Q3 2023 DraftKings Inc Earnings Call

November 3, 2023

[music].

Okay.

Good day and thank you for standing by welcome to the Draft Kings Q3, 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the especially the press star one on your telephone you will then hear an automated message device in your hand is raised to withdraw your question. Please.

Press Star one again, please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today, stating John Stanton Dodge cheaply Chief Legal Officer. Please go ahead.

Good morning, everyone and thank you 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 actual 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 draft Kings 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 release and presentation.

Which can be found on our website and in our quarterly report on Form 10-Q filed with the SEC.

Hosting the call today, we have Jason Robins co founder and Chief Executive Officer, Droppings, 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 will then open the line for your questions I'll now turn the call over to Jason Robins.

Good morning, and thank you all for joining.

The first three quarters of 2023 had been outstanding for drafting we have made thoughtful investments in our product throughout the year and are winning with our customers and our team executed tremendously around the start of the NFL and college football season.

Importantly, we remain focused on our core value drivers acquiring customers efficiently retaining and monetizing our existing customers.

<unk>, new jurisdiction and building an efficient and scale the organization.

I am pleased to share that the strong execution and focus resulted in another excellent quarter.

Revenue and adjusted EBITDA exceeded our expectations and our momentum continued into the fourth quarter with the start of the basketball and hockey season.

We are raising our expectations for fiscal year, 2023, and introducing initial guidance for fiscal year 2024 and.

In 2024, we expect revenue of $4 5 billion to $4 8 billion and.

And positive adjusted EBITDA of $350 million to $450 million.

Also expect to generate meaningful positive free cash flow in fiscal year 2024.

As we look back on the third quarter in 2023 here our key takeaways.

First we are winning our revenue in the quarter increased 57% year over year, and we achieved number one combined OSB in our gaming gross gaming revenue share in the U S.

Patiently added over 1000 basis point, the combined OSB ni gaming shares in the second quarter of 2022, which we are very proud of.

Second our investments in product and technology are paying off we.

Have created what we believe is the strongest product in the industry and I think overall engagement on our app and structural hold percentage continue to increase.

Importantly, we have a clear roadmap to extend our product advantage over the coming years.

Third our older States are generating significant contribution profit and newer states are generating positive contribution profit faster than previous state.

Fourth we expect attractive adjusted EBITDA percentage on incremental revenue as we believe our organization is largely at scale and therefore has a long runway of margin improvement.

Finally, the best is yet to come we are excited for the future and look forward to presenting our latest views on the U S opportunity sources of competitive differentiation core business drivers, including additional details on unit economics, and our multiyear financial outlook at our Investor Day on November 14th.

With that I will turn it over to Jason Park.

Thank you, Jason I'll hit the highlights, including our very strong third quarter performance increased 2023 guidance and our initial expectations for 2024. Please note that all income statement measures discussed except for revenue are on a non-GAAP adjusted EBITDA basis.

As Jason mentioned the organization is executing very well and that is showing up in our results. We achieved $790 million of revenue in the quarter, which is 57% higher than our third quarter 2022 revenue and our adjusted EBITDA of negative $153 million improved by $111 million on a year over year.

Okay.

Customer retention and engagement far exceeded our expectations.

Customers enjoyed our lives same game parlay offering as well as our live in player prop market.

<unk> was a bright spot throughout the third quarter and we successfully transitioned many of those customers into the football season.

Customer acquisition was also healthy and exceeded expectations. For example, we have already acquired more than 5% of the adult population in Kentucky. Following the launch of our sports book product in that state on September 28.

Structural hold but above nine 5% during the quarter and well ahead of expectations as we continued to improve our partly mix and optimize our trading capability.

Our actual sports book hold percentage was approximately 9% inclusive of customer friendly sport outcomes is primarily in college football and the NFL.

Promotional reinvestment as a percentage of PCR outperformed our expectations due to stronger than anticipated retention of existing customers, which resulted in a slightly higher mix of existing customers versus new customers promotion.

Promotions as a percentage of GTR continued to improve on a year over year basis for our OSB and <unk> states.

Our adjusted gross margin was in line with expectations and increased almost 300 basis points year over year.

<unk> handle growth combined with improving structural fourth book hold rate and better promotional reinvestment for OSB Ni gaming contributed to higher adjusted gross margin.

External marketing and fixed expenses were consistent with our plans as we executed our football season kick off and continue to exert discipline against our compensation expenses and vendor related costs.

We're very pleased with our results in our more mature OSB and I gave you state in the states that launch from 2018 through 2021, we continue to drive very strong handle and revenue growth year over year with a corresponding improvement in adjusted gross margin rate, while our external marketing costs decrease at a double digit rate.

Our strong third quarter results and our visibility into continued improvement have enabled us to significantly raise our expectations for 2023 revenue and adjusted EBITDA. We are improving our full year 2023 revenue guidance range to $3 7 billion to $3 $72 billion or by $195 million.

Midpoint.

We are also improving our full year 2023, adjusted EBITDA guidance range to negative $95 million to negative $115 million or by $100 million at the midpoint.

The bridge from the 2023 revenue and adjusted EBITDA guidance that we shared in August to our 2023 guidance as of today include stronger customer retention acquisition and engagement and structural sports book hold improvement, partially offset by customer friendly support outcomes in the third quarter and our expected launch and meet you.

You can see the details of the bridge in the earnings presentation, we posted to our website.

In terms of our full year, we are increasing our 2023 adjusted gross margin rate guidance to $43, 5% to 45%.

We now expect contribution profit, which we define as adjusted gross profit less external marketing to approach $800 million in fiscal year 2023.

We continue to expect fixed cost to grow less than 10% and external marketing to be consistent with prior guidance, even when including our investment in meat.

With regard to our balance sheet. We ended the second quarter with $1 1 billion of cash and now plan to end the year with more than $1 2 billion of cash as a reminder, we expect approximately $120 million of capital expenditures and capitalized software development costs for fiscal year 2023, and changes in net working capital to be a modest source of cash.

We expect this level of Capex to continue in 2024.

Moving on to our full year 2024 guidance, we are poised for a rapid increase in adjusted EBITDA due to continued strong revenue growth coupled with a scaled fixed cost structure.

Our 2024, we expect revenue in the range of $4 5 billion to $4 8 billion or nearly $1 billion of incremental revenue growth compared to the midpoint of our fiscal 2023 revenue guidance and more than double our revenue from 2022.

Our guidance range for 2024, adjusted EBITDA is $350 million to $450 million, which equates to more than $500 million of year over year growth compared to the midpoint of our fiscal year 2023, adjusted EBITDA guidance and more than $1 1 billion of adjusted EBITDA improvement since 2022.

Our guidance range for 2024 includes investment for launch approximately 5% of the adult population.

In addition, based on the midpoint of our fiscal year 2023, and 2024 guidance ranges, we expect year over year, adjusted EBITDA flow through percentage up 53%, which we look forward to delivery.

In sum, we had an excellent third quarter and are very excited about the trajectory of our business. We look forward to sharing more details at our upcoming Investor day.

That concludes our remarks, and we will now open the line for questions.

Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered you were seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.

Okay.

Our first question comes from Shaun Kelly with Bank of America. Your line is open.

Hi, Good morning, everyone and thank you for taking my questions just wanted to start with sales and marketing I think one of the many things we learn this quarter, we're seeing your overall sales and marketing actually declined year over year, and I believe implying external marketing down even more during the quarter.

As we look out to next year I think that pattern actually continues and I was just wondering if you could elaborate a little bit on what's enabling you to do that and still make the investments that you hope to and sort of just talk to us a little bit about.

Both mix.

New customers acquired versus existing and also seasonality. If you could just how should we think about external marketing across the year. Thank you.

Thanks, Sean.

You are correct.

We do expect further decline in external marketing next year and that is inclusive.

Potential launches in North Carolina, as well as some other states so.

Specifically the states that have legalized not any new states were predicting legalization and I think the biggest reason why is that as our existing states mature.

We see less and less external marketing spend there we are still continuing to acquire customers even in our oldest state vintages. So.

We do still have marketing spend allocated to those but it's certainly not nearly at the same level as in the first year or two or three of estate. So as states mature that comes down and so just generally the business is maturing we're seeing that happen, which is what we expected of course, if we see some very significant new states come online next year.

That could change but.

Right now based on the kind of launch that we expect is that we expect to launch.

We're forecasting an external marketing decline next year.

Thank you one moment for our next question.

Our next question comes from Jeff <unk> with Jpmorgan. Your line is open.

Good morning, guys, Alright, Joe sorry about that.

I've been getting that in third grade.

Yeah.

Hey, Joe.

When you look out to 2024 and you look at when you roll up your guidance and your.

Your forecast and when you look at OSB older States and newer states.

Is there a more meaningful contribution coming from the older States or how are you looking at between the different cohorts and vintages.

Yes, it's a great question, we actually are going to dive into that very specific topic and much more granular detail at our Investor day.

On the 14th very much look forward to sharing detail there and I think the way you can think about it is if you look at sort of the relative population sizes of the different vintages, and then think about the maturity curve. Obviously the older States are still growing so on a per population per capita basis. They will be larger and then if you kind of.

About how big each vantage is based on.

Percentage of population.

And then also think about the mix of whether its just OSB or OSB ni gaming that will give you a picture of how much but we actually are going to go into much more specific detail on this on the 14th.

I always very sternly warned by my IR team not to run the front run the Investor day, So I won't but great question and look forward to sharing more with you in a couple of weeks.

Great. Thanks, guys.

One moment for our next question.

Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Hey, Thanks, clearly there's been a lot of concerns or questions about the competitive environment, whether new entrants or existing folks who perhaps need to protect share. How are you planning for promotions into 2024 versus 23 in the guidance that you provided and could there be a reallocation from marketing savings that you're discussing.

We continue excuse me, it's a great question.

We continue to expect to see decline in promotions I know that there are a couple of states.

Report them that different data can be extrapolated, but it's always tricky to kind of look at a couple of hits, we actually saw a decline year over year and promotion rate for overall OSB in our gaming business in Q3, obviously as you know we saw gross margin increase of about 300 bps year over year next year, we forecasted a two to 300 bps gross.

Increase and Thats, mostly from promotional decline there is a little bit of hold rate increase in there too but.

We will stay disciplined and we've seen multiple waves of competition.

Last time, we saw a huge wave of competition. We stayed disciplined we didn't increase our promotion rate.

We expect to do that this time so.

Certainly contemplate a variety of different scenarios in our guidance and at this point I think we have a decent amount of experience and historical data on that different.

Different types of competition that might emerge, but I think the important thing for US is just to continue what we've done all along which is to stay disciplined to focus on bringing down promotion rate through optimization and then just naturally I think.

Continuing to see the user base matures and so much of that promotion goes to new customers.

I think if we continue to do that and execute well the trends that we've been seeing for the last seven eight quarters will continue.

Yes.

Sounds good thank you.

One of them before our next question.

Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Hey, guys. Thank you.

Jason when you guys think about your guidance for 24 within the context of the share gains you guys have showed consistently but really stepped up in the <unk>.

How are you thinking about I think relative to the 33 is what you guys had another lease that's blended across both channels. How do you guys think about that share within the context of next year's net revenue and EBITDA guidance flattish moving up et cetera.

Yes, it's a great question I mean, we've always sort of typically guided the same way, which is we look at historical cohorts and data project forward based on that so implicitly that generally implies a flat share and I think a lot of why we outperform this year right.

Such a significant margin was just our share increase.

No.

Certainly not banking on that for next year, where we're confident that we have some opportunity there and we believe that we can but as far as whats embedded in the guidance our methodology hasn't changed we look at historical cohorts. So just kind of implicitly implies flat share and any protection going forward.

Great. Thank you and then obviously based on your scale at this point and the flow through that you guys expect to receive or generate going forward. I guess the next question kind of becomes looking back to your March analyst day, one I think you guys laid out.

Gross margins like 56% at a steady state and some of the buckets platform processing et cetera.

That would that would kind of contribute to that.

How do you think about like kind of the evolution of maybe whittling down some of those costs, whether it be within processing, our revenue share and how far are we from having that as kind of a talking point around improving that gross margin.

Hey, Carlos Jason Park, Yes, so great question on the flow through and I'll start sort of on the bottom end of the income statement and Jason had already alluded to improving or declining external marketing costs within the 2024 time period and what I'd also add is we're going to we've had a.

A great 18 months of just exerting excellent discipline on our fixed costs will continue to do that then into the cost of goods sold part.

We guided to a 200 to 300 basis point improvement in gross margin rate.

Primarily as the promo reinvestment continues to improve and we do we do have multiple initiatives throughout the cost of good sold structure, whether those primarily around vendor related negotiations and continuing to achieve scale through volume discounts.

And those are those are embedded within our gross margin rate guidance as well and I think provide long runway of continued improvement both at the gross margin level and the EBITDA margin line.

And I think as Jason mentioned definitely the largest driver of gross margin improvement has continued maturity of that base, which brings promotion rate down but.

Certainly in addition to some of the negotiations. We also just have existing contracts with volume thresholds that we expect over time trip that will bring gross margins down and that's one of the benefits of having scale.

Yes, Jason and Thats kind of where I was going with that like what is that timeframe in the next year or two or is that kind of just ongoing enrolling I think it's ongoing really I mean at certain point you cap out but.

I would imagine.

Google gets better rates on vendors for things than we do so I think just as you get bigger you continue to be able to get.

Leverage in those areas because you can afford to pay more even if it's less on a percentage revenue basis and that's generally how all these things work is that as volume goes up the rate comes down.

So yes, I do think it's just kind of an ongoing thing we have a team that focuses on this pretty much all year round and is continually looking for ways to optimize the cost structure.

Great. Thank you both.

One of them before the next question.

Our next question comes from David Katz with Jefferies. Your line is open.

Hi, Good morning, everyone. Thanks for taking my question.

I'd like to talk about something that is.

Never never come up.

Until now which is your cash flow statement. If we start to think about what next year brings with the 24 guidance.

And I think.

In the prepared remarks, you talked about keeping capex at a similar 120 level.

You do start to.

While up you'll start to accumulate some cash.

And I'd love to get a sense for how you think about managing around that obviously you want to.

Keep yourself positioned for a state like Florida, or California, or whatever may happen, but.

Can you just maybe give us a little more color on how youre thinking about that.

Yes, it's great question.

Something we've actually been spending increasing time going through looking at all different options, including.

Organic investments we can make.

Opportunities for our capital structure optimization buybacks looking at Bay.

Basically how do we deliver the maximum value over the long term shareholders. So that is a great question. It's something that we feel fortunate that we now really are in a position to have real value creation from optimally, making the decisions to now we've been as you said focused on getting to this point, but definitely I feel very good about our trajectory.

On the cash flow side.

We will have more to say as we think it through but definitely a great question and something that we're actively discussing here.

Sure.

Okay.

Thank you.

One moment for our next question.

Our next question comes from Joe Stauff with Susquehanna. Your line is open.

Thank you good morning, guys.

Two questions I was just wondering in your guide for 'twenty four.

Jason You had mentioned I guess within the to the gross margin improvement you had an assumption for an improvements structural hold what is that and then.

I'm wondering if you could just comment on.

The level of adult penetration and user growth that you are getting.

And mass and Ohio, obviously, you've got the 7% pretty quick.

Is it fair to assume that that's now higher call. It two months into the sports calendar.

So great questions on the hold side.

We've forecasted basically that we continue on the same level of structural heart rate or on today. Obviously, there is some opportunities we think to potentially increase that but right now thats. What we have line of sight to so thats, what we put in.

I'm sorry, what was the second question.

Yes, just to comment on.

Trying to estimate.

Adult penetration, how many more customers are out there user growth et cetera.

You had given.

Ohio and mass in terms of where you had been.

You've got the 7% pretty quickly and I'm wondering.

Where that is now.

Yes, it's a great. Another great question I mean, we haven't found a ceiling yet and the oldest states. We continue to acquire customers even in a state like New Jersey or Sir first date that we launch and obviously is bordering a lot of other states that have since launch we continue to have healthy customer acquisition. So.

Hard to say, where the ceiling is we're well into the double digits in terms of adult population penetration in some of our oldest state so.

<unk> to go up over a long period of time, but certainly at this point, we have not found the ceiling yet.

Thanks, Jason.

Yes.

One moment for our next question.

Okay.

Our next question comes from Dan Pulitzer with Wells Fargo. Your line is open.

Hey, good morning, everybody.

Hoping you could talk a little bit more about hold maybe as you see it philosophically or the long term I mean is there a kind of a target our upper limit you see relative to the kind of mid nine level, you're at now and I guess, maybe along with that how do you think about the tradeoffs for hold relative to LTV for the customer.

Yes, I mean I think this is something that will just always continue to be analyzing and optimizing and it's almost a tricky question to think about in that sense, because it really depends on where youre getting hold increase from if you continue to create products that the customer wants and they have demand they have higher hold than that.

It can do a great job I think of continuing to raise your or then.

I think on the other side of it if you are raising a whole buy.

Neither forcing people and the things that they really don't want or making your pricing worse than the market I think thats, obviously potentially you could have a negative impact on LTV. So were very focused on the customer and on creating we think and we've seen this with a number of products, we've created from SGP to cash out.

We have a new one that we are going to be talking about at our investor day, or launching which I loved that im really excited about that kind of fit that double.

Our objective of being great for the customer and holding better than the average. So I think we have a long runway on that front and its really about focusing on the customer and maximizing the LTV. So in the end if we do see that anything whether it's sort of just the concept that whole tire or a particular product or anything that we've entered.

<unk> is having an adverse effect on LTV, then obviously, we will try to turn the dials accordingly, but.

That's really what the team is focused on hold is obviously a variable promotions are variable, but retention is the most important variable so very.

Very much focused across our value creation drivers across the LTV spectrum and I think that.

That is something that again, it's a little tricky because it depends on how you're doing it but I do think there is a lot more room for upside there than not.

Alright, thank you.

One of them before our next question.

Our next question comes from Robert Fishman with Moffett Nathanson Your line is open.

Hi, good morning.

<unk> gaming despite still early days on legalization is your confidence increased over the past year of how big of a driver I gaming can be for total company revenues and maybe also importantly, total company profitability and then separately with some of your competitors using that vision for streaming.

L games. This year can you discuss your updated thoughts on streaming live games in your App and whether you think there's any long term benefits for grafting.

So great questions on the first one.

Gaming is probably the one piece of our business I pointed its under talked about namely because we're only in 11% of the population now 87% is still not legalized huge opportunity there, obviously still tremendous opportunity with a little bit around half of the U S population, not having legal sports betting and <unk>.

This market is still growing too, but I gaming as we've noted in the past. We believe has roughly two times the Tam on a per capita basis.

Online sports betting so tremendous opportunity and I do think youll start to see more momentum in the states in the coming years. It should as we thought in the beginning sports is kind of leading the charge, but definitely.

Definitely feel like Thats been under talked about opportunity and how glad that youre, bringing it up and something that we much like the sports market feel we're very well positioned and having the number one position in the market at this point.

And then as far as the question on streaming and the App. It's something we did look at and continue to look I mean, I wanted to exciting parts of where we're at right now as a company and as an industry is that there is still so much innovation out there and theres. So many things that we can do to create value for the customer and for the business.

We had a really full product roadmap going into NFL.

It didn't end up prioritizing that one, but it's something we continue to evaluate and like I said I think the fact that there's things that people feel are value creating out there.

We probably would agree a value creating out there that still didnt make the cut because we have so many other really exciting things that we believe are adding value and generating the results that we've generated and it's just a really special time right now in the evolution of the market to be at where theres, so much great opportunity and so much innovation.

This is a great example of just this long product roadmap, we have of things that we know and have confidence we'll deliver value and then it's just a matter of time for it we can get to at all.

Perfect. Thank you.

One moment for our next question.

Our next question comes from Barry Jonas with <unk> Securities. Your line is open.

Hey, guys good morning.

Can you maybe talk about your expectations for the next wave of state to legalize OSB and where you could get access thanks.

Yes, great question.

Hard to say, obviously, if you look at the map.

A lot of the biggest states outside of the top three have already legalized, obviously, Georgia still one.

In that top 10 that it had some momentum in the last couple of years.

Hopefully we get some traction there this year.

Obviously, the big prizes of California, Texas, and Florida is still out there, but those might be a little longer path with Texas not meeting until 'twenty five.

Florida, and California, requiring valid initiatives so.

Those are really kind of the big states in terms of population left out there and I would say probably the clearest path now of them is in Georgia, but still really hard to say, what the timing and likelihood of that is.

And then more on the mid mid sized state we had good traction and progress in Minnesota last year, I think that could be one that's in play.

Jerry I think there continues to be a lot of interesting route there's some complications there too, but I think there is potential for that one.

And then like every year, there's always some states that we didn't anticipated going into the legislative session and then all of a sudden there is some momentum around and we usually figure that out either towards the end of the year. Early next year as people are starting to think about introducing bills in the upcoming sessions many of which start in Q1. So we'll know a lot more in the next three or four.

Months, but definitely think we'll get some more states. This year and those are a handful of other ones. So we ever ion.

Great and then just for a follow up with ESPN bet coming online mid football season, do you expect some trialing from your user base and is this at all reflected in your guidance explicitly.

We have seen so many waves of competition now and we really always had a highly competitive market. It's not like we haven't.

<unk> had a fierce competition pretty much from the start so we always expect that there will be competitors that will come and try to give our customers an experience and we have to just give them a better experience.

Certainly there are people that will go take promos and that'll happen, but in the end, we believe that most customers will gravitate to the best product. The best experience. So we're going to stay disciplined and I think it will probably play out in a very similar fashion to other times, but we've contemplated.

All sorts of scenarios and our guidance Thats why its guidance with a range, we definitely have thought through.

What we think the competitive environment in different flavors of that could look like.

We feel that based on now that we've been through this a few times not only do we have experience managing it. We also have a lot of data. So we feel pretty confident that our guidance range is going to encompass any variety of scenarios that could possibly emerge on a competitive front.

Great. Thanks, so much.

One moment for our next question.

Our next question comes from Robin Farley with UBS. Your line is open.

Great. Thanks.

Question, one is kind of a follow up to the topic just prior it.

It sounded like you were saying Youre forward guidance is based on kind of flat market share with with where you are at a given point and I guess Im just wondering.

Yes.

What degree you might have factored in that.

There were some competitors that either closed up shop or sort of temporarily but would be coming back in.

No.

Is there a factor in there when you think about market share next year.

Compared to this quarter or are you thinking that that's the share this quarter was not impacted didn't benefit from that at all.

And then my other question is just I'm wondering if you could give us a sense of any difference in consumer behavior between OSB customer gaming customer because we can see that cumulative aggregate revenues by state that you would see kind of what's happening on a per person basis, just thinking about like any consumer behavior.

Are there more strength or impact from consumer concerns right now in one versus the other thanks.

Yes, great question I mean on the first question.

Probably the best way to think about it is the.

The guidance kind of is implicitly.

Due to the methodology going to gravitate toward a flattish sheridan it wouldn't necessarily be like a flat share to the moment right because we're looking at.

Historical cohorts and seasonal data so it really would encompass more of a steady state share over a recent period of time than like a point in time like this month share type of thing. So that's how I would think about it.

And then as I noted I think really the range itself contemplates a variety of different scenarios and competitive impacts, including any impacts that we might seek to share to customer behavior, but.

Really based on historical data, we feel like we have all of those scenarios property encapsulated in the guidance range. So that's really how I think about it and then.

Really I think there's also an element.

<unk>.

Having confidence that our customers and our cohorts have been sticky through multiple waves of competition.

Flat share to me would be a disappointment, we've been gaining share I expect us.

Our team is going to be dissatisfied if we don't continue to gain share that doesn't mean that we're necessarily going to guide to that obviously as I noted were not but in.

In some ways you might think of flat share is actually a disappointment in some.

Kind of impact that we werent anticipating in that sense, but I think for US really the goal is always to continue to gain share and.

I think it's just a matter of how we forecast and the guidance methodology that we choose that you end up with the sort of flattish share implicit assumption in there.

I'm sorry, what was your second question was on gaming and OSB customers I think yes.

And kind of the consumer behavior is one of the others looking a little bit different in the last few months.

The key difference between the <unk> gaming in OSB customer is really the OSB customer is very seasonal and event driven and there are certainly people they bet on sports throughout the year, but the fact of the matter is that the sport calendar changes throughout the year. So youre just going to have more betting in times of heavy sport like right now versus.

Debt of summer or something like that I gaming is kind of there and is the same all the time. So while certainly we have overall activity differences because more customers on the platform for sport being more cross selling to I gaming on the individual customer basis their behavior isn't going to change a whole lot throughout the year, there's some seasonality to it but people tend to do.

During holiday times have more downtime and things like that but it's much more much less pronounced.

Pronounced than the OSB customer much more steady throughout the year.

Okay, great. Thank you.

One moment for our next question.

Our next question comes from Brady materially with Needham <unk> Company. Your line is open.

Great. Good morning, Thanks for taking the question revenue growth has been really explosive over the last couple of years, but the guidance for 'twenty four has at the year over year growth stepping down where there is some of the tailwind that had been supporting the revenue growth slowing as we move from 'twenty three 'twenty four.

And I think it's really just the size of the base increasing I mean, if you look at the absolute revenue growth, it's actually close to $1 billion in our guide for next year, so very healthy growth.

Certainly as the base gets bigger that percentage is going to be harder to keep in the $50 60, plus range. So I think thats really the big thing obviously there is a.

And in fact on new states that can either increase or if there is a lack of new states decrease that so thats something as you think about long term Tam always to keep an eye on but.

I think really what we are seeing next year, because we still see very healthy growth across all of our state cohorts. It's just a matter of we're coming off of a very large base of revenue and adding $1 billion of revenue doesn't give the same percentage of our nearly 1 billion I should say doesn't get the same percentage increase as it did in the past.

Understood. Thanks, Jason.

One moment for our next question.

Our next question comes from Brandon <unk> with Barclays. Your line is open.

Yes.

Hey, good morning, everybody. Thanks for taking my question.

So just one on gaming another another quarter of sequential market share growth there I'm curious if.

If you'd call out sort of your OSB share OSB momentum cross sell as the main driver of that sequential share lift how much growth in comparison to that are you getting from penetration in the.

The Golden side and in service getting more of those older customers those slots customers and growth from that angle and if you saw any benefit in the quarter from disruption at <unk>.

Certain competitor that had that had a headline.

Stuff in the news.

Yes.

So I think really the.

<unk> gaming business you mentioned a few questions ago I think is under talked about it's just such a strong business steady growth.

And we just continue to be able to cross sell better and acquire more efficiently as we get more data and test more things. So I think there's a ton of upside as you see more states legalize gaming there we don't have to reacquire a lot of the customers because such a large percentage of our shared does come from cross sell.

The other thing I note that we got a little bit of a boost on us.

We launched Golden Nugget in Pennsylvania that was the first state that Golden Nugget is actually on the drafting platform. So very excited about that we saw some really strong early results there and continue to feel really positive on the trajectory there.

And then we do expect to see more benefit from from continuing to migrate Golden Nugget in other states, Pennsylvania was a new launch we actually havent migrated any states yet that's all on the docket over the next couple of quarters, we're going to migrate pretty much every.

Every state.

For Golden Nugget online gaming so.

Really I think that's something that also contributed to a little bit of share increase and hopefully there is some more juice in that as we migrate these other states and continue to optimize that came in.

Yes.

Great. Thank you.

One moment for our next question.

Our next question comes from Clark <unk> with <unk>. Your line is open.

Thanks, Good morning, I appreciate the question.

Actually wanted to follow up on some of the comments that were just made around Golden Nugget I know you launched the Standalone App in Pennsylvania ice pack.

Kind of as you were saying that mean protect stack migration is done or at least most of the heavy lifting is behind us.

And also it sounds like with direct cost guidance next year that there really isn't much in terms of saving contemplated could you remind us I guess as you're moving.

The legacy product onto the Golden Nugget stack is this something thats really going to benefit share or are there other efficiencies that accrue to you guys I guess from from moving onto that stack or is it mainly I guess sort of the share and then exploring I guess sort of first party versus third party product mix opportunity. Thanks.

Yes. So that's a great question, we actually will get cost of goods sold synergy theres some <unk>.

Timing things with contracts that.

They have certain timeframes that affect the timing of when those synergies will actually fully materialize.

What we determined was they're not very material to next year, but they are there and we do expect to see some impact on the cost savings side and then as you also alluded to I think there's some upside on the revenue and share side as well given that we have a pretty consistent data showing that our product and our platform.

Converting new customers better monetize as existing customers better retained better.

So really feel like there's some upside there as well.

And Golden Nuggets won the same kind of story, we haven't built in a massive share increase or anything there. So.

It'll be interesting to see what we can do at that brand. Obviously, we have high hopes and are very excited about the migration coming up and hopefully there's some upside in that for us and it's certainly been a contributor.

As I noted we did gain share on the draft Kings brand too, but when you combine the two brands, we're almost at 30% share now in gaming which is.

Think about where we thought we could cap out a year or two ago is lower than that so we're pretty bullish on the gaming opportunity and.

Feel like lots of exciting potential tailwind in the 2024 product roadmap there.

Does it enable you guys to be a little bit more aggressive I guess with first party product next year also or should we think about I guess sort of the same.

Relative mix that we saw sort of this year and in the past.

I mean, certainly as the gaming business grows you can amortize those investments over a much larger revenue base, it's going to make more and more sense to invest in first party products and bringing more and more things in house, even on some of these tail games and things like.

Long tailed games, I should say and things like that so.

Gaming is such that we'll always have third party partners. There's just certain content, whether it's IP that we don't have the rights to or otherwise that you want that others have but I think as we continue to be able to build that base.

Have a larger revenue base.

Amortize our product investments over it's going to make more and more sense to try to bring some of the longer tailed games in house and of course, we're always and that hasn't changed and won't change trying to innovate and come up with new games that are differentiated and gain market share and also will have the effective of course.

<unk> Cannibalizing third party games as well so.

That's always something we're doing but I do think that as we increase the size of it there will be just an economic argument that emerges on some of the longer tailed games it doesn't exist today.

Yes.

Makes sense. Thank you.

One moment for our next question.

Our next question comes from Michael Graham with Canaccord. Your line is open.

Thank you I wanted to follow up.

Development topic for a minute.

You had such a great piece of innovation over the last couple of years like can that accelerate.

Over the next couple.

Related to that one of the things we've seen historically from the great Big Tech, China thinking like Netflix Google.

This book, they've been able to institutionalize.

Engineering led product development ethos that has really enabled them to kind of extend leadership over time I'm. Just wondering how prominent that is in your strategic thinking.

I mean that is absolutely essential in our strategic thinking we've said pretty much from day, one the product wins and that is.

First and foremost the thing that we feel like has to be at the.

Absolute forefront of the industry in order to be the best obviously, there are a lot of other things that go into customer experience marketing analytics. Many other elements of the business. They are important and we invest across those two but really the heart and soul of the organization as product and technology.

I think youre, absolutely right that that's something that we really feel like over the last several years has been a differentiator really stem from day, one has been a differentiator for us and as far as the first part of your question on the pace of innovation I actually expect it to increase.

Lot of the work that we had to do once we had acquired our own technology platform and then some of the cleanup afterwards.

It was really ongoing until late into 2021, so it's really been less than two years that we've kind of had just full runway.

Not to mention the fact that there is many other infrastructure investments there.

We had to make over time that now positioned us to just more rapidly innovate so were always balancing.

Whether its implementation of AI to improve developer efficiency on our Pam We're building out an API driven structure. So the teams outside of Japan team can unlock different features in there and integrate products in a better way, whereas OE trying to think about not only how do we innovate for the customer, but also velocity and pace of <unk>.

Innovation, how do we make our teams more efficient how do you make them quicker and some of that as you said is cultural for sure. But there is also an infrastructure investment piece of just making it easier.

Does it get the organization gets larger where more jurisdictions. The natural tendency is for it to get more complex. So there is just a constant I think push on our end to not accept that and to try to drive more efficiencies. So that we can innovate at a faster velocity.

Thank you Jason.

One moment for our next question.

Our next question comes from Jed Kelly with Oppenheimer. Your line is open.

Hey, great. Thanks, Thanks for taking my question just going back to hold as you engage more customers playing more sports layer on more parlay products does that reduce the volatility around your ability to forecast hold like does it become more consistent and then just in light.

Just with the <unk> guidance does that assume that the.

Percentages you saw whole percentages in October you expect that to continue for November and December. Thank you.

So on the first question.

I think really is.

We get more data and as the market matures everything whether it's hold rate or any other metric of the business.

That forecasting gets tighter and tighter which is great I do think we're already pretty tight unfold forecast in terms of expected hold Theres just board outcome and as far as your question on mix and how it affects it.

Really as time goes on having more variety, meaning more sports more different types of beds will certainly make it more steady so as <unk> grows as more sports get adoption.

All of that.

It's exactly what you think like the more concentrated in one type of better one sport anything is the more susceptible you are to support outcome.

Perfect. So as time goes on and as the base matures and as more people play more things and try more products, we do expect that volatility to decrease.

Also as we see more I gaming I think same thing gaming Statesville also to smooth it out because the whole day did not vary as much on gaming based on any sort of outcome driven event. So.

That's a couple of ways I think about it as far as the Q4 guide we've assumed structural hole at the same we did see some favorable support outcomes kind of the opposite of Q3 in October So I wouldn't necessarily say the exact told in October is what we expected the remainder of the year, but we believe the structural hole will be in line.

We sort of always taken outcome ignostic approach when we're forecasting, but then appropriately built into our guidance range all sorts of different scenarios that might occur.

Thanks, Great quarter.

Thank you one moment for our next question.

Our next question comes from Ryan <unk> with Craig Hallum Capital Group. Your line is open.

Hey, good morning.

Droppings hasn't participated directly.

<unk> business, but any thoughts on Michigan, New York, Florida, all cracking down on pickup and player props.

And some of your competition, there and secondly to that could that potentially be a be good for your sports betting OSB <unk> business in New York and Michigan.

Yes, it's a good question I definitely think that cracking down on the.

Legal market is a good thing for us.

The GAA I believe I hope I don't mess this number up.

Said that just didnt legal betting states alone there is about $4 billion right now of revenue leakage, it's happening into the illegal market. So it's a real issue and probably costing states close to $1 billion in tax revenues at this point so.

Definitely a big deal and.

Something that we're happy to see states doing but we haven't really thought about any direct impacts on the business, it's not something we contemplate in our guidance.

I think depending on the situation there could be.

Potential for some of that revenue did leak into the legal market to come back into the legal market and if that happens we certainly hope that we get our fair share of it.

Impressive performance guys. Good luck.

Thank you.

Number four our next question.

Our next question comes from Jordan Bender with JMP Securities. Your line is open.

Great. Good morning from the market share gains in recent quarters. I was wondering if you guys had a sense of how much of that is true player conversion coming from other apps versus.

Finding new players in existing states versus even hold rate pushing out <unk> sharing just overall growing the market. Thank you.

I think it's a combination of multiple things I mean internally, we see all of our metrics going in the right direction and retention rates hold rates.

Promotional reinvestment rate across OSB ni gaming is down all of that independent of any sort of.

Competitor of wallet.

Dynamics all of that is true so.

Just sort of based on that math, yes that certainly led to a reasonable amount of the share increase it's really hard to say.

How much of it is that how much of its new players coming into the market and us disproportionately acquiring those players relative to competition and then retaining those players better relative to competition versus truly stealing players from competitors.

We don't really know.

Certainly no.

Amongst some players that they have tried multiple apps.

We think theyre getting them to decide that we're the best and where the place they want to concentrate their play is an advantage, but it's hard to say historically, how much of share gain has been driven by one factor or another.

Great and then for my follow up Jason Park, I believe you said, you're assuming next year, 5% legalization that legalize not launched yet is that to say you guys are moving away from assuming incremental legalization within your revenue guidance.

That's correct our revenue guidance includes.

Assume the launches of states that in total represent 5% population.

Thank you very much.

One moment for our next question.

Our next question comes from Stephen <unk> with City Cowen Your line is open.

Yes, thanks for the question.

Dressing took pretty significant OSB share in new Jersey in Q3, and the state license I think got to like almost 49% can you just provide some more color on what's driving that what youre dealing with the VIP activity there.

Can quantify on the revenue upside for the quarter, how much was driven by New Jersey, and then do you expect this market share to be maintained in Q4 and 2020 for it. Thank you.

Yeah very good question, New Jersey has been a real great story for US It was our first day.

It continues to be one of our largest states, but early on we got off to a hot start and then we candidly in our first data had a weaker product at that point and we lost a lot of share to the competition and ended up dropping down.

Quite a bit relative to where we are today and I think the team is really focused on building out that great experience driven by a great product and we're winning across segments from the most casual with the VIP in New Jersey, all of our segments are performing well customer acquisition continues to be very strong in new Jersey, whoever thought that once New York and <unk>.

Medicare and everywhere else and in Pennsylvania launched that New Jersey would not have any growth anymore was wrong continue to see quite a bit of customer acquisition and growth in new Jersey.

<unk> gaming has been around for like a decade, there and continues to grow at a steady clip. So I think when you kind of put all that together in New Jersey is obviously has been a big focal point for us and we knew that there was a lot of opportunity to recapture there given that it was our first state and we have made so many enhancements to our products and some of the early days and we're <unk>.

Very.

Grateful that many customers have given us a shot and have seen a lot of the product and experience improvements that we've made.

Thank you.

One moment for our next question.

Our next question comes from Chad Beynon with Macquarie. Your line is open.

Good morning, Thanks for taking my question.

Understanding that the focus remains in North America, given some settling out in some international markets given regulation changes has anything changed just in terms of the risk reward.

Kind of looking outside of North America, given where your product is right now and where the balance sheet is.

We obviously are aware of the global gaming market.

I think long term there is a lot of upside for US there, we believe that the product and technology investments and other operational infrastructure and marketing infrastructure. We're building will be very portable throughout the globe.

That said, we also understand that the largest market in the world is developing right now and we're in a really strong position in a lot of what we feel has helped us and benefitted us has been our singular focus here. So.

And that's something that we're very cognizant oven.

As we think about longer term opportunities, it's really important that we always keep that in mind and continue to make sure that the focus this year.

If we can figure out over time away to find other ways to capitalize on our global opportunity we will but.

Certainly we'd never do so at the expense of our focus in the U S, which obviously we think is.

Just the tremendous opportunity in front of us.

As I said I think a lot of what's benefited us as having that focus and we don't want to give that up easily.

Thanks I appreciate it.

One moment for our next question.

Our next question comes from John Decree with CBRE. Your line is open.

Good morning, everyone.

Well covered a lot of ground, maybe just one one question on maybe some some insights into consumer behavior from where you guys sit I don't know if you.

Can you talk a little bit about what youre seeing.

As states mature versus new states that launch.

The customer evolves in terms of.

Average bet.

Deposit size.

Metrics that you look at how they've been trending I guess with the.

The notion that new states are you penetrating quicker they are reaching contribution quicker or are they just starting at a more sophisticated or more mature point.

And older vintages, so kind of a kind of a broad question, but curious if you can talk about any of those trends.

Yeah, It's a really fascinating question and there is a lot of different data and insight that can be gathered from looking at all the different states. It's it's an interesting one so.

If I can.

More stay at a high level answer your question.

As you noted the penetration rate is definitely increase penetration to the adult population in terms of how fast that's happening as a result, you might imagine.

We're acquiring a larger base of customers going deeper. Therefore also means that we're not just acquiring some of the same types of customers. We acquired very early in other markets. We're also acquiring some of the customers that we acquired later in other markets, but overall.

That initial cohort is incredibly valuable.

We've really seen most of that show up in increased CAC efficiency, just because such a large influx of new customers is really brought the CAC down for us and a lot of the new states in the early days. So that's something we're definitely seeing and.

As far as the other dynamics go there's also improvements and things that we've made to the product and the way that we do CRM that have affected things. So we're seeing customers in new states come in generally with a higher starting parlay mix, because it's easier to kind of get people accustomed to coming in on some of these new products, we've launched versus older states getting people to retrain behaviors.

To try different products when they are used to using the product in a certain way and I think that has the opposite effect it increases the immediate monetization and things like that so.

A lot of moving levers there, but overall I think youre kind of seeing those two high level factors impacting the product improvements and CRM improvements. We've made are increasing some of the metrics coming out of the gates, but youre also just seeing so much faster ramp and the population penetration that we're capturing more casual customers with some of the.

More diehard customers and Theyre in that early phase as well.

Both of them are I think overall.

Resulting in a net very positive impact for us, we're seeing great tax relative to where we saw in the early days of launching new states in the Ltvs continue to be incredibly strong from those early cohorts.

Understood. Thanks, Jason I appreciate the additional color.

Ladies and gentlemen, this concludes the Q&A portion of today's conference I'd like to turn the call back over to Jason Robinson for any closing remarks.

Thank you all for joining us on today's call.

Really excited about 2023 shaping up to be an excellent year for draft Kings. So proud of the team for our Q3 results and looking forward to close the year with Bang and really equally if not more excited about 2024 and beyond lots of great things ahead on the product side and also very excited to be having a very meaningful part.

Positive adjusted EBIT, a year for the first time so.

That's a good milestones ahead, we're excited about the opportunity and we look forward to sharing additional insights our investor day on November 14th.

Hope everybody has a great rest of the next couple of weeks, we'll see again on November 14th.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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[music] Good day, and thank you for standing by and welcome to the Draft Kings Q3, 2023 earnings call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the especially the press star one on your telephone you will then hear an automated message device in your hand is raised to withdraw your question. Please press star. One again. Please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today State and Jacques.

Dodge cheaply Chief legal officer. Please go ahead.

Historical results or from our forecast, we assume no responsibility to update forward looking statements other than as required by law.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release and presentation.

Which can be found on our website and in our.

Our quarterly report on Form 10-Q filed with the SEC.

Hosting the call today, we have Jason Robins co founder and Chief Executive Officer, Droppings, 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 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 the.

The first three quarters of 2023 had been outstanding for draft Kings we.

Have made thoughtful investments in our product throughout the year and are winning with our customers and our team executed tremendously around the start of the NFL and college football season.