DraftKings delivered profitability during the company’s second quarter of 2023, doing so for the first time since the sportsbook operator went public at the height of the COVID-19 pandemic.
After years of heavy spending on marketing and promotions, the profitable quarter may assuage some investor concerns that the industry’s leading operators lack the fiscal discipline to remain austere when necessary. The profitable quarter is in line with other digital competitors such as BetMGM, Caesars, and Rush Street Interactive, each of which also turned a profit for the first time ever during the three-month period ending on June 30.
One day after releasing earnings following the close of the market on Thursday, DraftKings CEO Jason Robins gushed that the results are a reflection of a relentless focus on cost efficiencies.
DraftKings generated second-quarter revenue of $874.9 million, topping analysts’ estimates of $762.3 million for the period. During the quarter, DraftKings also reported adjusted EBITDA of $72.9 million, significantly up from negative-$118.1 million in the year-ago quarter.
The company defines adjusted EBITDA as the net gain or loss before the impact of interest income or expense (net), income tax provision or benefit, and depreciation and amortization. Generally, the metric also removes certain one-time, non-recurring items that may distort a company’s EBITDA in a given quarter.
On a forward-looking basis, DraftKings expects to generate “meaningfully positive” adjusted EBITDA for full-year 2024, according to a company presentation released Thursday.
Operational efficiencies
Capitalizing from the proliferation of same-game parlays (SGPs) across the industry, DraftKings recorded a structural hold percentage of approximately 10% during the second quarter, up from 7% in the year-ago period. The higher-than-expected hold resulted in a $30 million contribution to adjusted EBITDA, according to DraftKings CFO Jason Park.
Ahead of Friday’s call, a host of equities analysts expressed bullishness toward the industry as a whole due to customer fervor for the SGP products, also known at some sportsbooks as “single-game parlays.”
“The industry has been better than expected given single-game parlays and reduction in promos, so I think that’s good for the overall space, mainly DraftKings and FanDuel,” Macquarie analyst Chad Beynon told Yahoo Finance.
DraftKings also outlined several “core value drivers” on why the company believes its growth model is working. The company described the trends in a business update disseminated to shareholders on Thursday.
- Over the quarter, DraftKings acquired new customers at a 39% higher rate than the year-ago quarter, the company said in the letter. DraftKings brought in a high rate of new bettors while reducing customer-acquisition costs by 16% from the same period in 2022.
- DraftKings indicated that it has seen a considerable uptick in online sports betting (OSB) and iGaming market share over the last 12 months. The company ended the quarter with 35% OSB handle share in the markets it operates in, as well as a 32% OSB share in gross gaming revenue. The improvements represent a year-over-year increase of 8% and 12%, respectively. DraftKings credits the impact of national marketing and improved customer retention metrics, along with rapid product and technology innovations for the uptick.
- Speaking of technological improvements, DraftKings is turning its attention to the start of the 2023 football season. DraftKings plans to introduce several product enhancements that it anticipates will result in a “more engaging experience” for the customer. DraftKings alluded to expanded in-house same-game parlay capabilities, extended cash-out market coverage, and faster in-play bet settlement, among other enhancements.
As a result, DraftKings increased its full-year 2023 revenue guidance midpoint by 10% to $3.5 billion. The underlying tailwinds may be enough to drive scale allowing DraftKings to eventually reinvest back into the business, according to JMP Securities analyst Jordan Bender.
DraftKings ended the second quarter with $1.1 billion of cash and cash equivalents, an increase of $26 million compared to the three-month period ending March 31. Asked whether DraftKings will re-engage in discussions with ESPN on a potential deal involving the licensing of the network’s sports betting brand, Robins demurred. DraftKings reportedly neared an agreement last fall with the “Worldwide Leader In Sports” before talks collapsed.
While DraftKings already has a marketing partnership with ESPN, Robins indicated that the company could be interested in expanding the commercial relationship if there is mutual interest.
“We’re perfectly happy with the relationship as it is now, so I think that’s how we’re thinking about it,” he said.
Skepticism from some analysts
DraftKings incurred sales and marketing expenses of $207 million on the quarter, down 46.7% from the same period in 2022. One analyst, Carlo Santarelli of Deutsche Bank, harkened back to a series of long-term projections released by DraftKings during an Investor Day presentation in March 2022. Among the forecasts, DraftKings set a target for promotional intensity, with a goal of reducing promotional allowances to about 22% of the company’s gross revenue. Separately, DraftKings articulated another goal for sales and marketing expenses to account for about 10% of net revenue, according to Santarelli.
On Friday, the Deutsche Bank analyst asked DraftKings if the company had a definitive timeline on when both targets will be reached. Robins responded that the company plans to address the topic in greater detail at its Investor Day in the fourth quarter. Still, he doesn’t anticipate a “material change” to either target from current levels.
Another analyst, Joe Stauff of Susquehanna, inquired on a metric known as “contribution profit.” DraftKings uses the measure to gauge performance in individual states, defining contribution profit as the company’s gross profit in a certain jurisdiction minus expenses from internal marketing. DraftKings ended 2022 as contribution profit positive in 11 states, resulting in a net of $105 million.
When the contribution profit from more mature states exceeds the contribution profit from states that are still in investment phase, cumulative contribution profit will be positive, according to DraftKings’ internal projections. Stauff asked DraftKings for an update on the percentage of states that have met the standard. Robins punted there as well, responding that it is another issue DraftKings plans to address on Investor Day.
After completing state launches in Ohio and Massachusetts in the opening quarter, DraftKings ended the first half with adjusted EBITDA of negative-$148.6 million. For the fourth quarter, the company projects positive adjusted EBITDA in the range of $150 million to $175 million.
DraftKings’ improved 2023 guidance estimates negative adjusted EBITDA of $205 million for the year. Even with a strong close to 2023, the guidance implies that the company may endure a challenging third quarter. One Twitter user crunched some numbers that suggest that DraftKings’ adjusted EBITDA for the third quarter could provide a hit of around negative $230 million.
Bolstered by the profitable quarter, DraftKings’ shares surged 12% in Thursday’s after-hours session, eclipsing $33/share. While shares retreated somewhat on Friday afternoon, DraftKings still traded around $31, up approximately 4% from Thursday’s close.
Since opening the year around $12/share, DraftKings has rebounded from a difficult stretch in 2022 by more than doubling in price. DraftKings is still down considerably from its March 2021 peak when it topped $70/ share.
