Entering this week’s earnings release, DraftKings faced some pressure from investors to exhibit an improved outlook after previously indicating that it could generate profitability by the second half of this year.
Now that it topped analysts’ expectations with the company’s 2023 first-quarter results, DraftKings may be ahead of schedule. In projecting improved 2023 adjusted EBITDA guidance this week, DraftKings now anticipates breaking even on an adjusted EBITDA basis by this year’s second quarter. Adjusted EBITDA is typically defined as the amount a company earns over a given period before interest, depreciation, and amortization. The metric also removes any one-time, non-recurring items that may distort a company’s EBITDA on a given quarter.
DraftKings reported adjusted EBITDA of negative $221.6 million for the three-month period ended March 31, doing better than analysts’ estimates of a loss of $261 million. The company also generated revenue of $770 million, an increase of 84% from the same period in 2022, beating analysts’ expectations for revenue of $705 million. DraftKings cited operational efficiencies from high customer acquisition rates and “healthy customer retention” among the factors for the strong quarter.
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During the first quarter, DraftKings increased new users 57% year-over-year while its customer acquisition costs declined 27% from the prior year’s quarter, the company wrote in a letter to shareholders. Leading operators in the sports betting industry are laser-focused on lowering the costs to acquire new customers as the push to reach profitability intensifies.
“I am confident DraftKings is well-positioned to achieve profitability on an adjusted EBITDA basis in the near-term and deliver long-term value for our shareholders,” DraftKings CEO Jason Robins said in a statement.
DraftKings rose more than $2 a share in Thursday’s after-hours session, surging nearly 10% to $23.40. By Friday morning’s pre-trade session, DraftKings surpassed $24 a share, up more than 15% from Thursday’s close. DraftKings surrendered some of the gains at Friday’s opening of the market, but still traded above $23. Later on Friday, DraftKings’ eclipsed $25 a share, reaching its highest levels on the calendar year. DraftKings still remains far below levels from two years ago, when it peaked at $74 a share.
Promotional intensity
A major topic on Friday’s call centered around “promotional intensity,” or the amount DraftKings is spending on bonus bets and other promos to woo customers. When a legacy state moves closer to market maturity, the mix of new versus existing customers shifts toward the latter, according to DraftKings’ business model. Since DraftKings’ “promotional reinvestment” is higher for new customers, the company expects promotional intensity to wane over time as it expands its reach across the country. DraftKings views legacy states as those that have been live for several years.
The trends played out in the first quarter as DraftKings acquired customers in new jurisdictions at a higher rate than legacy states in the past. In Massachusetts, DraftKings has acquired about 6% of the total adult population since the company launched online sports betting two months ago. For seven recently launched states, including Massachusetts, the company’s average acquisition rate hovers around 3.4%. By comparison, the figure failed to hit 1% in five state launches from 2018-19. In evaluating the data, DraftKings tracked acquisition metrics for the first 30 days of a new state launch.
Robins pointed to the transition from local to national advertising as a factor for lowering costs. Typically, DraftKings sets a goal of attaining profitability in a state anywhere between “two to three years” from its debut. The hot starts in Massachusetts and Ohio provide Robins with optimism that the path to profitability will be shorter moving forward.
At the same time, DraftKings is encouraged by recent customer retention metrics. Among the states where it launched in 2018-19, DraftKings’ 2023 first-quarter handle grew about 25% year-over-year, CFO Jason Park noted. All told, improved customer acquisition, retention, and engagement led to about $195 million in revenue improvement, he added.
JMP Securities analyst Jordan Bender believes that DraftKings is benefiting from delivering products at scale, which in turn has created a “snowball effect.” As DraftKings reinvests back into the business to drive greater retention, the improvements are flowing through to the bottom line, he wrote in a research note.
Across the industry, leading operators are determined to optimize efficiency in promotional spending. Top sportsbooks are turning to artificial intelligence and personalization to target individual customers more effectively. Operators are also becoming more vigilant at cracking down on bonus shopping, a point Robins reiterated on Friday.
Long-term prospects
Another closely watched metric over the quarter centered around DraftKings’ hold percentage from favorable sports outcomes. In last year’s first quarter, DraftKings took a $25 million hit from sports event outcomes, as Robins alluded to losses related to Saint Peter’s University’s deep run in the NCAA Tournament. Over the first quarter of 2023, DraftKings’ hold percentage lingered around 8%, according to Robins, a rate he attributed to more favorable outcomes and an improved parlay mix. For the period, the hold percentage improved about 250 basis points (2.5%), Robins said, with the parlay mix resulting in an increase of approximately 4%.
DraftKings is also focused on structural hold improvements, buttressed by product enhancements from its in-house tech platform. This year, DraftKings introduced in-game same-game parlays for NBA and MLB markets, products the company believes will serve as a differentiator from its competitors. Same-game parlays generally produce higher holds than straight win bets.
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DraftKings has faced some criticism in the past for high marketing costs, and the company ended the quarter with $389.1 million in sales and marketing expenses, an increase of 21% from last year’s quarter. In terms of percentage increase, DraftKings slowed the pace of spending. In last year’s first quarter, DraftKings spent $321.5 million in the category, up 40.6% from the same period in 2021. In another category, which DraftKings dubbed “cost of revenue,” expenses swelled 66.4% to $521.7 million.
Another analyst, Deutsche Bank’s Carlo Santarelli, pressed Robins on whether DraftKings has any plans to benchmark marketing spending in the future as a percentage of revenue. Despite the strong quarter, Santarelli expressed skepticism that DraftKings’ short-term profitability outlook will carry over for a more lengthy period.
DraftKings’ earnings release capped a busy week where rivals FanDuel, MGM Resorts, and Caesars all reported first-quarter results. Flutter, the parent company of FanDuel, said it expects the U.S. operator to be profitable this year on an annual basis. BetMGM intends to achieve profitability later this year, while Caesars‘ digital segment nearly broke even for the quarter.
Robins did not provide an update on the company’s full-year 2024 guidance, preferring to wait until an upcoming company investor day presentation. While DraftKings ranks second in online sports betting (OSB) market share to FanDuel, Robins appears determined to close the gap.
“Having a big competitor in FanDuel gives us someone on the OSB side that we can chase down,” Robins said.
