DraftKings CEO Jason Robins downplayed concerns associated with mounting short-term losses as the company continues to expand sports betting operations ahead of its highly anticipated public listing potentially on tap for some point this year.
For the nine months ended September 30, 2019, DraftKings reported net losses of $114.1 million, up nearly 52 percent from the same period a year earlier. It came as DraftKings’ revenues rose to $191.1 million, a year-over-year increase of 44 percent. DraftKings, which entered into a definitive business combination agreement with Diamond Eagle Acquisition Corp., a special purpose acquisition company and tech/software supplier SBTech on Dec. 23, is gearing up for its public debut.
As DraftKings prepares to woo investors in the coming months, the company is taking steps to disclose its financial results. According to an SEC Form S-4 filing, dated Jan. 6, DraftKings reported net losses of $76.2 million for the year ended Dec. 31, 2018, the first year the company offered a legal sportsbook in addition to daily fantasy sports contests, following a landmark decision by the Supreme Court that May.
Sacrificing short-term losses for long-term growth
The losses accelerated for DraftKings over the first nine months in 2019, as the company ramped up its marketing budget while entering new markets. Following the New Jersey launch of DraftKings Sportsbook in August 2018, the company added mobile sports betting operations in Indiana, Pennsylvania and West Virginia last year.
But Robins is undeterred. When looking at the top line of the combined businesses, DraftKings expects to increase revenue approximately 30 percent to $540 million in 2020.
Subsequently, DraftKings projects an annual revenue increase of an additional 30 percent to $700 million in 2021. The projections are based on the assumption that numerous additional states will legalize sports betting by then and that online sports betting is available to approximately 20 percent of the U.S. population, according to a DraftKings’ investor presentation.
DraftKings attempted to come up with as conservative a forecast as possible, Robins told Sports Handle, given its status as a neophyte public company.
DraftKings is going public, and it’s forgoing the typical IPO process. Here’s what you need to know about the fantasy sports company’s new 3-way deal. https://t.co/BWbAXDT3Jo pic.twitter.com/8GsRdImyw9
— CNBC (@CNBC) December 23, 2019
A much-needed capital infusion will help. Under the proposed combination, DraftKings received a funding round of approximately $304 million from a group of institutional investors. The capital investment will be used to pursue further expansion in new states legalizing sports betting, Robins said. Robins is bullish on markets in Colorado and Michigan, two states expected to launch sports gambling regimes in their respective states this year.
Speaking exclusively to Sports Handle at CES 2020, Robins appeared relaxed and confident in his company’s long-term prospects during a 45-minute interview at the Aria’s Ironwood Ballroom in Las Vegas.
“For investors who have convictions in the industry, they don’t get too hung up in what happens this quarter or even next year,” Robins said. “If you have conviction and believe in the ultimate market, you’ll be patient as it unfolds.”
Little cause for concern?
In an effort to assuage investors, or provide some context to explain the losses, Robins cited several factors for DraftKings’ financial results. For one, since DraftKings launched mobile in a number of states toward the latter half of the year, the company expects the returns to take longer to materialize. What’s more? The investment period once a state launches sports betting can be lengthy, Robins pegs it at about two to three years in New Jersey.
While some investors may be focused on conditions such as market share and operating expenses when mulling whether to buy stock in DraftKings, the company uses a different metric to govern many of its business decisions. Since predicting market share in some states is difficult, if not near impossible, DraftKings typically evaluates the Net Present Value (NPV) of an investment. A calculation of NPV takes into account the difference between cash inflows generated from an investment and cash outflows over a given period. By making smart investment decisions, a company like DraftKings can avoid spending unprofitable dollars just to gain a foothold in certain markets.
“Based on the data we have, we think there is a pretty strong return and a pretty high NPV per dollar that we’re getting back from what we’ve spent,” Robins said.
Through the first 11 months of 2019, the year-to-date handle among all sports betting operators in New Jersey eclipsed $4 billion. Still, DraftKings has yet to reach a point where there is enough cash flow from the Garden State to offset the costs of launching in “three or four new states,” over a short period of time, Robins said.
At the moment, DraftKings’ marketing expenses are being driven up by the comparatively high rates for advertising on the local level. When a company purchases media in a local region it can cost anywhere from “2.5 to 3.0 times,” more per impression than the rate it pays on a national basis, Robins said. He expects that the company’s advertising expenses will decline as a larger segment of the U.S. population enters the sports betting market.
By then, DraftKings can capitalize on a competitive advantage due to its scale. It may be wise for a company with sports betting in states that account for 60 percent of the nation’s population to air a commercial on SportsCenter, given their extensive reach. The marketing strategy could be less effective for a company in a region that only represents about 30 percent of the population.
“When they buy the same ad on SportsCenter, that company that is reaching 60 percent is going to be reaching twice as many eligible customers,” Robins said.
DraftKings appeared to go to great lengths in the registration statement to alert investors on the risk factors related to the business combination. The company, according to the filing, cautions that it may continue to “incur significant losses,” in future periods, though the frequency and duration is not specified.The pace of legalization in holdout states is also beyond the control of operators, potentially impacting DraftKings’ growth.
Robins is in search of investors who are interested in where the company will be in three to five years, not the next three months.
“Those are the types of investors we want because it takes some of that volatility out of the equation,” he said.