Draftkings Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Shaun Kelley - BofA Global Research (US) - Analyst : Jason, if we could start off, I think most of our questions this morning from investors have really kind of been around the flow-through assumptions for next year. So obviously, some pros and cons. But where we left it a quarter ago, I think you had spoken about a 50% flow-through kind of on a long-term basis, and I think that's somewhat some of long-term objectives had kind of pinpointed to. This year, for next year, you're looking at 39%. So can you just talk about some of the puts and takes behind those variables as well as sort of how it interacts with what you're seeing on the revenue and customer acquisition side at this point? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 08, 2024 / 1:30PM, DKNG.OQ - Q3 2024 Draftkings Inc Earnings Call

Question: David Katz - Jefferies - Analyst : So just rolling through the rest of the year, one of the discussions we've been having is how do we get comfortable month to month and quarter to quarter that the kinds of impact that we see here don't recur and/or flip back in the more positive direction. I guess what I'm asking is if you could talk about some of the levers that you have at your disposal and how the business evolves to mitigate some of the luck factor that showed up here.

Question: Robin Farley - UBS - Analyst : Great. One small thing, just wondering, I don't know if you said the hold percentage in Q3. And then the bigger question is, with Illinois you've talked about changing promotional activity to kind of offset the higher tax. Can you talk a little bit about, do you feel like you've sort of fully figured out how to do that, or is that still a work in progress? In other words, are you where you want to be with that trade-off?

Question: Carlo Santarelli - Deutsche Bank - Analyst : Jason, I was wondering, so within the context of the 31% revenue guidance for next year. To the extent you can't -- like how would you parse that between market growth across both iGaming and sports betting, market share and promotional extraction? If you could kind of bucket maybe the growth across those three verticals or any kind of direction you can give on that?

Question: Carlo Santarelli - Deutsche Bank - Analyst : Great. And then just on the promotional side, is -- obviously 300 was the number this quarter. Is that kind of in the ballpark of what you're looking to extract next year for the entirety of the year? Or is it something a little more muted just based on what you just said, i.e., the customer acquisition environment?

Question: Carlo Santarelli - Deutsche Bank - Analyst : Great. And if I could, just one follow-up. You guys obviously provided some good disclosure around your MUPs and ARPMUPs in the period ex Jackpocket the ARPMUP up growth, I believe, was 8%. Is that just a mix issue of some of the newer customers you're bringing in? Or is that something that maybe relates to some of the legacy customers and you guys getting a little bit smarter with managing volatility and whatnot?

Question: Joe Greff - JPMorgan - Analyst : I'll start with the question that Carlos just asked, maybe ask it somewhat differently. If you can look back at the 3Q and parse between OSB and iGaming segments, can you talk about spend per existing user versus newly acquired users, how much of a delta or maybe lower spend new users might have relative to some of your longer-term, maybe more VIP customers?

Question: Joe Greff - JPMorgan - Analyst : Great. And then with respect to your 2025 revenue and EBITDA guidance range, what's contemplated at the high end versus what's baked into the low end? What's that $100 million EBITDA bridge? What's the delta there?

Question: Joe Greff - JPMorgan - Analyst : Great. And then one final question here. Given the aforementioned customer-friendly results in October, have your handle expectations versus a quarter ago called change? In other words, would 4Q handle actually have gone up relative to three months ago, given these outcomes and what might be stronger engagement?

Question: Ben Miller - Goldman Sachs & Company, Inc. - Analyst : I guess just on the 25% EBITDA guide, I was wondering if you could expand on what some of the embedded assumptions are in there versus last quarter? And what some of those moving pieces are that leave the range unchanged against factors that may or may not be new this quarter? You obviously have a revenue guide versus prior expectations. It seems like you're mitigating some tax in Illinois. Are there any assumptions from Missouri? Any color around that would be helpful.

Question: Ben Miller - Goldman Sachs & Company, Inc. - Analyst : Great. And then maybe just a big picture one, Jason. I'm curious your thoughts on the non-sports betting prediction markets, and whether that's an opportunity, or how you think about that from a product standpoint, from a competition standpoint, as either cannibalizing or an opportunity for OSB and iGaming?

Question: Stephen Grambling - Morgan Stanley & Co. LLC - Analyst : I'm going to try to roll two into one here. One is just on the guidance for 2025. I guess, what level of customer acquisition or user growth do you have embedded in the revenue guide? And then secondarily, you talked about the 500 basis points increase in parlays within the football season, I guess, what do you think is explicitly driving that? And is that going to carry over into other sports in the next year?

Question: Stephen Grambling - Morgan Stanley & Co. LLC - Analyst : Just as you think about -- what's the drivers of the 500 basis points increase in parlays? Does that carry over into other sports, or specific product changes? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 08, 2024 / 1:30PM, DKNG.OQ - Q3 2024 Draftkings Inc Earnings Call

Question: Ben Chaiken - Mizuho Securities USA - Analyst : Jason, the elevated external marketing for '25 totally makes sense. But I guess the question is, in '24, you had a similar opportunity to acquire customers that you didn't see coming at the beginning of the year. How are you estimating that opportunity in '25 a year plus out? And I know you -- I think you said you're taking a conservative angle. But again, just more so, how did you quantify the magnitude of the opportunity for something that seems maybe hard to predict?

Question: Ben Chaiken - Mizuho Securities USA - Analyst : Got you. And then just some back-of-the-envelope math, is it fair to say you held the light by about 500 basis points in October? I'm basically saying the 250 of hold divided by an estimated October handle on our end? Does that sound right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 08, 2024 / 1:30PM, DKNG.OQ - Q3 2024 Draftkings Inc Earnings Call

Question: Clark Lampen - BTIG - Analyst : Jason, I wanted to follow up on structural hold rates. You called out 11 for next year, you're pacing towards 10.5. Hopefully, without sounding too myopic, why only 50 basis points of increase expected when I think a lot of the conversations that we've had so far around product mix shifts and the momentum that you guys are seeing with packaging product, stuff like that, it all feels quite positive?

Question: Clark Lampen - BTIG - Analyst : How does micro-betting, I guess, sort of factor into that, if at all, also next year? I'm curious if you could give us an update maybe on the simple bet integration and perhaps when we might start to see, I guess, some of the product that's sort of in the pipeline starting to roll out?

Question: Joe Stauff - Susquehanna Financial Group LLLP - Analyst : I had a question. Maybe if you could describe maybe retention levels and what they look like between, say, an OSB and a casino customer. And the reason I ask is, certainly within OSB, you have a significantly larger competitive advantage given your product and number of iterations and so forth and the amount of share that you have versus the casino market that certainly seems finite today and more competitive. And so I was just curious about what does retention levels look like between, say, both of those customer cohorts?

Question: Dan Politzer - Wells Fargo Securities, LLC - Analyst : I know a lot of the focus has been on the 2025 guide. But one of the things I was looking back at your Investor Day last year, you actually forecast revenue of 2026 at $6.2 billion. So as you think about that relationship and maybe that could be just stale at this point, but should we think about kind of the path forward outside of 2025, the flow through and maybe the leverage as maybe you kind of look to exceed those prior targets given there seems to be upside on revenue, how should we think about that kind of going forward? And along with that, sales and marketing, you guys did a lot of deals in 2020, 2021, probably rolling off soon. So I mean, is that also an opportunity as we think about kind of the flow-through as we move past 2025?

Question: Brandt Montour - Barclays - Analyst : I'd like to dig in a little bit more on the 11% hold number. Jason, how do you think about that 50 bps lift in terms of average parlay -- or parlay mix versus average number of leg count improvement? And could you get there just by anniversarying the parlay mix lift you're seeing today? Understanding that there's differences in your product across sports. And then the last part of this question is with regards to your main competitor and the hole that I know that you see that they do, what would it take to get to something a little bit closer to what they're doing next year? Is that even possible, like a 12% or a 13%? What would that take?

Question: Jed Kelly - Oppenheimer & Co. Inc. - Analyst : Great. Just on iGaming, can you sort of talk about the promotional velocity, how that's trended over the last couple of quarters, where that's going into '25? And then just on the -- you had a King of the Court promotion. I thought it was really good. Can you talk about any learnings or engagement and the ability to sort of do some type of a social parlay -- social promotion again?

Question: Jed Kelly - Oppenheimer & Co. Inc. - Analyst : iGaming promotional velocity?

Question: Barry Jonas - Truist Securities - Analyst : With Missouri approving OSB, curious what states you're eyeing next for OSB or even iGaming? And maybe specifically, I wanted to get your thoughts on Florida given recent comments from the Seminoles maybe opening the door for others.

Question: Barry Jonas - Truist Securities - Analyst : Great. And any thoughts on Florida?

Question: Bernie McTernan - Needham & Company, LLC - Analyst : Maybe just to start with the expectation of $850 million of free cash flow for '25, how should investors think about the use of cash, particularly for buybacks next year? And then just a follow-up on hold. We all can track what happens with certain game outcomes and how that with favorites winning, how that can negatively impact hold. Is it possible to disaggregate the total impact on hold between what was going on with team outcomes versus player props in the quarter?

Question: Michael Graham - Canaccord Genuity - Analyst : I just wanted to ask about one of your slides in the deck. You said you have 3.6 million MUPs at the end of the quarter and 9.3 million total customers. I just wanted to ask if you could update us on your strategies for reactivating customers who have not engaged recently. Is it just a matter of promotional spend, or is there -- are there other things you're doing?

Question: Chad Beynon - Macquarie Capital (USA) Inc. - Analyst : Obviously, with the 30% growth for '25, you have a lot of focus areas that you need to be dialed into. But Jason, I wonder if anything has changed just in terms of beginning to look at some international markets, or more importantly, when is the right time to start considering growing in other markets as top line might begin to slow if there's no legislation here in North America?

Question: Chad Beynon - Macquarie Capital (USA) Inc. - Analyst : Thank you very much.

Question: Jeff Stantial - Stifel, Nicolaus & Company, Inc. - Analyst : Jason, I wanted to drill down into a comment you made early on in the call. If I caught it correctly, you said both the volume of users acquired and the signup offer per user acquired were both up year on year, though promotional reinvestment, as you note, in the latter was down about 300 bps year on year. Is that mostly retention bonusing optimization and structural hold expansion that's driving that improvement? And then strategically, should we think about the higher nominal sign-up offer as being mostly opportunistic in the current user acquisition environment? Or how much is it maybe informed by more what certain competitors are offering?

Question: Jeff Stantial - Stifel, Nicolaus & Company, Inc. - Analyst : Great. And then just in terms of the second part of that question, the offer levels per user acquired, is that just opportunistically leaning in when the fish are biting? Or is there kind of another reason to raise the per user offer?

Question: Jordan Bender - Citizens JMP Securities, LLC - Analyst : The original gross margin guidance for '24 was 45% to 47%. So as we think through the bridge, on one hand, Illinois is a negative, which you've noted there should be some offset, game outcomes are onetime and Jackpocket should be actually positive to gross margin. So I'm just struggling to get why gross margins are essentially in the same place in '25 kind of blending those factors together. Is there anything else that we're missing here?

Question: Ryan Sigdahl - Craig-Hallum Capital Group LLC - Analyst : How much of the $55 million of promotion optimization was because of customer-friendly sports outcomes and you just didn't have to retention, promote quite as much to them, versus an actual structural change in the promo strategy and playbook that we can run with going forward?