DraftKings Inc. (NASDAQ:DKNG) Q4 2022 Earnings Call Transcript February 17, 2023
Operator: Good day and thank you for standing by. Welcome to the Fourth Quarter 2022 DraftKings Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to Stanton Dodge, Chief Legal Officer. Please go ahead.
Stanton Dodge: 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 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 DraftKings’ operating performance. These measures should not be considered in isolation or as a substitute for DraftKings’ 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 filings with the SEC. Hosting the call today, we have Jason Robins, Co-Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business; and Jason Park, Chief Financial Officer of DraftKings, 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.
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Jason Robins: Good morning and thank you all for joining. First off, I am very excited about 2023. We are more focused than ever on expense management. Since our previous earnings call in November, we have made surgical decisions backed by strong analysis about our expenses and have actioned items that totaled an expected $100 million of adjusted EBITDA relative to our prior guide. Including the impact of the increase in our 2023 revenue guidance, we have improved our adjusted EBITDA guide from a range of negative $475 million to negative $575 million to a range of negative $350 million to negative $450 million, and notably expect to generate more than $100 million of adjusted EBITDA in the fourth quarter of 2022. As you can see, we are in a great spot and are seeing an acceleration in our contribution profit and adjusted EBITDA.
And we will continue to explore ways to drive efficiencies, both in our compensation and non-compensation expense categories. To be clear, the top line is performing very well, and we have strong momentum heading into 2023. We grew revenue 81% year-over-year in the fourth quarter and had an adjusted gross margin rate of 49%. Jason Park will speak more about what drove our strong fourth quarter results. Turning to our product offerings. DraftKings’ mobile sportsbook was the number one most downloaded sportsbook app in the United States since Super Bowl Sunday. For sportsbook, one of our key product highlights was the launch of our own in-house live same-game parlay product, making us the first operator to deliver this capacity end to end for the NBA.
This continues our focus on enhancing our parlay offering, which drives increased hold rate. And for iGaming, we launched DraftKings Jackpot, a unique type of progressive jackpot that is shared across more than 100 slots in table booking. We also received approval for our first live casino game developed entirely in-house, which we expect to launch in the coming months in New Jersey. I am 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. While our work here is not done, we feel great about our trajectory and the ability the team has shown in driving strong revenue growth, while also managing our expenses better than ever before.
I also noted that it is critical for top management to not take their eye off the ball in this area. And I am personally very focused on ensuring that goals, compensation and accountability are all aligned toward this very important objective. With that, I will turn it over to Jason Park.
Jason Park: Thank you, Jason. Yes, let me hit on some of the highlights, including our Q4 performance, our new and improved 2023 guidance and some information on our underlying state vintages. Please note that all income statement measures, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, we have great momentum coming out of Q4. In Q4, we posted $855 million of revenue, which represents 81% growth versus Q4 2021. This brought our full year revenue growth to 73%. Adjusted EBITDA was positive in October and was positive for the entire quarter after adjusting for the roughly $75 million investment we made in our recent launches in Maryland and Ohio. Our revenue was better than our prior guidance, primarily because of structural improvement in our sportsbook hold and fundamentally better customer trends than we expected.
Customers are engaging more with our products and are less reliant on promotions. We also managed out approximately $25 million of expenses in Q4. 2023 is off to a great start. This will be a year of continued revenue growth and expense management; strong customer trends, including customer retention, handle per player, hold rate and better promotion reinvestment are enabling us to increase the midpoint of our revenue guidance from $2.9 billion to $2.95 billion. And our expense management programs have already identified $100 million of cost savings for 2023, roughly $50 million from scale marketing efficiencies and another $50 million from people-related costs. These two factors, along with our higher revenue outlook, allow us to confidently increase our adjusted EBITDA guidance range from negative $475 million to negative $575 million to negative $350 million to negative $450 million.
I also wanted to spend a bit of time on foundational state economics. At any given point in time, our company results are a reflection of a combination of mature states, newer states and brand new states. Our states are performing very well, and we are seeing faster paths to positive contribution profit than we expected. For example, when we look at our 2018 to 2019 vintages states, which represents roughly 10% of the U.S. population, we are seeing great results. In 2022, those states grew net revenue by 50% versus 2021. This continued growth is due to several factors. We are seeing great customer retention, handle for retained player is growing, promotional reinvestment is coming down and hold percentage is going up. And because much of the net revenue growth is coming from less promotions and higher hold, our adjusted gross margin rate in that vintage was up more than 400 basis points in 2022 versus 2021.
Finally, our absolute marketing dollars in those states decreased by more than 15%, these are important statistics and they are the foundational drivers of continued contribution profit expansion and acceleration across our states. This increase in total contribution profit, combined with much slower growth in fixed costs, results in an acceleration of our adjusted EBITDA profitability and clear progress towards achieving our long-term adjusted EBITDA goals. That concludes our prepared remarks, and we will now open the line for questions.
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Q&A Session
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Operator: Our first question comes from Shaun Kelley with Bank of America. Your line is open.
Shaun Kelley: Jason or Jason, I was wondering if we could just drill down a little bit on some of what you’re seeing on the kind of structural hold improvement. That seems to be a really big story and one that you called out, yes, mix shift. Can you just give us a sense about two things? What’s the underlying assumption for kind of 2023 as you think about what you saw results wise in the fourth quarter? And then secondarily, what’s some of the kind of product road map? How do you think you can kind of continue to migrate customers into those types of products in the medium and long term?
Jason Robins: Great question. So, really, I think it made a ton of progress in this area, which I think has been enabled by having migrated towards the beginning of last NFL — excuse me, the previous NFL season to our own platform, and really, I think NFL 2022, with the culmination of a year’s worth of work, which has continued through. We just launched live SGP for MBA, which I think was the first stop. We were the first operator to do so, and that was an entirely in-house built and traded product. So really, I think we should expect to continue to see more and more effort towards driving a better parlay product offering, and I think that will continue to drive more mix shift. Also, we are making other changes. Certainly, mix shift is the largest driver of what we’re referring to as structural hold increase.
But we are also making other adjustments to our models, rolling out new and improved models, improving our data environment and doing a lot of other things that are helping us improve our trading performance. So, I do think there’s some additional upside. We continue to be able to execute against those things on the product road map.
Jason Park: Yes. And I would add, Shaun, in terms of your question for guidance. As we saw the empirical structural hold flow-through in Q3, late Q3 and Q4, we’ve embedded that into our 2023 revenue guidance, which is a big part of the increase in our revenue guidance that we provided today.
Operator: Thank you. One moment for our next question. That question comes from David Katz with Jefferies. Your line is open.
David Katz: And congrats on the quarter. So with respect to this kind of updated operating platform or the updates that you’ve made, if hypothetically, we were to see — and I know we’ve talked so much about sports betting, if we were to see iGaming hypothetically go live in New York, can you shed a little light on how that might impact what the guide is, both on the loss and the cash flow side?
Jason Robins: Absolutely. So, I think, obviously, there’s a lot of moving parts, how big is the market, what’s the structure around the tax rate, promotional deductions, those sorts of things. I think in general, what we’ve said in the past is, we assume roughly 7% to 8% of the U.S. population — or it was 7% to 9% are new sports betting markets each year, and 3% to 4% for iGaming. So, New York, obviously, would be on the upper end of that. But overall, those assumptions are baked into our 2024 guidance I don’t think even if New York did pass the bill this year, I think it’s unlikely that it will go live this year. Remember, they passed the bill the year before they went live. It was early the following year, but it took until the following year to go live for mobile sports betting.