Shares in DraftKings fell sharply on Friday when the company missed analysts’ customer estimates during the fourth quarter of 2021, even as the sports betting industry heavyweight beat Wall Street revenue forecasts over the final three months of last year.
While an average of 1.97 million monthly unique paying customers engaged with DraftKings for the three-month period ending Dec. 31, 2021, the company still fell short of Bloomberg estimates of 2.1 million average monthly users on the quarter. This raised concerns among analysts, as DraftKings’ marketing expenses nearly doubled last year, while the company continues to wage an intense battle with rivals to acquire customers.
More disconcertingly, DraftKings projected an adjusted loss for 2022 in the range of $825 million to $925 million, a marked increase from 2021. By the fourth quarter of 2023, however, DraftKings intends to achieve profitability.
DraftKings’ shares initially plunged as much as 17% in pre-market trading, as analysts questioned the long-term earnings outlook. While shares rallied somewhat as DraftKings CEO Jason Robins attempted to assuage analysts’ concerns on Friday morning, DraftKings still opened the session at $18.95 a share, down about 14%.
By 10:40 a.m. ET, DraftKings fell back again to $17.55, down 20.4% on the session. DraftKings is down more than 70% from last March’s levels, when it traded above $60 a share.
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DraftKings had revenue of $473.3 million in the fourth quarter of 2021, up 47% from revenue of $322.2 million over the same period a year ago, and the company topped Zack’s Investment Research consensus estimates of $439.5 million for the final quarter of the year. Overall, DraftKings had revenue of $1.29 billion in 2021, more than doubling the total from 2020, when the online sports betting industry roared back to life in the second half of the year after a once-in-a-century pandemic led to the cancellation of March Madness.
But DraftKings’ long-range profitability forecasts were met with skepticism from traders on Wall Street, who remain unconvinced that the Boston-based company will be able to turn a profit at any point within the next two years. Pivoting from the company’s reluctance in recent quarters to release forward guidance on earnings, DraftKings estimated Friday that it expects to generate positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in the fourth quarter of 2023.
DraftKings reported adjusted EBITDA of -$676.1 million in 2021, compared with adjusted EBITDA of -$391.9 million a year earlier. DraftKings ended 2021 with adjusted EBITDA of -$127.9 million over the fourth quarter, down considerably from the -$87.8 million it recorded in the category in the prior year’s quarter.
Through DraftKings reported adjusted EBITDA per share of -$0.35, the company reported lower than expected losses, as analysts predicted per share quarterly losses of -$0.82. A bevy of top sportsbook operators across the industry are expected to report heavy losses in 2021, as the customer acquisition wars intensify.
Delving into ‘contribution profit’ metric
Robins fielded numerous questions on Friday’s call on a metric known as “contribution profit,” which the company uses to evaluate its earnings potential in various states. DraftKings announced Friday that it ended 2021 as “contribution profit positive” in five states, without disclosing the names of the jurisdictions.
At the moment, there are 10 states, according to DraftKings, that are either contribution profit positive or on track to hit the milestone this year. Robins defines contribution profit as the company’s gross profit in a certain jurisdiction minus spending on external marketing.
“DraftKings’ strong fourth quarter performance exceeded our expectations on the top and bottom line,” Robins said in a statement. “We enter 2022 positioned to grow our market share, further optimize our user experience and continue to strengthen our multi-product suite of offerings.”
Generally speaking, DraftKings maintains a playbook for each state, in which the company strives to attain profitability over a period of two to three years from initial launch. Despite a hefty 51% tax on online gross gaming revenue from mobile sports betting in New York, DraftKings still intends to turn a profit within a three-year period.
The guidance on contribution profit implies that the company’s spending habits will tail off in states where it is successful in acquiring new customers, versus newly launched ones where the customer acquisition wars have just begun. For instance, DraftKings has already attained profitability in New Jersey, but is only in its second month of operations in neighboring New York.
Robins is also confident that marketing and promotional spending will abate as DraftKings continues to transition to a national advertising strategy. With fewer states on board at the start of the post-PASPA era, DraftKings had to rely on a more regionally focused strategy, which is more costly for sportsbook operators. DraftKings further explained the company’s expected path to profitability in an annual report filed with the U.S. Securities and Exchange Commission (SEC) on Friday.
Our expected path to profitability is based on the acceleration of positive contribution profit growth driven by marketing efficiencies as we continue the transition from local to regional to national advertising as well as scale benefits from investments in our product and technology and general and administrative functions. On a consolidated Adjusted EBITDA basis, we expect to achieve profitability when total contribution profit exceeds the fixed costs of our business, which depends, in part, on the percentage of the U.S. adult population that has access to our product offerings.
–DraftKings Form 10-K filing for year ended Dec. 31, 2021
Next steps for DraftKings
Before the start of the NCAA Division I men’s basketball tournament, DraftKings will host an annual Investor Day presentation on March 3. While the Super Bowl is the single largest day on the annual sports betting calendar, March Madness represents the largest multi-week event for top U.S. sportsbook operators.
Over the company’s first five weeks of mobile sports betting in New York, DraftKings handled $454.9 million in wagers, translating to GGR of $35.8 million. DraftKings trails FanDuel in handle ($632 million) there, but leads its archrival in revenue, generating approximately $5 million more in online GGR over the period. The New York State Gaming Commission is expected to report Super Bowl figures on Friday, when the commission releases its weekly mobile sports wagering report.
DraftKings increased its full-year 2022 revenue guidance on Friday from a range of $1.7B-$1.9B to a range of $1.85B-$2B. The guidance for 2022 does not include figures from any states that may launch later this year.
“It is clear that the business model is working,” DraftKings Chief Financial Officer Jason Park said on the call. “We are acquiring customers efficiently with a clear two- to three-year gross profit payback periods, and states are turning positive two to three years after launching. Therefore, we have an increasingly clear line of sight into turning EBITDA positive.”