future quarters, a lot of what we also improve throughout last year was already taking effect in the back half of the year. We have other initiatives that we think could lead to some upside this year, but of the things that we know.

We have that we baked into our forecast a lot of that was already realized in the back half of last year. So.

You see a bigger impact in Q1 and potentially in the first part of Q2 as well whereas.

As we get closer to <unk> some of that is kind of lapping year over year.

Okay helpful. Thanks, Jason and then with respect to just media tie ins you've done some of these.

Exclusive live broadcasting partnerships.

It appears that there will be more opportunities if you want to kind of expand with other other partners in the media space just wondering what you've seen.

From a success or failure with some of these exclusive deals that you've had if the engagement is higher and maybe it's worth exploring some of those opportunities that could come up in the next 12 to 24 months.

Yes, I mean I think.

Sure.

For us.

Continuing to optimize there is a big part of optimizing our marketing.

Really.

It's a deal by deal thing so at this point.

Tremendous data.

Not just from our decade plus of daily Fantasy sports been now for almost five years of sports betting on what types of media deliver what types of results.

<unk> been a big part of our year over year optimization and I also think that the market environment has improved which we noted earlier on a previous question. So.

So theres a lot to like in the media space and.

From the standpoint of deals we evaluate each deal on a deal by deal basis.

The hurdle is if we were to take those same dollars and spend them on the open market could we do at least as well and if we think we can do at least as well then why tie them up so it has to be a deal where we feel like we have some sort of strategic advantage either access to good efficient standard increased scale it wouldn't be achievable elsewhere.

Sure.

Some sort of deal that would give us favorable pricing or something that would make it so.

Having a tie in a tie up of dollars versus flexibility on a dollars would make sense for us.

Makes sense. Thank you very much.

One moment for our next question.

And our next question will come from Robin Farley of UBS. Your line is open Robyn.

Great. Thanks, I have two questions. One is just a follow up I'm sorry, I didn't know if you clarified how much keener acquisition contributed to that.

A 10% increase in unique users and then another question also.

On your guidance you guys typically every year being nine.

9% population.

That would take.

Quite a few of those smaller states you mentioned.

To legalize this year as you kind of achieve that.

Increased access to their population for 2024.

Sure.

You don't see those multiple legalization and obviously, if Texas modern ship.

<unk>.

Is there enough organic growth.

To maintain guidance, even if you don't get multiple legalization.

This year for 2024.

So thank you Robin on the first question, we actually like for like so it wasn't just we took <unk> added it in in cap No G. NOG in the base in fact, if you look at <unk>.

It's actually a little bit of a downward drag on that 10% number. So it would have actually been higher if you just looked at the draft Kings brand.

But its all included so that's in there and on the second question.

As far as like.

It's going to vary year to year, right and right now I think if you look at bills that are alive, you could see a scenario, where it's above what we forecasted below or right on obviously, a Texas comes through then that plus Kentucky alone is already over the target.

Texas did not you still get to that sort of range that we've said as an expectation if north Carolina, Minnesota, and Vermont end up passing alongside Kentucky. So I think either of those are potential scenarios to get at or above and obviously, if some or none of those bills passed then we won't so.

I think too early in the year to kind of call that as far as the implications and what they would be.

We were still seeing nearly double.

Year over year revenue growth in our older State vintages in Q1, we mentioned that earlier and I think.

Again people need to remember that even the oldest of states are still less than five years into this thing and so.

A ton of just organic growth happening I do think long term Tam we need to continue to see state legalization, but I wouldn't make too much out of whether we're above or below in any year. In fact, one of the interesting implications is really on the specific 2024 numbers, if we see less.

Legalization I don't really expect a tremendous difference to 2020 for revenue because a lot of the states that might legalize. This year would end up launching throughout 'twenty four there will be new user acquisition and things like that.

So it probably won't really move the needle a whole lot on revenue, maybe a little bit but not a ton.

Where it really would have an effect would be on the EBITDA, which obviously, we want to see more state legalization, but in the short term last would mean more EBIT less state legalization would mean more EBITDA in 2024 so.

It's kind of an interesting way to look at it as well I think.

Great. Thanks very much.

Thank you.

And one moment our next question.

And our next question will come from Jordan Bender of JMP Securities. Your line is open.

Great. Thanks for taking my question, if we think about your legacy customers. The promotional intensity of those players may be look consistent with more international markets or do you think there is still more room to save on promotions coming from those cohort cohorts.

I think definitely there is more room.

And similar to how we look at hold it can't be.

Something where we create a worse customer value proposition have worse experience and you don't need to.

There is plenty of levers just by making sure we get the right things targeted to the right people. So that they are actually Jen.

Generating incremental <unk> alongside the promotional dollars and having the effect that we want.

There is optimization of bonus hunters out there, which we've been very focused on there is all sorts of levers that you can pull.

And then there is still just the natural decline that youre going to see over time as the market matures.

You can look across Europe , and see that trend in a number of different markets. So.

No doubt Theres still room, there and that's still a focus area for the team and at the same time.

We feel like there's no real absolute target, it's certainly about maximizing long term MPV and player value. So.

We're also leaving the flexibility and I'd say that if you can find wins, where you can really drive increased revenue our attention through promotions that payback quickly then we want you to pursue that as well.

Great. Thanks, and then for my follow up a decay horse should we be thinking about that as a revenue driver for you guys or is that more kind of a cross sell opportunity into other areas of the business.

I mean, it will have a revenue impact, but it would be fairly de minimis on the year, we're still rolling it out it's in I think 15 states now.

So still in the process of doing that I think we'll have more to say probably in more and more information on that once we get through the triple Crown, particularly the Kentucky Derby, which.

I think will give us.

Our sense of what kind of customer acquisition, we can expect.

And I think really it's still new enough that I wouldn't necessarily ascribe a whole lot of revenue this year to it but as we get smarter about how to utilize that product and cross sell between it and sports book and I gaming I think you'll continue to see a bigger and bigger impact in.

Something that we felt was important to add to our product portfolio and will also work to better integrate long term.

Great Thanks, Jason nice quarter.

Thank you.

Our next question.

Yes.

Okay.

And our next question will come from Ryan Macdonald of Craig Hallum Capital Group. Your line is open.

Good morning, guys nice job.

Thank you so on Massachusetts. So you guys defended your home turf very nicely there took number one handle share by a commanding lead.

How important was that psychologically to win that really battleground and I guess did you change your spend and your strategy versus running the normal playbook that you say applied in Maryland or Ohio.

I think really the only thing that.

We changed in terms of the strategy was just making it clear that we're a hometown company and obviously thats unique to here so other than that it was pretty much the same playbook.

I think new England in particular.

We tend to love our own here. So we feel like that was a really good angle for this market and it worked it was very effective from a market share perspective.

New customer acquisition perspective so.

We will continue to do that but otherwise its the same state playbook that we've been optimizing over the last 20, plus states and I think that was the biggest reason.

That we've had success in penetrating because he saw similar adult penetration and maybe not quite as much market share, but similar acquisition in adult penetration in Ohio, and Maryland as well.

And then just for my follow up with the lives Sam game Parlay products for the NBA Major League baseball has that accelerated in game betting in total or is it just a shift in what people are betting on live and being margin accretive rather than incremental.

No it's definitely incremental I mean, I think that right now we're seeing both parlay I know, we talk about parlay a lot, but we're also seeing in game grow.

So there's a lot of upside there I think the biggest upside in in game is just figuring out how to get the video feeds lower latency for people, who want to do the play by play type of betting but.

No doubt live same game Parlay has driven an increase in engagement in game.

Thanks, Good luck guys.

One moment for our next question.

And our next question will come from John Decree CBRE. Your line is open.

Good morning, everyone. Thanks for taking my questions.

Maybe the first one which is probably a little bit of a summary from a couple of components that we've talked about this morning already but.

With structural hold rate going up and then particularly in vintage cohorts that promotional intensity is moderate here coming down but yet in Europe .

Our customer retention seems to be increasing nicely, which is a really nice tailwind I'm wondering if you could kind of talk about what you think is kind of driving that that's accessories, so presumably customer values going up or if they are spending more but also coming back more frequently.

I think it really starts with product.

<unk> product will create stickier customers.

I think customer experience has been a big focus we've had significant improvements in our <unk>.

<unk> year over year, including the introduction of chat and other things that I think would help a lot our CRM on the marketing front has been optimized for several years now and I think we've made a lot of year over year improvements in that.

Especially as it relates to some of the post Super Bowl retention and cross sell into I gaming I think the CRM team has done a fantastic job.

Really it's been execution across the business I think.

It's been a lot of really good work by a lot of great people across the whole company.

Thanks, Tim.

Helpful and maybe an easy one for Chase and park.

Cash at the end of the year is expected to be around $800 million in the past I think you've been comfortable with capitalization, but is it fair to assume with that cash balance and profitability trajectory improving that.

Im still comfortable with your capitalization at this point.

Very comfortable with our capitalization.

No need for additional capital.

Thanks, Jason.

Great quarter guys congratulations thank.

Thank you.

And I would now like to turn the conference back to Jason for closing remarks.

Thank you all for joining us on today's call we're off to a strong start in 2023 and are excited about the rest of the year and beyond I look forward to speaking with you over the next few weeks and hope you all stay safe and well. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Q1 2023 DraftKings Inc Earnings Call

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