Pressured by investors to show signs of profitability this year, DraftKings has found itself at a crossroads.
DraftKings CEO Jason Robins practically admitted as much in a shareholder letter released by the company Thursday, enumerating the vast changes undergone by the financial world in 2022.
Gone are the days when investors will accept outsized losses as long as a company grows revenue, Robins wrote. The broader concerns seeped into the sports betting space, where leading companies reined in extravagant marketing campaigns last year, citing the long-term lack of sustainability for the industry.
While DraftKings projected revenue this year of at least $2.8 billion when it introduced 2023 full-year guidance last November, the company also estimated negative earnings around $500 million for the year.
After topping earnings and revenue estimates in the fourth quarter of 2022, DraftKings may have assuaged some investor concerns. Others, however, remain skeptical while questioning the company’s cost structure and executive compensation models. On Thursday after the bell, DraftKings reported 2022 fourth-quarter revenue of $855 million, up 81% from the prior year’s quarter. With record revenue, the company beat Wall Street consensus estimates of $797.1 million for the three-month period ending on Dec. 31, 2022.
— TD Ameritrade Network (@TDANetwork) February 17, 2023
DraftKings also reported adjusted EBITDA of -$49.9 million on the quarter, a marked improvement from the same quarter a year earlier (-$127.9 million) when net losses swelled above $325 million. For the final quarter of 2022, DraftKings reported a net loss of $0.53 per share, compared with per-share losses of $0.80 in the year-ago period. Analysts projected a net loss of $0.63 per share.
DraftKings ended 2022 with revenue of $2.24 billion, nearly a billion more than the previous year. The company also concluded the year with adjusted EBITDA of -$728.1 million, compared with -$676.1 million in 2021.
Robins focused intently on expense management on Friday’s call with Wall Street analysts, noting that DraftKings cut in-year costs in 2022 by more than $100 million. Since DraftKings’ last earnings call in November, it made “surgical decisions,” backed by strong analysis on the company’s expenses, he said. DraftKings announced the elimination of approximately 140 positions (or 3.5% of its workforce) on Feb. 1, primarily consisting of employees outside the U.S.
While DraftKings ranked second for the quarter in U.S. online sports betting market share, according to Eilers & Krejicik, the company far outpaced BetMGM and Caesars, which ranked third and fourth, respectively. FanDuel and DraftKings’ combined gross gaming revenue in the quarter reached 73.9%, as DraftKings accounted for a share of 27%.
Can @DraftKings $DKNG cut back on spending and still work on increasing #market share?@Jefferies' David Katz tells @contessabrewer that "market share is important, but we want you to show us a clear path to #profit. It's not just about the market share." pic.twitter.com/8zq0hl0Njb
— Worldwide Exchange (@CNBCWEX) February 17, 2023
“I am very pleased with how we concluded 2022, with continued top-line growth and strong focus on expense management,” Robins said in a statement.
The stakes are high as leading sportsbook operators make a concerted effort to achieve profitability in 2023. FanDuel, DraftKings’ archrival, swung to profitability in the third quarter of 2022, becoming the first U.S. sportsbook to turn a profit in a single quarter. Two others, BetMGM and PENN Entertainment’s Barstool Sportsbook, project that they will reach profitability in the second half of this year. DraftKings reiterated Thursday that it expects to become profitable in the fourth quarter, before generating full-year positive adjusted EBITDA for 2024.
“It’s a positive step to see DraftKings showing discipline on marketing costs and pruning some personnel costs,” Bank of America analyst Shaun Kelley wrote in a research note. “Still, DraftKings remains well behind competitors who are either nearing or at profitability in 2023.”
Revisiting contribution profit
Last year at this time, DraftKings introduced a term known as “contribution profit” for assessing its performance in individual state markets. DraftKings views contribution profit as the company’s gross profit in a certain jurisdiction minus spending on external marketing. While DraftKings closed 2021 as “contribution profit positive” in five jurisdictions, the company noted last February that it was on track to reach the benchmark in 10 states.
DraftKings surpassed its own expectations, finishing 2022 as contribution profit positive in 11 states, according to company data released on Thursday. When DraftKings enters a new jurisdiction, the company begins to invest in the state through marketing and promotions for a period of approximately two years, DraftKings CFO Jason Park wrote in the letter to shareholders.
“Following this period, in our experience, a state turns contribution profit positive and begins to generate significant growth in contribution profit,” Park wrote.
$DKNG currently holding $1.3B in cash. Expects to have $700M by 12/31/23
Fixed expense growth is expected to slow meaningfully in 2023 and decelerate further in 2024.
18 of 19 states were contribution profit for q4 and 11 states were contribution profit positive for 2022.
— Nick cowles (@NickCowles11) February 16, 2023
Overall, DraftKings recorded total contribution profit of $105 million in 2022, covering states that were still in investment mode, Park added. By the end of 2023, Park estimates that DraftKings’ total contribution profit will surpass $500 million, even when factoring investment in new states. DraftKings did not provide a state-by-state breakdown of the metric.
Of the 19 states in which DraftKings operated as of Dec. 31, 18 were contribution profit positive, according to Park. Only Maryland, which went live the day before Thanksgiving, failed to hit the benchmark. When not factoring investments into Maryland and Ohio, two recently launched states, DraftKings would have delivered fourth-quarter adjusted EBITDA of around $25 million, DraftKings contends.
The underlying profitability trends left Truist Securities analyst Barry Jonas impressed. Jonas also credited DraftKings for an improved 2023 EBITDA loss guidance. DraftKings adjusted the midpoint of its 2023 adjusted EBITDA outlook to -$400 million, lowering projected EBITDA losses by $125 million from prior estimates, Jonas noted. Within the outlook, DraftKings projects $50 million in savings from external marketing efficiency, with another projected savings of $50 million from a category it described as “lower compensation and related expenses.”
Some argued that the changes are not enough. Though the pace of external marketing spending slowed in 2022, DraftKings still spent more than $1.1 billion in the category. DraftKings also had stock-based compensation of $578 million last year, including $130.1 million in the fourth quarter alone.
Over the past three months, DraftKings performed a full organizational review culminating in new marketing and compensation expense plans for 2023, Park said. Under new changes to the company’s management incentive structure, about 50% of DraftKings’ performance-based compensation will be based on hitting revenue targets, with the other half tied to targets on adjusted EBITDA. As a result, DraftKings expects that stock-based compensation will decline by approximately 30% to around $400 million this year.
This is why the leaders @DraftKings had to write a letter to shareholders.
Cost of revenue doubled? Stock Based Compensation was 578M for a company with zero profits (?). Until they are profitable they are not working for shareholders…they are lining their pockets. $DKNG… https://t.co/etWnJJDxD2
— Captain Mike Dzikowski (@MikeDzikowski) February 17, 2023
Improved hold percentages
For 2022 as a whole, DraftKings ended the year with an online sports betting hold percentage of 7.7%, in line with models constructed by Macquarie analyst Chad Beynon. Hold percentage in sports betting is typically defined as the percentage of handle that a sportsbook keeps relative to dollars wagered. Of the $65 million in unexpected revenue from the fourth quarter, DraftKings attributed $30 million to higher holds from structural improvements.
Shortly after its transition to an in-house trading platform powered by SBTech, DraftKings began offering same-game parlays around the start of the 2021 NFL season. Park credited an increased parlay mix and average leg count, along with investments in the company’s in-house data science models, as drivers for the improved hold. DraftKings recently rolled out an in-game same-game parlay product for the NBA, the first of its kind throughout the industry, according to Robins.
“I think the U.S. customer is uniquely oriented toward the proposition of ‘bet a little to win a lot,'” Robins said. “We’re still at the infancy stages of this product. There’s so much we can do to innovate and make it more exciting for the consumer.”
In terms of player metrics, DraftKings increased monthly unique payers (MUPs) by 31% on the quarter to 2.6 million average monthly unique paying customers. The increase reflects strong unique payer retention and expansion into new states, the company said. During the quarter, another metric known as “ARPMUPs,” or average revenue per MUP, rose to $109, an increase of 42% from the same period in 2021.
DraftKings climbed more than 6% in Thursday’s after-hours session to $19 a share. DraftKings continued its climb in Friday’s pre-market trading, reaching $20, up 12%. Shortly after DraftKings concluded its quarterly earnings call on Friday morning, the stock traded at $20.68, surging more than 16% in the early session.
Riding tailwinds from the Super Bowl, DraftKings’ shares on Friday reached their highest level since September. Heading into the earnings call, DraftKings led U.S. sportsbooks in app downloads on Super Bowl Sunday, according to Robins.
DraftKings is now up more than 50% from its opening price at the start of the calendar year. At the same time, DK is still down more than 70% from its all-time high of $74 a share two years ago.