DraftKings Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 17, 2023

There are 18 speakers on the call.

Operator

Day, and thank you for standing by. Welcome to the 4th 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.

Operator

I would now like to turn the conference over To Stanton Dodge, Chief Legal Officer, please go ahead.

Speaker 1

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.

Speaker 1

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 Robbins, Co Founder and Chief Executive Officer of DraftKings, We'll share some opening remarks and an update on our business and Jason Park, Chief Financial Officer of DraftKings, will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robbins.

Speaker 2

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 total an expected $100,000,000 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 $475,000,000 to negative five $75,000,000 to a range of negative $350,000,000 to negative $450,000,000 Notably expect to generate more than $100,000,000 of adjusted EBITDA in the Q4 of 2023.

Speaker 2

As you can see, We are in a great spot and are seeing 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 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 4th quarter and had an adjusted gross margin rate of 49%. Jason Park will speak more about what drove our strong 4th quarter results.

Speaker 2

Turning to our product offerings. DraftKings Mobile Sportsbook was the number one most downloaded sportsbook app in the United States on 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 1st 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 King.

Speaker 2

We also received approval for our 1st 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 the 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 it is critical for top management to not take their eye off the ball in this area.

Speaker 2

And I am personally very focused on ensuring that goals, Compensation and accountability are all aligned towards this very important objective. With that, I will turn it over to Jason Park.

Speaker 3

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 estate 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 $855,000,000 of revenue, which represents 81% growth versus Q4 2021.

Speaker 3

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 $75,000,000 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 sports book hold and fundamentally better customer trends than we expected. Customers are engaging more with our products and are less relying on promotion. We also managed out approximately $25,000,000 of expenses in Q4.

Speaker 3

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 $2,900,000,000 to $2,950,000,000 And our expense management programs have already identified $100,000,000 of cost savings for 2023, roughly $50,000,000 from scale marketing efficiencies and another $50,000,000 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 $475,000,000 to negative $575,000,000 to negative $350,000,000 to negative $450,000,000 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.

Speaker 3

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 vintage estates, which represents roughly 10% of the U. S. Population, we are seeing great results. In 2022, those days grew net revenue by 50% versus 2021.

Speaker 3

This continued growth is due to several factors. We are seeing great customer retention, handle per retained player is growing, promotional reinvestment is coming down and whole 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.

Speaker 3

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.

Operator

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

Speaker 4

Hi, good morning everyone.

Speaker 5

Thank you for taking my question. Jason or

Speaker 3

Jason, I was wondering if we could

Speaker 5

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, mix shift.

Speaker 4

Can you just give us a sense about 2 things? What's the underlying for kind of 2023 as you think about what you saw results wise in the Q4? And then secondarily, what's some of the kind of product roadmap? How do you think

Speaker 5

you can kind of continue to migrate customers into those types of products in the medium

Speaker 4

and long term? Thank you.

Speaker 2

Great question. So really I think I 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 op we are the 1st 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.

Speaker 2

So I do think there's some additional upsides. We continue to be able to execute against those things on the product roadmap.

Speaker 6

Yes. And I would add, Sean, in terms The question is 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.

Speaker 2

Thank you very

Operator

much. Thank you. One moment for our next question. That question comes from David Katz with Jefferies. Your line is open.

Speaker 7

Good morning, everyone. Thanks for taking my question and congrats on the quarter. So with respect to this kind of updated operating platform or the 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?

Speaker 2

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.

Speaker 2

S. Population or even 7% to 9% Our new sports betting markets each year and 3% to 4% for iGaming. So New York obviously will 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.

Speaker 2

I think it's unlikely that it will go live this year. Remember, they passed a bill, the year before they went live. It was early the following year, but it So, some states have been faster, but I think most have generally been the following calendar year. So I think we're looking at 2024 and as I mentioned, we've built in some assumption around that, but this would be a bigger iGaming Market than we had assumed.

Speaker 7

And just to follow that up, if I may, is it a fair assumption that The negative impact both to earnings and cash flow from an iGaming state of size would be less Then it would be from a sports betting or is that not a correct assumption?

Speaker 2

No, I think that is correct, particularly if it's State that already has sports betting where we've already had a lot of customer acquisition investment like New York. So, we've acquired 100 and Thousands of players in New York already, I think the cross sell opportunity there would be enormous. We know that some of these players are going to Connecticut, to New Jersey, Pennsylvania to do iGaming now. So I do think there is some incremental customer acquisition spend, but it's not the same as a fresh market where we haven't had 100 of thousands of customers that we've acquired already. So it's an accurate assessment, I think.

Speaker 2

Got it.

Speaker 7

Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. One moment. We have a question from Jason Bazinet with Citi.

Speaker 3

I just have a

Speaker 8

high level question. You guys obviously are making a lot of progress Improving the operations and every metric seems to be moving in the right direction. At the highest level, When you think about how these improvements compare to some of the long term targets that you've laid out at prior Investor Days, Is the implication that the goals are the same, but you'll just maybe get there faster? Or do you if things keep going as well as there's scope for some of those to move up? Thanks.

Speaker 2

That's a great question. We will later this year be providing an updated long term outlook at an Investor Day, so stay tuned for that. But Speaking to conceptually, I do think there's some upside there. We certainly have some upside on the whole rate front. I think promotions will probably end up somewhere in line with where we think they'll be long term.

Speaker 2

And then on the cost side, I think there's always effort that needs That's something I think that really has resonated with the team is, yes, obviously, we're all cognizant of the market environment we're in, We also understand that to build the most profitable long term company, we need to be as efficient as we possibly can. And that's a message that everyone on leadership has really taken to. The Board conducted a thorough review of management incentives towards the end of 2021 and starting in 2022, which continued to 2023, We realigned management incentives so that there was an equivalent focus on EBITDA and profitability to what we previously had had on revenue. So I think that when we look at the long term and like I said, we'll provide more specific updates later this year. I do think there's some upside if we can continue to find the efficiencies that we've been finding over the past 12 months.

Speaker 8

That's super helpful. Thank you.

Operator

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

Speaker 9

Hey guys, thank you. Jason, whoever wants to take this one, as you guys think about kind of the structural whole improvements that you're making and you think about kind of the new Parley Product relative to retention and acknowledging it's early with a lot of this stuff, but you obviously had some growth over the course of 2022 with your addressable TAM with new states that have come online. I believe your monthly unique payers was up High 20s this year, I'm not sure if that is in line with kind of the addressable TAM that you brought up, but it seems similar at least. As you think about like kind of that retention effort, as holds are rising, how could you kind of comment around the balance between How to retain and kind of how to improve efficiency on a per customer basis?

Speaker 2

I think that's an extremely important question. And Really in the end, it's all about the customer. We start there. What's nice about the Parley product is customers love it. It's something that I think helps with retention if the product offering keeps getting stronger.

Speaker 2

So we don't view it as a trade off at all. We look at it as And benefits the customer and also creates attractive economics for the company. And I think Parley is a great example of that. We've had DFS For years and while certainly and if that's a skill game, while certainly people do win, it's not as common. But when they win, they have an opportunity in these Big tournaments to win very large prizes.

Speaker 2

And I think the parlay product functions the same way. If somebody does a very large parlay with lots of legs, they have an Turn a very small bet into a large payday and I think that's really the value prop that's unique about the parlay product relative to the singles bets.

Speaker 9

Great. Thank you, Jason. And then if I could just one follow-up. In terms of adjusted Sales and marketing, I think the external marketing in 2022 was a little over $800,000,000 you guys disclosed. The total was a little over $1,100,000,000 Should we expect as soon as 2023 that line Starts to that expense starts to come down a little bit this year or is that relatively flat this year and maybe you leverage A little bit of the revenue growth and then maybe in subsequent years is where we start to see that sales and marketing kind of chip away and go lower.

Speaker 2

I think that's right. I think we'll be relatively flat this year. I think that we're obviously some of this will depend on the cadence of State launches, but based on sort of a baseline expectation, I think we'll be relatively flat this year. And as you noted, I think as more and more states mature, as The market overall matures, you'll start to see it tail down a little bit. But this year, I think we're expecting to be basically flat year over year.

Speaker 9

Perfect. Thank you, guys.

Speaker 2

Thank you.

Operator

Thank you. One moment. Our next question comes from Ed Young with Morgan Stanley. Your line is open.

Speaker 10

Thank you for taking my question. And first of all, just to say thank you for some of the extra disclosure in the presentation. It's really very useful and appreciated. I want to ask about the statement you've reiterated really, which is around producing your first adjusted EBITDA positive quarter in the Q4 Of this year and then how that set them to 2024. Given as you mentioned that you were there this Q4 Except for the New State investment, can you just help us sort of think about that statement?

Speaker 10

Is that due to the Cadence of the cost savings that you mentioned, is that due to conservatism around the new state launches and not having perfect line of sight for that? Or is there anything else? Is there a reason particularly why that couldn't come earlier? You just maybe don't want to commit yourself to that? Thanks.

Speaker 2

Yes. I think, so it's a great question, Ed. Certainly, there's seasonality to the business and There are quarters where there's deeper marketing investment like Q1 and Q3. I think that For us right now, especially given Ohio, Maryland are brand new, Massachusetts, we expect to launch, hopefully sometime in March. I do think that that's really the reason behind us staying with the Q4 message.

Speaker 2

I think because of those launches, we expect an even better Q4. And what we're seeing is that those states so far Maryland, Ohio at least are ramping faster even in Arizona. Arizona was the fastest ramping state we had And some of our more recent states like Maryland and Ohio have really even been faster. So I think the good news is that that's going to contribute more contribution profit sooner. I just don't know if Q2 is too soon to expect that.

Speaker 2

But either way, I think that we'll be continuing to focus on efficiency, Continuing to focus on trying to get profitable sooner, that's the goal of the company. And right now, I think we're comfortable Committing to $100,000,000 plus in EBITDA in Q4, but we're trying to get that number up and we're trying to get every quarter to do better than what we're thinking And there's a number of efficiency oriented initiatives around the company that I think could potentially contribute some upside.

Speaker 10

Thank you.

Operator

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

Speaker 11

Hey, great. Thanks for taking my question. Maybe following up on Carlo's question, can you just talk about Your churn rate this football season, I guess, with the higher holds and you did have a better football outcome too Versus last year and what's kind of driving the underlying churn rate. And then just question just on 1Q. Can you talk about sort of some of the dynamics around the Q1?

Speaker 11

I think last year March Madness was negative or Lower than you thought. So can you talk about sort of some of the comps we should be thinking about for 1Q? Thank you.

Speaker 2

Yes. I think so on the first question, we've seen really strong retention rates. Obviously, we've been keeping an eye on this as hold has increased. We have other market comps that we see even higher hold levels than us that has, I think had decent retention, so we feel confident there's still room to increase hold without affecting churn. And thus far, we've seen only positive trends on the retention rate side.

Speaker 2

As far as March Madness, I think it's been a weird last few years. You had the cancellation of March Madness in 2020. And I think college basketball is really coming back in a big way now in terms of popularity. We're seeing more adoption In the regular season than we had in the previous couple of seasons. So, we think it's going to be a great March Madness and, I'm really looking forward to it.

Speaker 2

It will be hopefully, It will be the first time that residents of Massachusetts will be able to bet in state. So I think that will be a big opportunity. And then obviously continuing to learn more and get better on figuring out ways to drive better bet mix. That said, college sports, I will say, is one of the tougher ones on the bet mix side because a number of states don't allow player props and Also people are generally just less familiar with the players, so they're more likely to combine parlays of multiple teams. So we'll be focusing there.

Speaker 2

Obviously, still trying to drive the same game parlay product too, but I think college sports multi game parlay is a little bit easier than same game parlay given some of the dynamics I described.

Speaker 11

Great. And then just one quick follow-up. Is there anything to call out from the World Cup in 4Q that won't be in there this year? Thanks.

Speaker 2

World Cup was great. I mean, no doubt about it. That said, it was low single digits percentage of our revenue. And I think, we don't believe that there's anything really that you should adjust accordingly from World Cup, I think that, it was a nice little boost, but didn't have a tremendously material impact on our financials last quarter.

Speaker 6

And I would just add, I would just add on World Cup that was obviously already included in the Q4 guidance that we provided in November.

Speaker 2

And when we looked at the

Speaker 6

data on a customer by customer level, It felt more as much like a handle shift between sports that were very prevalent in Q4 as it was

Operator

Thank you. And our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Speaker 12

Hi, good morning. You called out how you're looking for more efficiencies around not renewing certain team, league and media rights going forward. I'm just wondering if you can expand upon these different relationships and maybe how they've changed over the past year or 2 since you first signed the deals Now that some of the other OSB players have pulled back.

Speaker 2

Yes. I think What you're describing is one of the many efforts around the company aimed at becoming more efficient and obviously marketing being a big expense category, Team and league deals being a big expense category, we feel there's room there. We've had a number of partners that have been very constructive and have agreed to reductions That would make these deals efficient in the way that we need them to be. And there's others that we will be discontinuing when the deals come up and Have discontinued as they've come up over the past year. So, it's really been a mix.

Speaker 2

There's been a lot of really great partners though that are recognized that the market Change have said, look, we want long term to be in business with DraftKings and we realized that this is not an efficient part of the portfolio right now and we need to rework it. And there have been others that we've had to unfortunately discontinue the deals with. So it will be a mix of things, but it's really part of an overall effort that We have to be more efficient as a company and I think there is an opportunity in this category to get even better.

Speaker 12

And if I could just ask one quick follow-up. Any update you'd Care to make about the future partnership with Disney and whether the relationship has changed at all since the early days, since Bob Iger is back?

Speaker 2

No, I mean, we've continued to have a great relationship with Disney, ESPN, Jimmy Pitaro and his team have been great partners. We've really enjoyed that relationship, gotten a lot out of the partnership and we always talk to our partners about ways that we Can improve and extend and grow the relationship, and Disney and ESPN have been a great partner thus far.

Speaker 12

Thank you.

Operator

Our next question comes from Clark Lampkin with BTIG, your line is open.

Speaker 4

Thanks. Good morning. I've got just one for Jason Park. Jason, we assume you guys are finishing 'twenty three with, I guess, let's just say, as a wide range, dollars 600,000,000 to $800,000,000 of cash and you're going to be, At that point, a lot closer to breakeven on a cash flow basis. Does it make sense to be a little bit more aggressive with Ask you to explore debt financing options in a market where so many of your competitors are now leaning out at least on the sports betting side And you're past the point of having to illustrate to the market that you won't need to raise capital just to remain a going concern.

Speaker 4

Thank you.

Speaker 6

Yes. Appreciate the question, Clark. Yes, just to clarify, I would not say that we're at like $600,000,000 to $800,000,000 I Greater than the $700,000,000 ending 2023. So maybe $700,000,000 plus is probably a better way to think about it. Yes.

Speaker 6

And look, I think the most important thing is we're in a great place where we can just focus on operating the business, finding efficiencies, Not having to worry about any type of financing needs. And in terms of broader questions around debt's role at DraftKings, we'll continue to evaluate the entire capital structure, obviously, the macro environment on potential instruments like that. And we'll come back to you if anything comes to fruition.

Speaker 2

Yes. I'd just add that I think that because of our cash position, Were there an opportunity to be aggressive in places, we don't need capital whether equity or debt financing. So it's something I think if there were some Strategic opportunity or something like that perhaps we would explore, but from an organic standpoint, we don't need to. So I think it's unlikely you'll see us Take out any debt and any equity capital at all. And I think it's virtually impossible to imagine a We do so for organic purposes.

Speaker 2

As far as leaning in more, we are trying to be surgical and that means not just Cutting and being efficient in places that we know we need to be more efficient, but also leaning in, in places where we have the data and the conviction. That said, you asked the wrong guy in Jason Park. I don't think he's met a cost he's liked in the last year. So, yes, sometimes we have to tell Jason you can't cut everything. But Definitely, the team is, I think, as a result of having a great analytically driven culture and a great Amount of data, very confident that there are places that, yes, we certainly are cutting, but we also need to be leaning into as well.

Speaker 8

Thanks,

Operator

Alex. Thank you. Our next question comes from Ben Chaikin with Credit Suisse. Your line is open.

Speaker 13

Hey, how's it going? On the SG and A side, the guide for 2023 suggests Maybe up 10% or 12% year over year, 2023 versus 20 2. I'm kind of bucketing everything between contribution profit and EBITDA. Does that growth rate continue and that's relative to 40% growth rate between 2022 2021. Does that growth rate continue to decelerate Even as you add new states?

Speaker 2

The growth rate of fixed costs?

Speaker 13

Just the whole SG and A bucket, So everything between contribution profit and EBITDA that's growing

Speaker 2

in the 10

Speaker 13

to 12 range?

Speaker 2

Yes. I think there's really very little Fixed cost impact of launching new states. There's some customer service sometimes, but we're also working hard to find ways to be more efficient there. So We were able to offset any need to grow there with other efficiencies that we find. So really it's mostly Variable cost COGS that we see with new revenue coming in from new states, there's obviously marketing expense, but not really fixed cost.

Speaker 2

I think most of our functions are at scale or pretty close. So that's why you're seeing moderate fixed cost growth this year, significant reduction in fixed Cost growth year over year. And I also think that the team is working hard to be more efficient. I think that there's been a real, light bulb that's Gone off here that we can do more, and actually grow revenue faster if we become more efficient. And there's a connection between being better focused on And I think making that connection and really realizing that Actually these things feed off of each other that the better we do to manage our expenses and be more efficient as an organization, the more that we're going to be able Deliver value for the customer and that will actually lead to market share gains and revenue growth.

Speaker 2

I think that's been a real rallying cry for the team over the past It continues to be in 2023.

Speaker 13

Got it. That's super helpful. Thanks.

Operator

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

Speaker 1

Hey, thanks a lot. I just wanted to ask about some of the disclosures you had around the growth in your mature States that 2018 to 2019 cohort, you referenced 50% year over year growth and you gave some good reasons for that growth around retention and Increased hold. I just wanted to ask about what you are seeing in terms of customer growth, player growth In some of those mature states and are you do you feel like you're getting close to terminal penetration or like what are you learning about The way the model works as you kind of get a little bit deeper into some of these mature states.

Speaker 6

Yes, great question. So And thanks for calling that part of the letter out. I'd say if you unpack the 50% Revenue growth that we experienced in that 2018, 2019 vintage, probably 70% was from existing customers and And call it 20% to 30% was from new customers. So point is, even though there are those states were in their 3rd or 4th full year, they were We were still acquiring new customers. So we haven't found a ceiling yet even in those more mature states in terms of total population penetration.

Speaker 2

Yes. I think also if you look at comps around the world, other markets, I mean growth typically occurs decades. And so Obviously, growth rates go down. It's not going to continue growing at 50% forever, but I don't expect we've hit any sort of ceiling there. I know different dynamics, but the iGaming market in New Jersey, which is now coming up on almost a decade, still growing.

Speaker 2

So I think lots of comps around really not just the world, but if you look at the U. S. Lottery market and other sorts of Harrison, it's just very much a market that I think always has new customers coming into it. And I think there's an expectation that we should have that there'll be pretty steady growth for at least another decade or so.

Speaker 6

And just super important, Mike, the sources of growth is The point is, it's much more than just new customer acquisition. It is existing customer handle growth, that whole improvement and continued promo Reduction that drives that net revenue growth.

Speaker 2

And we're still in the phase of the market where we're finding big wins on the product front. We're finding ways that we can be more smart operationally that we can reach customers in a more effective way. So I think there's still many years of just innovation that will drive growth in our consumer wallet share. And when we think about wallet share, we don't Think about it within our own industry, we think about our customers' entertainment wallet share. And we believe that customers We'll be willing to spend more time with us and spend more with us if we create better products that they find more entertaining than other things they could be doing for fun.

Speaker 1

Okay. Thank you guys and congrats on all the progress.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from Bernie MacTiernan with Needham and Company. Your line is open.

Speaker 4

Great. Thank you for taking

Speaker 14

the questions. Jason, I want to take your pulse on the M and A market and just given everything you've talked about in the shareholder letter and profitability, does that impact Your philosophy on using your stock as a currency?

Speaker 2

I think they're somewhat independent. Obviously, the more that we can get some momentum behind the stock, the more attractive it becomes as a currency. But I don't think that it's really something that we really are focused Right now, we're very focused on our internal operations, focused on getting more efficient. Obviously, there will be Time in the market and hard to predict because we're in such a rapid phase of evolution right now. There will be a time in the market where those things really make sense and we can focus more on it.

Speaker 2

But right now, there's a lot of focus on just how we Make sure that this company is on a clear path to profitability and that we're operating in the most efficient and cost effective way we can.

Speaker 14

Understood. And then just a follow-up on Parley's. I think a big question just given the success is where could it go? Do you guys have a sense in terms of just what the U. S.

Speaker 14

Penetration of parlays is relative to the rest of the world or more mature markets?

Speaker 2

I think that's a great question and it's tough to compare to rest of world. I think the U. S. Is a bit unique. My belief is that The U.

Speaker 2

S. Consumer, in the gaming market, a lot of the roots of it are in the lotteries where there have been lotteries across states for a lot longer than And that lottery mentality of big jackpots I think is carried over into other products. We even see it in BFS where our most attractive offerings are the large tournaments that you can enter for anywhere from $3 to $20 and win 100 of 1,000 or 1,000,000 plus in prizes. So I think that's carrying over into the U. S.

Speaker 2

Market and I actually think for that reason parlays have more upside than they would in other parts Not to say that they're not popular in other parts of the world. They call them accumulators in Europe and certainly that's been a big growth area overseas. But I think the U. S. Customer is uniquely oriented towards the kind of proposition of bet a little to win a lot.

Speaker 2

So I think there's a lot more upside and we're still at the infancy stages of this product. I mean there's so much we can do to innovate and make it more exciting and more

Operator

Thank you. And our next question will come from Ryan Sigdahl with Craig Hallum. Your line is open.

Speaker 3

Good morning, guys. Curious to get your thoughts on the current competitive dynamics. We've seen several operators pulling back More notably on online sports betting than iGaming, but then you have fanatics with the most notable high profile, I guess, New incumbent coming or entrant coming. How do you think about promotional and marketing intensity from an industry standpoint in 2023, better or worse year over year?

Speaker 2

I think it will be better. There will be more mature states. I think that natural kind of promotional reduction that happens as states mature will continue You see a tailwind from that. Obviously, there's always going to be new entrants coming in and out of the market. I think one thing we've seen though is that and I expect the same would apply to any new entrant.

Speaker 2

The market competitively has become much more rational. We talked about this in the letter. There was a period of time in 2020 and part of 2021 where there was really a message from the market that Market share and revenue growth were all that mattered. And I think you saw some irrational behaviors from some of our competition Coming about as a result and I think once the market started to change their tune and there was more of a demand on Accountability for efficiency and profitability, you saw that change. And I don't see that changing again.

Speaker 2

I think that we're in a new phase of the market where Competing on a much more rational playing field is the norm. And I think that you'll continue to see that whether it be existing operators or any new

Operator

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

Speaker 2

Hey, good morning, everyone. Jason, I was hoping just to clarify on the 2023 revenue guidance. I think for the Q4, you guys had 30,000,000 Uptick in revenue from the structural improvement in hold. I just want to clarify your 2023 guide that you issued at the same time, that did include the hold benefit? And then just for my follow-up, just the pace of the fixed OpEx deceleration, if you could maybe parse that out in terms of the G and A, Product and tech and other corporate marketing and I guess where you've seen the most efficiencies?

Speaker 2

Thanks.

Speaker 6

Yes. So In terms of your first question on hold percentage, yes, that's all embedded within the guide and the H1, H2 revenue split that we provided. So Any type of empirical pattern that we're seeing that we have confidence will continue, we'll embed into our guidance. And in terms of further breakdown of P and T, S and M, G and A fixed cost growth, I think Someone earlier mentioned 10% to 12% growth. I would say that that's pretty similar across all three of those areas.

Speaker 2

Got it. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Brandt Montour with Barclays. Your line is open.

Speaker 12

Hey, good morning, everybody. Thanks for taking my question. I wanted to ask about Igaming. Looks like you guys have had really good success gaining share on the DraftKings side in New Jersey in the 4th quarter, Pennsylvania in the 4th quarter, Michigan in

Speaker 5

the 3rd quarter. I'm just curious if

Speaker 12

you're able to sort of break down that success between some of the things you mentioned in terms of product like Progressive jackpot or success you've had in cross selling during this NFL season or if there's any sort of cross learnings you're able to you're leveraging from G Nag, any color can be helpful for us. Thank you.

Speaker 2

Thank you. I appreciate it. Yes, we I mean, we are really pleased In January, we had the number one market share in iGaming in New Jersey for the first time since we launched in December of 2018. So, great culmination of over 4 years of effort from the team building products, optimizing our analytics, And obviously, onboarding a new brand in GNOG. And I think the most exciting thing is that we feel the biggest upside is yet to come when we migrate GNOG to the DraftKings platform and product suite.

Speaker 2

That's going to hopefully happen later this year. And I think that will give us an additional boost as well as provide ongoing cost savings due to not having to pay revenue share to as many third parties. So Lots of benefit there and I think already seeing some great results from the product side. And also you mentioned too, I think we've gotten even more effective at cross sell, I think As we get more data, that's sort of our sweet spot. The more data we have, the more effective and efficient we can become.

Speaker 2

So Not only have we gotten more effective at increasing cross sell, we've been able to do it more efficiently as well. So that's something that I'm very proud of that the team has been able to make great progress on.

Speaker 12

And if I may just quickly follow-up on that. Is it fair to assume that 2023 guidance assumes that you're able to hold the share gains that you just Recently enjoyed?

Speaker 2

Well, there's always seasonality in the business. So naturally, we're going to do best during heavy Sports periods on the cross sell front, more activity in the platform. So we've embedded that in. But yes, I think as far as like when you adjust for that and look at where we are today, I would say yes, although the January report is brand new. So I can't say that we necessarily like looked at the implications of that.

Speaker 2

But more so what we do is we look at the underlying cohort data, and we bake in adjustments for

Operator

Thank you. Our next question comes from Joe Stauff with SIG. Your line is open.

Speaker 15

Thank you. Good morning. Thanks for all the information. I wanted to follow-up and ask on user growth. Jason, you had mentioned and certainly we can observe this that states are they're ramping so much faster.

Speaker 15

And so I guess what is the right way to think about kind of how long it takes you to reach that sort of Golden cohort, nowadays, I guess, maybe versus a year, year and a half ago. And then I had one follow-up, please.

Speaker 2

It's a great question, Joe. I think this is a tricky one because as we compare states, there's differences in time of So we talk about Arizona ramping quickly that was in September and then you try to compare that to a state like Ohio or Maryland that launched Maryland towards the end of the year, Ohio, Jan 1, or Massachusetts that we expect to launch in March. And You have to there's only a limited number of data points when you have all those different variables to really be able to say. But I think at sort of a big The implication is one, there's probably some deeper investment upfront. I think that what we've been really happy to see is that we've actually at least through 2022 been able to absorb that by finding Efficiencies throughout the rest of the business, if you look at the letter, we basically funded all of the state launches in 2022 through finding cost efficiencies elsewhere in the But then the other implication of it is that the inflection towards contribution profit positive happens sooner.

Speaker 2

You get greater operating leverage sooner, Which means more upside from a revenue and profitability standpoint sooner. So I think that's kind of the way to think about it. Exactly how it ends up netting out over the course of the year, I think we need a little bit more data to see. But at a macro level, that's Kind of how I describe it. And it is no matter what, whether you take seasonality, it is unequivocally, observably true that states are ramping much faster Than they were 3, 4 years ago.

Speaker 15

That makes sense. And then maybe just a follow-up on Structural Hold in general, you certainly mentioned that the new in house NBA same game parlay Sort of capabilities that you had launched. And I was wondering, I know at least For part of your NFL product, you do outsource same game parlay. I'm wondering if your 2023 guide includes bringing that in house?

Speaker 2

So the team is working at bringing that in house now. As far as our 2023 guide, we do expect At some point in 2023 that that will be the case and that is built into the guide, but it won't affect the entirety of 2023. And I noted this earlier, we have already started to roll out some of our own in house SGP, most recently the live SGP APMBA product we rolled out which is the first in the industry to have we were the first in the industry to have it. So I think that's a good signal that We're reaching a period where we have now with over a year and a half under our belt, lots of data to build out some of these new models. We've gotten to a point where we feel like we can put out models that are as good or better than what we can get off the shelf from 3rd parties.

Speaker 15

Thanks very much. Great quarter.

Speaker 2

Thank you, Joe.

Operator

Our next question comes from Chad Beynon with Macquarie.

Speaker 16

Good morning. Thanks for taking my question. First, just wanted to ask about opportunities or aspirations in non North American markets, given your data science and kind of all the learnings that you've had in the past couple of years, it seems like you're in a pretty good position To make a dent in some of those markets. Obviously, a lot to do still here in North America, but wondering if anything has changed in other markets. Thanks.

Speaker 2

I do think you're right that the technology we've built is going to be very portable to the global Gaming market. And we believe that when we do decide to expand overseas, we'll have advantages over incumbent competition when it comes to product, When it comes to hold rate things like that. That said, we are laser focused on the U. S. And on Ontario right now.

Speaker 2

I think that The opportunity here remains very significant and growing. We have a lot of work to do to become more efficient as an organization that we need to focus on. There will be a time and a place to focus on international expansion, but it's not going to be right now. It doesn't mean that we won't look at it and start to do some This year behind the scenes. I think we have to always be thinking about what future things we want to do and start laying some of the research and groundwork But on the whole, the team is very focused on how do we continue to make progress and do better for the customer in the U.

Speaker 2

S. And how do we continue to

Speaker 16

I know you and your competitors on the mobile side are doing a lot of work communicating the story, but it also Seems like a lot of the land based operators are as well as they've seen probably lower cannibalization than they may have feared. So do you think there will be more momentum? Do you think that's more based on kind of what happens in the economy? What's really going to start kind of the rolling Stone for more iCasino discussions. Thanks.

Speaker 2

Yes. It's a great question. And I think that there are you noted one, I think Certainly, the opportunity for tax revenue and should states find themselves more in need of that, that could have an effect. I also think that as an industry we need to do a better job getting the story out there. There's a lot of Great work that's been done by the AGA and other groups to really put the data out there about just how significant and large the illegal sports betting market is.

Speaker 2

And I think that's been a big driver of policymakers saying, look, we got to do something here. I don't think there's been nearly as much Coverage of the illegal eye gaming market, even though it exists, I mean, if you go to pretty much any of the mobile sportsbooks and online sportsbooks that you see overseas That are operating illegally, they almost all of them have an online casino. It's just not talked about as much. I think inherently it's a less social product. People talk about it And I think like I said, the industry probably just hasn't focused as much as we could have on really making that data clear.

Speaker 2

So I think it's a combination of those two things, those states that see the tax opportunity and realize that there's a real way to Take something that's happening already, just like sports betting is in the illegal market and bring it into the light and protect consumers and also generate revenue for the state.

Speaker 16

Appreciate it. Thank you.

Operator

Thank you. And our next question comes from Robin Farley with UBS. Your line is open.

Speaker 17

Great. Thank you. I wonder if you could give us a little bit of color on your guidance for states that are contribution positive. It was 11 states getting to $105,000,000 last year. For the $500,000,000 this year, how many states will that be, to generate that 500,000,000 And is it still at one point you talked about a 3 year payback period for, when in these state legalizes until it's profitable, Is that faster now given the ramp up in Arizona?

Speaker 17

What would you say that timeline is? And then last little clarification, you talked about The percent of population that your long term guidance is 7% to 9% of new OSB every year. It's fair to say though right that your 2023 and 20 24 guidance Specifically, your 2024 guidance doesn't rely on any states that haven't already actually legalized just not operational yet, right? In other words, no new legislation to happen for that to be hit? Thanks.

Speaker 2

That last point is correct. The only state that's not even live yet that we did assume in the guidance Massachusetts and the reason is it's pretty far down the line. So we felt it was more helpful to investors to get a view with Massachusetts included. But we have not assumed any other state launches from new legalization that happens this year. As far as I'm going to try to remember I think the first one, on a sort of state by state basis, we have not disclosed which states are contribution profit positive for 20 We plan on covering that in more detail at our Investor Day later this year.

Speaker 2

So we will be providing additional disclosure and data on that. We had to save something for that to keep you to get you to show up Robin. And then on I'm sorry, what was your second question? Oh, speed and approximately inflection. Yes.

Speaker 2

So, I think you're absolutely correct. One of the implications of faster ramping with new states is that the inflection To profitability and the degree of operating leverage that you get earlier is greater than what we had seen in some of the earlier states that launched More of the 2018, 2019 2020 timeframe. So there is that implication and I think that could potentially Having effect not just with the states we're seeing launch in recent months as well as Massachusetts, but with future states that launched that Again, something I think we'll address at the Investor Day. But in a nutshell, to answer your question directly, I do think it brings in The timeline to pass the profitability for a new state, and we'll be providing a more specific update on that later this year.

Speaker 17

Great. Thanks very much.

Speaker 2

Just to

Speaker 6

make sure, Robyn, the 2024 EBITDA does include an assumption of more states legalized?

Speaker 2

Yes. 2020, sorry. So 23% does not. 24% we have assumed 7% to 9% or 7% to 8%, I forget, as a population Launches for sports betting and 3% to 4% for iGaming.

Speaker 17

Okay. So that would be that some new states in this late of session right would be That would

Speaker 12

be, yes.

Speaker 2

And the implication if that comes in higher or lower if it's less so while it may mean less Pam, it actually means we're probably going to have faster profitability ramp. So I think either way it's a good

Speaker 17

Includes the losses from those new states, right? If the profitability is in your 2024 guidance, the losses would be in the 2023 guidance already in theory that would

Speaker 2

Oh, sorry. We did not know. We assumed other than Massachusetts, no more state launches in 2023. So there will be no effect in 2023 If that occurs. If we do see more states launch in 2023, yes, that will happen.

Speaker 2

But what I was referring to was launches in 2024. So what that would mean is that the investment period for those states would be in 2024 and would have a downward Sorry, if there were not launches, it would have a positive impact on EBITDA in 2024.

Speaker 17

Okay. All right. Thank you.

Operator

Thank you. And our next question comes from Joe Greff with JPMorgan. Your line is open.

Speaker 9

Good morning, guys. Just with regard to the incremental benefit in 2023 Or 2023 updated guidance versus 3 months ago, and the benefit coming from More efficient promotional activity and more efficient promotional reinvestment. How broad based is that or how market

Speaker 2

concentrated is that? And then

Speaker 9

how much of a How much of a benefit from a market like New York is driving that improvement?

Speaker 2

Well, the bulk of our guidance increase on the EBITDA side came from direct Defense management. So about half of it came, or about $50,000,000 of it, I should say, came from compensation expense, About $50,000,000 came from marketing. So definitely big impact there. Some of the revenue increase This hold rate and promotion optimization, some of it with some underlying handleretention metrics we're seeing in our cohorts. As far as state by state, I don't think there's anything in particular at the state level that's different.

Speaker 2

States are maturing as expected and the increases We're seeing the whole Raider happening across the board. We do see in some of the newer states that we've launched that we have faster adoption of parlays and same game parlays. I think that's largely Our product offering is in such a better place than it was a couple of years ago, but that I think It's probably the one example. Other than that, I think the increases that we're making to hold rate and other things that are driving underlying

Operator

Thank you. And that's all the time we have for questions. I'd like to turn the call back to Jason Robbins for closing remarks.

Speaker 2

Thank you all for joining us on today's call. We had a really great finish to 2022 and are excited about 2023 and beyond. I look forward to speaking with you over the next few weeks and hope you all stay safe and well. Thank you.

Operator

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

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Earnings Conference Call
DraftKings Q4 2022
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