Yahoo Finance DraftKings Inc. (NASDAQ:DKNG) Q3 2023 Earnings Call Transcript
DraftKings Inc. (NASDAQ:DKNG) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good day, and thank you for standing by. Welcome to the DraftKings Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stanton Dodge, Chief Legal Officer. Please go ahead.
Stanton Dodge: 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 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 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 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.
Jason Robins: Good morning, and thank you all for joining. The first three quarters of 2023 have been outstanding for DraftKings. 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 NFL and college football season. Importantly, we remain focused on our core value drivers, acquiring customers efficiently, retaining and monetizing our existing customers, entering new jurisdictions and building an efficient and scaled organization. I'm pleased to share that this 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 seasons.
We are raising our expectations for fiscal year 2023 and introducing initial guidance for fiscal year 2024. In 2024, we expect revenue of $4.5 billion to $4.8 billion and positive adjusted EBITDA of $350 million to $450 million. We also expect to generate meaningfully positive free cash flow in fiscal year 2024. As we look back on the third quarter in 2023, here are our key takeaways. First, we are winning. Our revenue in the quarter increased 57% year-over-year, and we achieved number one combined OSB and iGaming gross gaming revenue share in the U.S. We've efficiently added over 1,000 basis points of combined OSB and iGaming shares since 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 are seeing overall engagement on our app and structural hold percentage continue to increase. Importantly, we have a clear road map 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 states. Fourth, we expect attractive adjusted EBITDA flow through 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 14.
With that, I will turn it over to Jason Park.
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 basis. Customer retention and engagement far exceeded our expectations as customers enjoyed our live same game parlay offering as well as our live and player prop markets.
MLB 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 Sportsbook product in that state on September 28. Structural hold was above 9.5% during the quarter and well ahead of expectations as we continue to improve our parlay mix and optimize our trading capabilities. Our actual Sportsbook hold percentage was approximately 9%, inclusive of customer-friendly sport outcomes, primarily in college football and the NFL. Promotional reinvestment as a percentage of GGR 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.
Promotions as a percentage of GGR continue to improve on a year-over-year basis for our OSB and iGaming states. Our adjusted gross margin was in line with expectations and increased almost 300 basis points year-over-year. Strong handle growth combined with improving structural sportsbook hold rate and better promotional reinvestment for OSB & iGaming contributed to higher adjusted gross margin. External marketing and fixed expenses were consistent with our plans as we executed our football season kickoff 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 iGaming state. In the states that launched 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 decreased 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 $3.67 billion to $3.72 billion or by $195 million at the 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 sportsbook hold improvement, partially offset by customer-friendly sport outcomes in the third quarter and our expected launch in May.
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 May. 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. For 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 investments to launch approximately 5% of the adult population.
In addition, based on the midpoints 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.
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