Yahoo Finance DraftKings Inc. (NASDAQ:DKNG) Q4 2023 Earnings Call Transcript
DraftKings Inc. (NASDAQ:DKNG) Q4 2023 Earnings Call Transcript February 16, 2024
DraftKings Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the DraftKings Q4 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I’d now like to turn the call over to Stanton Dodge, Chief Legal Officer. You may begin.
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 forecasts. 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.
Reconciliation 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 annual report on Form 10-K 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 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. Last year at this time, we shared our first end of year letter. In that letter, I described DraftKings as a company that would thrive when business conditions became more challenging. I wrote that our culture and people positioned us well to execute, which effectively made 2023 a proven year for DraftKings. As you've seen, our team rose to the occasion. Revenue increased 64% year-over-year in fiscal year 2023, even with very customer-friendly outcomes in late November. More importantly, we improved adjusted EBITDA in fiscal year 2023 by nearly $600 million year-over-year and posted our first two adjusted EBITDA positive quarters in company history. Beyond our financial highlights, we improved our product and customer experience and also made a number of operational improvements to better serve our customers and operate more efficiently.
We gained share, including taking the number one position in combined OSB and iGaming gross gaming revenue share in the US for the third quarter. We focused on our core value drivers and empowered our leaders to set aspirational goals and drive their teams to meet and exceed those goals. We lean heavily on data and analytics, giving us the confidence to cut expenses in some areas and double down in others. This year, our focus will largely be on essentially the same items. We are still in the early innings of the US online gaming industry, and there is still share that can be gained through innovation and operational excellence. We will continue to focus on product and customer experience as key differentiators. We will continue to leverage our scale to invest in important areas, while also focusing heavily on efficiency and optimization.
And we will continue to focus on the core value drivers of our business. Having superior lifetime values and customer acquisition costs is the ultimate competitive advantage. And we have a number of initiatives planned to enhance both in 2024 and beyond. We also continue to face new competition as we consistently have over the years. In the past, we've been able to drive growth and gain share, while simultaneously becoming more efficient. But importantly, we do not take any of our recent success for granted. We have the right team in place and are working hard to maintain our edge. Going into 2024, there are three main opportunities on my mind. The first is continuing to foster our entrepreneurial culture and empower our great people to pursue big opportunities.
The second is developing our next crop of leaders and giving them opportunities that allow them to stretch, grow, and contribute at higher levels. The third is leveraging our free cash flow which we expect to generate in order to maximize value for our shareholders. We are excited to have an agreement to bring Jackpocket into the DraftKings family and enter the rapidly growing US digital lottery vertical. Importantly, this is not just a new product for our customers to enjoy, but really a way to strengthen our core OSB and iGaming position in the US by optimizing our overall LTV and CAC. We look forward to working together to provide tremendous and differentiated value to the combined customer base. In closing, 2023 is a fantastic year for DraftKings, yet I believe that 2024 will be even better.
I am unbelievably excited about the plans we have in place to continue serving our customers and growing our business. Most importantly, I am excited about the quality of the team we have in place, and I have no doubt that we will continue to execute very effectively against our key priorities this year. We will work tirelessly to produce great results and build on the incredible momentum we generated in 2023. With that, I will turn it over to Jason Park.
Jason Park: Thank you, Jason. I'll hit the highlights, including our full year 2023 and fourth quarter performance and our updated guidance 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. In fiscal year 2023, revenue grew 64% versus 2022, and adjusted EBITDA improved year-over-year by nearly $600 million versus 2022, which resulted in year-over-year adjusted EBITDA flow through percentage of 40%. Adjusted gross margin increased nearly 200 basis points as we delivered higher sportsbook hold percentage and improved our promotional reinvestment for OSB and iGaming.
Adjusted sales and marketing expense grew 3% as we reduced marketing in our more mature states and transitioned further into more efficient national marketing. In the fourth quarter, we continued to generate great performance across our core value drivers and produced more than $1.2 billion of revenue and $151 million of positive adjusted EBITDA. Better customer acquisition, retention, and engagement resulted in higher than expected handle for the quarter and positively impacted revenue and adjusted EBITDA by $93 million and $42 million, respectively. Structural sportsbook hold percentage was 10.4% and well ahead of expectations as we continued to improve our parlay mix and optimize our trading capabilities. This trend positively impacted revenue and adjusted EBITDA by $53 million and $38 million, respectively.
As you are well aware of by now, sport outcomes were very customer friendly in the fourth quarter, primarily in the final two weeks of November, while December was consistent with expectations. Our actual sportsbook hold percentage for the fourth quarter was 9.2% due to sport outcomes, which were a headwind to revenue and adjusted EBITDA of $175 million and $126 million, respectively, compared to our expectations. 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. In November of 2023, we guided fiscal year 2024 revenue of $4.5 billion to $4.8 billion and adjusted EBITDA of $350 million to $450 million. Today, we are improving our fiscal year 2024 revenue guidance range to $4.65 billion to $4.9 billion and our adjusted EBITDA guidance range to $410 million to $510 million.
Customer acquisition, retention, and engagement in Q4 and Q1 to date has continued to exceed expectations due to ongoing product innovation and marketing optimization initiatives. These trends account for $90 million of the revenue improvement and $35 million of the adjusted EBITDA improvement. Higher structural sportsbook hold percentage as a result of continued year-over-year bet mix improvement, as well as improvements in trading and risk management accounts for $35 million of the revenue improvement and $25 million of the adjusted EBITDA improvement. From an intra-year perspective in 2024, we expect first quarter revenue to increase approximately 45% year-over-year and second through fourth quarter revenue to each grow year-over-year in the 20% to 30% range.
We expect adjusted EBITDA to be approximately breakeven in the first quarter, nearly $150 million in the second quarter, and above $300 million in the fourth quarter. Importantly, we are also now guiding free cash flow. We expect to generate between $310 million and $410 million in free cash flow in 2024 based on approximately $120 million of annual CapEx and capitalized software development costs, as well as a modest source of cash from changes in networking capital and interest income. Therefore, we will end the year with approximately $1.6 billion of cash before using approximately $413 million to fund our proposed acquisition of Jackpocket. Looking further ahead, as discussed at our Investor Day and the letter we released last night, we expect to generate positive and increasing free cash flow starting this year and are beginning to explore ways to optimize our capital structure.
Our expectation for sustainable revenue growth and adjusted EBITDA margin expansion over the next several years offers us a number of options to maximize long-term returns for our shareholders. That concludes our remarks and we will now open the line for questions.
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