DraftKings Inc.

Welcome to the DraftKings Q1 2022 earnings conference call. My name is John. I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press 0 then 1 on your touchtone phone. I will now turn the call over to Stanton Dodge, Chief Legal Officer.

Good morning, everyone, and thanks for joining us today. Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties, and other factors, as discussed further in our SEC filings, that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will discuss certain non-GAAP financial measures that we believe may be useful in evaluating DraftKings' operating performance. These measures should not be considered in isolation or as a substitute for DraftKings financial results prepared in accordance with GAAP. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings presentation, which can be found on our website and in our quarterly report on Form 10Q filed with the SEC. Hosting the call today, we have Jason Robbins, co-founder, chief executive officer, and chairman of DraftKings. who will share some opening remarks and an update on our business. And Jason Park, Chief Financial Officer of DraftKings, will provide a review of our financials. We will then open up the line to questions. I will now turn the call over to Jason Robbins.

Good morning, everyone.

On today's call, I will cover the following topics. First, we are very excited to welcome the Golden Nugget Online Gaming Team to DraftKings. Since the announcement of the proposed acquisition in August 2021, our excitement around bringing these companies together has only increased. The acquisition closed yesterday, and we are well prepared to integrate our respective businesses, begin executing on our multi-brand strategy, and capture our adjusted EBITDA synergies, which we expect to reach approximately 300 million long-term. Second, we'll discuss our first quarter financial achievements. Revenue for the first quarter exceeded the midpoint of our guidance by $7 million. and adjusted EBITDA significantly outperformed our expectations, finishing more than 12% better than the midpoint of our guidance. Third, we see a stronger top and bottom line outlook for the year and are raising both our 2022 revenue and adjusted EBITDA guidance. Despite broader concerns around the macroeconomic environment and inflation, our cohort-level data has remained very healthy, and our path to profitability has become more clear. Legislative momentum has remained robust as well. Looking forward, we see strong top-line growth continuing through the remainder of the year and beyond, coupled with continued optimization of our margin profile and overall cost structure. Finally, I will touch on recent product developments and adjacent growth verticals. We are continuing to innovate and improve the customer experience by consistently adding new games and features, which we believe will ultimately support customer acquisition, retention, and by extension, player LTVs. Additionally, we continue to make progress in media and marketplace, and we are very excited about the future prospects for both. Let's start with our acquisition of Golden Nugget Online Gaming. We are very excited to welcome the Golden Nugget Online Gaming team to DraftKings and have a well-designed integration plan that is already being implemented. The acquisition will allow DraftKings to leverage Golden Nugget's established brand to broaden our reach in new customer segments, particularly within iGaming. It will also enhance the combined company's iGaming product offerings through DraftKings' vertically integrated tech stack and Golden Nugget Online Gaming's unique live-to-dealer capabilities. In addition, the transaction increases DraftKings' customer database size through access to the more than 5.5 million members in the databases of the Golden Nugget 24-day club and Landry's Select Club on top of the current DraftKings database of more than 20 million accounts. We continue to have confidence that the combination of our businesses will result in long-term adjusted EBITDA synergies of approximately $300 million. Now let's turn to our first quarter results. DraftKings generated $417 million of revenue in the first quarter, which exceeded the midpoint of our guidance by $7 million. Revenue growth is primarily driven by our B2C business, which increased 44% compared to the prior year period. Adjusted EBITDA of negative $290 million in the quarter also outperformed our expectations by $40 million compared to the midpoint of our guidance. Part of the reason why we are outperforming our own expectations is markets such as New Jersey have turned highly profitable and continuing to grow at an attractive rate. We have also identified efficiency opportunities and executed on them, which drove some of the outperformance in first quarter adjusted EBITDA. These efficiencies were up and down the income statement, including in our COGS, marketing, and corporate fixed costs. The primary driver of these cost opportunities was faster growth and state expansion, which has allowed us to accelerate progress towards our plans for our long-term cost structure. Our Q1 adjusted EBITDA also benefited from corporate costs that shifted from Q1 to the remainder of the year. Consequently, some of the reduced costs in Q1 will continue to positively impact DraftKings going forward, while others are simply due to timing. Suffice it to say, we will continue to look for opportunities to accelerate the realization of cost efficiencies as DraftKings continues to grow and scale. Our key performance metrics, including user acquisition, retention, and engagement, also continue to trend well. Q1 includes two marquee sporting events, the Super Bowl and March Madness. Basketball, both the NBA and college, also drew increased attention and interest throughout the quarter. The NBA has been strong, including when the NFL was still in play, while the Super Bowl saw tremendous customer engagement. For the Super Bowl, we set a single-day record for first-time OSB bettors, which increased 77% year over year. For the first weekend of March Madness, our first-time OSB bettors increased 42% year-over-year. March Madness this year featured very player-friendly results overall, especially the exciting run by St. Peter's to the Elite Eight. Bettors across the country backed the Peacocks during their surprise run. This run contributed to our lower-than-forecasted OSB hold. Hold variance due to game outcomes resulted in approximately $25 million of reduced revenue in the quarter. First quarter monthly unique payers increased to approximately $2 million, up 29% versus Q1 2021. Average revenue per monthly unique player increased 11% year-over-year to $67. Notably, average revenue per monthly unique player would have grown approximately 26% if we adjusted both Q1 2022 and Q1 2021 for OSB holds. Cost of goods sold and marketing spend were both elevated in the first quarter, primarily due to our launch in New York on January 8. Gross margin percentage was also negatively impacted by sports betting hold during the quarter. With that, I will turn to our updated outlook for the business. We have several unique capabilities, including our growing DFS database, which is a great source of OSB customer acquisition, a decade of marketing know-how to acquire sports fans, our sophisticated data science and analytics organizations, our vertically integrated tech stack, top-rated products across all categories in which we operate, and single account and wallets These capabilities are very difficult to replicate by other operators and are the reasons for our very attractive CACs and strong share, which support our growth outlook for 2022 and beyond. We are raising the midpoint of our 2022 revenue guidance from $1.925 billion to $1.975 billion and improving our 2022 adjusted EBITDA guidance to a range of negative $760 million to negative $840 million. This increased guidance does not include the contribution of the Golden Nugget online gaming business, nor does it include our contemplated launch in Ontario. Jason Park will touch on our preliminary expectations for GNOG in Ontario. I also want to spend a few minutes discussing the outlook beyond 2022. As a starting point, the pipeline for new states remains robust. As you know, following our launches in New York and Louisiana, DraftKings is currently live with online sports betting in 17 states that collectively represent approximately 36% of the U.S. population. Additionally, DraftKings is live with iGaming in five states, representing approximately 11% of the U.S. population. We also expect to go live in Ontario in the near future, pending licensure and regulatory approval. Ontario represents about 40% of Canada's population, and Ontario will be the fifth largest U.S. state by population if it were in the U.S. However, due to the presence of gray market operators, many of which have been present in Ontario for several years, we do not believe that the timing of our launch will have any impact on the share we are able to achieve in that province. There are three U.S. jurisdictions that have legalized mobile sports betting in which we are preparing to launch on licensure and approval from regulators, Maryland, Ohio, and Puerto Rico. These three jurisdictions represent approximately 7% of the U.S. population. and will bring the percentage of the population where DraftKings expects to offer legalized mobile sports betting to approximately 43%. In Kansas, which is about 1% of the U.S. population, a mobile and retail sports wagering bill has passed the legislature and is now pending executive action. We are also very excited by momentum in California. The approximately 1.6 million signatures submitted by Californians for solutions to homelessness and mental health support will likely allow us to qualify the ballot measure for the 2022 November ballot. This is a really important step. Once the signatures are verified, then the initiative will be placed on the ballot in November. And if the initiative passes with a simple majority, then it becomes law. From there, regulators will implement a framework, and we are hopeful that we can get live sometime in 2023 pending licensure and regulatory approval. California, of course, represents a significant revenue and adjusted EBITDA opportunity. with approximately 12% of the United States population. In fact, if California were a country, it would be the fifth largest economy in the world ranked by GDP. In short, from a legalization perspective, there is a lot to look forward to. Finally, I will touch on recent product developments and adjacent growth verticals. Our sports betting app continues to score very well in third-party surveys. Eilers and Krychek recently published its quarterly report on U.S. sports betting and app rank. The firm tested 41 sports betting apps and ranked each on user experience, betting interface, features, core, and aesthetics. DraftKings app was tied for number one overall and was the top three for user experience, betting interface, and features. We continue to believe that product innovation and quality of customer experience will create strong customer acquisition, retention, and LTVs, giving DraftKings a sustainable competitive advantage over the long term. Q1 was only the second full quarter since migrating to our own proprietary in-house technology platform, and we are pleased with the progress we have made, not just with our sports betting app, but across our entire product portfolio. In the first quarter, we continued to deepen our content offering for OSB. For example, we added Next Field Goal Micromarkets for the NBA and college basketball, which offers the ability to wager on the Next Field Goal type, Next Field Goal team, and whether the next two- or three-point shot will be made by the home or away team. We also added several player markets to our college basketball in-game parlay offering, including point scores, assists, rebounds, and three-pointers made, as well as combinations of these markets. In iGaming, our focus on cross-selling and in-house content development continued to pay dividends. In the first quarter, 43% of mobile sports betting users in our iGaming space also engaged with our iGaming product, and 54% of iGaming handle came from DraftKings-developed games. And in April, we launched our first DraftKings Developed Slots game in New Jersey. With DraftKings Social, we have created an integrated and highly engaged community that allows fans to interact with each other within a peer-to-peer environment. In April, we launched betting groups, which are a seamless way to collaborate on a sports betting experience. Users can create a group and distribute a link for others to join. Once the group is created, all actions of the members who elected to share their bets will be dropped into the group in real time. notifying group members with a link directly to that new bet. In fact, anyone in a league can remake their league as a sports betting group in our mobile sports book, and one-tap invite everyone in the league to their betting group. Imagine a group of friends watch March Madness or the World Cup from wherever they might be around the country, all engaged and all with a rooting interest in all of it happening via DraftKings. For daily fantasy sports, in March we added International Auto Racing League Formula One to our portfolio of sport offers. This offering leverages the experience and success of our NASCAR Daily Fantasy product, as well as the popular Netflix series. Turning to DraftKings Marketplace, we now offer auctions for NFTs in the marketplace in addition to regular drops. We introduced this additional mechanism for participants to access NFTs to broaden our appeal to a wider audience. We also now have a proprietary end-to-end in-house NFT factory, where we create our own content and distribute it on our marketplace through primary drops and auctions. Users can buy, sell, and collect NFTs on our secondary market to add to their collection sets and receive promotions and utility associated with certain NFTs. Prior to March's NCAA basketball tournament, DraftKings Marketplace introduced the Primetime NFT Series, which is designed to deepen engagement with DraftKings during these defining moments. DraftKings Primetime NFT Series collection includes proprietary and homegrown DraftKings NFTs that receive cross-product utility and bonuses only available to the DraftKings ecosystem. such as DFS tickets, DK dollars, crowns, automatic gold status tier in our loyalty program, and sportsbook free bets. We will continue to look for opportunities to develop our own content and work with high-quality third-party content suppliers, such as our relationship with Autograph and our recently announced deal with Metabilia. We also continue to build out our media vertical through content agreements with prominent voices within the sports industry, such as former ESPN host and commentator Michael Exenior, Meadowlark media personality Jessica Smetana, and a championship-winning NFL executive, Michael Lombardi. Most recently, popular baseball personality and content creator Jared Karabas and former Notre Dame football player and television personality Mike Gullick Jr. joined DraftKings. Each of these agreements brings exclusive content, such as podcasts and in-depth commentary, which can only be found at DraftKings. I look forward to updating you on additional product developments throughout the year. Before I conclude my remarks, I'd like to note that we recently marked our 10-year anniversary as a company. I want to thank my co-founders, Paul Lieberman and Matt Kalish, and all of our stakeholders, including our employees, both past and present, our customers, and our investors who helped make all of our achievements possible. We also recently published our second ESG report. You can find the report on our investor relations website. The report focuses on our ongoing commitment to environmental, social, and governance issues, including responsible gaming, the well-being and vitality of our employees and the communities in which they work, and environmental sustainability. We believe our long-term success is sustained by our attentiveness to each and every one of our customers, employees, shareholders, and communities, and we look forward to continuing to achieve meaningful ESG progress. I will now turn the call over to Draft Team CFO, Jason Park, who will discuss our first quarter results and updated 2022 guidance.

Thank you, Jason, and good morning, everyone. We are really pleased to announce our Q1 results of $417 million of revenue and negative $290 million of adjusted EBITDA. Our B2C revenue grew 44% versus prior year, as we saw strong performance across our states. Our customers are very strong, with handle per active up in every single state versus prior year, and no discernible sign of macroeconomic factors impacting our customers' engagement with our products. It's worth noting our revenue would have been roughly $25 million better if not for some customer-friendly investments. sport outcomes. MUPS increased by 29% to $2.0 million and ARPMUP increased 11% to $67. MUPS were up in all states with mobile registration available in both Q1 2021 and Q1 2022 as we continue to retain well and acquire new customers and were buoyed by new states we've launched since Q1 2021. ARPMUP was strong as well and would have been $71 were it not for tough hold. As most of you saw in the state data and in press reports, hold was lower than typical for the industry in Q1 due to sport outcomes. B2B was, as expected, generating $13 million in the quarter due to the termination of our Asian reseller agreement. Gross margin rate on an adjusted EBITDA basis was 32%. Q1 gross margin rate was heavily impacted by the launch of New York, which had negative gross margin in the quarter due to Q1 being its launch quarter and, of course, the state having the highest tax rate in the country. New York accounted for more than half of our year-over-year decline in gross margin rate. Continued mid-shift out of high-margin daily fantasy sports also impacted our year-over-year change in gross margin rate. Looking forward, I expect gross margin rate to settle at roughly 40% for the full year 2022, as promotional intensity declines in our more mature states, and we continue to reap the benefits from bringing our bed engine in-house. On adjusted EBITDA, I am pleased that we posted negative $290 million, which was $40 million better than the midpoint of our guidance range. Our better than expected Q1 adjusted EBITDA was driven by a combination of timing of expenses, as well as true cost efficiencies, which will permanently improve our underlying cost structure. Sales and marketing expenses were up 40% versus prior year due primarily to the additional states in which we operated versus Q1 of 2021. Tax continued to be very attractive and in line with our goal of acquiring customers for an amount less than their cumulative three-year gross profit generation. Product and technology and general and administrative expenses were up 53% and 56% respectively versus prior year, mostly due to higher compensation expense. As I mentioned last quarter, we have clear plans in place to have meaningfully slower growth in our fixed costs starting in 2023, which supports our overall path to profitability. During the quarter, we refreshed our multi-year plan and continue to have strong conviction that under any realistic scenario of state launch timing, we have sufficient capital to achieve positive free cash flow comfortably. As a reminder, we continue to believe that at least 10 states will be contribution profit positive in 2022, meaning those states will generate significant positive contribution profit in 2023. This trend, combined with a meaningfully slower growth rate in our fixed costs, sets us up for improved cash flow in 2023 and to not need additional capital looking forward on our earnings call in february we increased our 2022 revenue guidance to a range of 1.85 billion to 2.0 billion today we are raising our revenue guidance to a range of 1.925 billion to 2.025 billion for 2022. the 50 million dollar increase of the midpoint to 1.975 billion equates to year-over-year revenue growth of 52%, largely due to B2C revenue growth of approximately 60%. This guidance is based on the strong fundamental customer trends we are seeing and a return to normal hold for the remainder of the year. This guidance is only for the states in which we are currently live. We expect MUPS and ARPMUPS to grow at a roughly equal rate in 2022 as in 2021. Our outlook for marketplace and B2B is unchanged at approximately $70 million and $40 million, respectively. Regarding our 2022 quarterly revenue cadence, we expect Q2 revenue to be between $400 and $420 million, which is slightly higher than the implied guidance we provided in February. We expect Q3 revenue to also be between $400 and $420 million, and Q4 to be $730 to $750 million. You'll notice this cadence implies a relatively higher percentage of revenue being generated in the second half of this year compared to 2021. This is due to our expectation that New York and Louisiana will ramp up throughout the year and DraftKings Marketplace will hit its stride at the beginning of football season. Today, we are also meaningfully improving our adjusted EBITDA guidance from a range of negative 825 to 925 million to a range of negative 760 to 840 million. which represents a $75 million improvement in the midpoint. We performed $40 million better than our expectations in Q1 as a result of the timing of expenses that we now expect to recognize through the remainder of the year and efficiency opportunities that we have identified and captured across the P&L. The net impact of these efficiencies as well as flow through of our increased 2022 revenue guidance results in the $75 million improvement in the midpoint of our 2022 adjusted EBITDA guide. From a quarterly perspective for 2022, we expect our adjusted EBITDA in Q2 to be between negative 140 and 160 million due to the timing shift of expenses offset by efficiencies. We expect adjusted EBITDA in Q3, which is impacted by the start of the NFL season, to be about double Q2, and we expect our Q4 performance to be the best for the year as we benefit from higher seasonal revenues. It is very important to note that our revenue and adjusted EBITDA guidance for 2022 includes all states in which we were live as of May 6th, including New York and Louisiana, but does not include the impact of our acquisition of GNOG or any other new jurisdiction launches such as Ontario. For the full year, we expect that the acquisition of GNOG combined with our expected launch in Ontario in the second quarter would contribute $130 to $150 million in revenue and negative 50 to 70 million in adjusted EBITDA. For Q2, we expect that the GNOG business combined with our launch in Ontario would contribute between 20 and 25 million in revenue and negative 35 to 45 million in adjusted EBITDA, assuming Ontario launches in May. We are very pleased that underlying customer trends continue to be very positive and that we have identified and captured efficiency opportunities that together have allowed us to improve our 2022 adjusted EBITDA forecast. We feel terrific about our customer cohort gross profit paybacks, as well as state profitability, and thus our trajectory for revenue and adjusted EBITDA in the short and long term. That concludes our remarks, and we will now open the line for questions.

Thank you, and I'll begin the question and answer session. If you do have a question, press 0 then 1 on your touchtone phone. Once again, if you do have a question, press 0 then 1 on your touchtone phone. Standby for questions. Our first question is from Thomas Allen from Morgan Stanley.

Thank you. So in the first quarter, revenue came a little bit ahead of expectations while marketing

was much lower can you just talk about you know what's going on with marketing you know where you're finding efficiencies where you're seeing opportunities thanks thanks thomas great question um i think we're we're starting to enter the phase where national advertising is going to be more and more of our mix and we're able to through a series of tests that we've been conducting over the past few quarters optimize out of some of the local uh television and other local marketing that we're doing so I think that's been a big source of efficiency there, and we expect it to increase, of course, as more states launch.

Great. Thank you. You're welcome.

Our next question is from Jed Kelly from Oppenheimer.

Hey, great. Thanks for taking my question. Just circling back to GNOG and some of their remarks, How should we think about what GNOG is going to do for MUPS and ARPMUPS? And then Jason, I appreciate the commentary on all the state legislation. You didn't mention Massachusetts. I know there's two competing bills. Could you give us an update what you think about what's going on there as well? Thanks.

Sure. So on GNOG, you know, just to remind everybody, The strategic rationale behind the deal was really for us to be able to increase the audience that we'd be able to reach. What we found is that the DraftKings brand is very strong with a certain demographic of customers, particularly those that are sports fans. It's viewed more as a sports brand. We have had some success getting casino-first customers on, and we feel really good about the state of the product and have really great LTVs once we do get those customers on. but we think there might be a more efficient way to do it. And we also think there might be audience that we're not getting to right now. So that's really the goal is to go after that other segment of the iGaming market. And I think having a strong brand like Golden Nugget that really appeals to that segment of audience will help us increase our muck. As far as Massachusetts goes, you know, we continue to be hopeful that there'll be something done. This is obviously our backyard. So having our products be legal in the Commonwealth is very important to us. And, you know, just like any legislative process, even one in our backyard, it's always impossible to predict what's going to happen. And, you know, we continue to be hopeful and we continue to be ready and available to work with lawmakers should we be able to be of assistance.

And just following up on Golden Nugget, the gross margin guidance you called out, that does not include any impacts from Golden Nugget.

No, we separately are guiding to the combined impact of Golden Nugget in Ontario. We wanted to provide more of an apples to apples view so that we could highlight some of the cost efficiencies and also revenue outperformance we're seeing in the core business. And we separately, you know, Jason Park shared some numbers around what we expect the combined effect of Golden Nugget in Ontario to be this year.

Thank you.

You're welcome.

Our next question is from Sean Kelly from Bank of America.

Hey, good morning, everyone, and thank you for taking my question. I just want to go back to some of the comments around gross margin. Obviously, some clear one-time impacts in this quarter due to New York, and it sounds like hold as well. But, you know, Jason, if I caught the comment correctly, I think you mentioned 40% for the full year. I think your longer-term target has that number getting into the mid or even high 50s. Could you help us think about the bridge and some of the pieces to see that step function or improve materially in the medium to long term? Thank you.

Sure. I think the biggest factor will be the lowering of promotional intensity. Promotional intensity has both an impact in net revenue and margin because a lot of the costs that we see in the COGS lines come as a function of gross revenue. Naturally, having less contra revenue will bring up margin. Also, there are a number of other cost initiatives that we have underway, some focused on COGS, some focused on other parts of the P&L that we believe will improve COGS over time. So we think between the internal initiatives that we have as well as just the natural change to gross margin due to lowering promotional intensity, you'll see us reach the long-term targets that we've set out.

Thank you very much.

You're welcome.

Our next question is from Bernie McTernan from Needham & Company.

Great. Good morning. Thanks for taking the question. Jason, I was just wondering, are you seeing any change in the promotional or competitive intensity in the U.S.? And is that impacting your strategy at all? And if intensity is falling off, just how you think about kind of like the diminishing terms of advertising spend, whether it's an opportunity for you guys to be more aggressive or keep your spend and keep share, or is the opportunity to pull back and have more flow through to the bottom line?

Thanks. I think that's a great question. I would separate that into two things. One would be new user offers, and the second would be tentpole events such as the start of NFL or Super Bowl events. I think we'll always run promotions around those events. Those events are great for reactivating people. They're great for acquiring. I think that will always be a part of our strategy. And what we see is that a lot of the promotional dollars end up being, you know, put back into play, which increases the longevity of a customer, which is great. And it also is just really great for activating people during key times. So that I think will continue. I do think that some of the very, you know, Aggressive new user offers have started to taper off significantly. And, you know, we always stay disciplined. We never went, you know, nearly as far as we saw some of our competitors going with the aggression of new user offers. But certainly a softening there will help, I think, the overall market and could lead to faster than expected reduction in promotional intensity versus previously what we may have thought.

Understood. Thank you.

Our next question is from Joe Stock from Susquehanna.

Thanks. Good morning. Two questions, if I could. One is on Golden Nugget. I'm just wondering, it's always a well-managed company. As you suggested, it gives you access to a new consumer demographic and a high proportion of digital slots. They did rent all three pieces of their tech stack and I'm wondering how quickly that software integration would take. And then maybe the second question is just on Sports Hold, kind of going forward, and maybe some of the product mix changes that you have and how to think about that the rest of the year. Thank you.

Can you repeat the second question, please?

Sure. I was just wondering, you know, for your OSB product offering and the product mix that you've realized to date, you know, some of maybe the newer products that you would have that could move, you know, the sports margin higher, you know, going forward.

Great. Thank you. So on your first question around Golden Nugget and the integration plan, One of the nice things about having a bit of a period between the announcement and the close of the deal is we have a really strong integration plan, so everybody knows exactly what they need to do to perform that migration. That said, until we closed, which was only yesterday, there were limitations to what access to their code base and other sorts of things the engineering team here could have. So a lot of what you learn is in the weeks after you acquire when you can really get understanding I think at this point we're not prepared yet to put a timeline on the migration, but certainly by the time of our next earnings call in August, we will be able to do that and intend to do so. And, you know, we expect that there will be a lot of synergy realized once we complete that migration. On the product side, you know, I think it continues to be about pushing parlay and same-game parlays. We've only had the same-game parlay product for about six months or so now. It's been doing very well. We've added a lot to that offering. So we're going to continue to find ways to improve that product and also continue to find ways to, you know, introduce it to our audience and ensure that they know how fun it can be. And I think that will be the biggest driver of Upward Hold when we look at where we see some opportunities based on observations of competitors. Almost all of the opportunity, we believe, is in driving higher parlay mix. Thanks, Jason.

You're welcome. Our next question is from Jason Vazanay from Citi.

I just had a quick question on the 10 states contributing or generating positive contribution margin this year. Would those just be the states that we would expect based on launch date? And then given the lower promotions, the faster customer ramp you talked about on the last earnings call and advertising efficiency, Has the rule of thumb sort of tightened in terms of how long it takes a state to generate contribution profits?

That's a great question. On the first topic, we specifically list the states out in our March Investor Day presentation, which can be found on our Investor Relations website. I must confess I will probably lose track if I try to cite all 10 off memory here, but we list them out, so I encourage you to go take a look there. On the second question, I think that's a great point. We are seeing faster ramp, which has resulted in more meaningful marketing and promotional investment up front than some of our earlier states, but also appears to be leading to a faster path to profitability. So we haven't put a new sort of game plan out there yet, but we are seeing that. And in the coming months, we may be able to say something about what that path to profitability timeline can look like. But it certainly is moving in a positive direction.

That's great. Thank you.

Our next question is from Carlos Santorelli from Deutsche Bank.

Hey, guys. Good morning. I just want to go back to Jason Park, something that you talked about a little bit about the growth rates on products and technology and G&A expenses. Obviously, and I'm making the adjustments for some of the non-cash items, but core G&A was down fairly nicely sequentially. I'm assuming that's where some of the timing stuff lies?

Yeah, on a sequential basis, Q4 versus Q1, I think the G&A reduction is more about the accrual of annual bonuses for the employees. That's going to be the big driver. In terms of timing shift, you know, that That was probably a bit more than half of the Q1 beat, and you'll see that come back in as recognized cost throughout the remainder of the year. It was throughout multiple cost categories, Carlo. It wasn't sort of disproportionately focused on any one category.

Okay, great. And then just as you talked about kind of moving into 23, the comment was, we would see kind of meaningfully slower expense growth at some point in this year. Do we, do we anticipate, you know, perhaps some of those items, you know, start to level off, um, on a sequential basis at least. And then you start to kind of straight line from there.

So, um, That's a great question, Carlo. Thank you. I think that we will see that start to happen a bit, but a lot of the growth that we're seeing year over year in, for example, compensation costs comes from hires that were made throughout 21, which didn't have a full year of salary and benefits in 21, but due in 22. We already are focusing on leveling off headcount expense and also looking for other areas that we can manage expense better. There are a number of initiatives underway. We don't have anything yet that we are ready to say is going to yield results, but there is a lot of effort focused there, and we'll have more to say on that in the coming quarter. Great. Thank you, guys. You're welcome.

Our next question is from Michael Graham from Canaccord.

Yeah, thank you. Jason, you mentioned the New Jersey profitability profile was improving. And I just wonder if you could, you know, give a little more depth around, like, is that more on the revenue side or the marketing side or just, you know, kind of what are some of the moving pieces there? And sort of a related question, you're seeing nice art and up expansion and maybe just it'd be interesting to learn a little bit of, you know, kind of about the components of that art and up expansion. Like are players engaging across more sports? Are their wager sizes going up? Just sort of what are you seeing in terms of player behavior there?

Thanks. I'll take the first question, then Jason Park can take the second. So, on your New Jersey question, it's really up and down the P&L. We're seeing strong revenue growth that's a bit better than our expectations, and we're also seeing some of the cost initiatives that we've put in place play out throughout all the states, particularly the national advertising efficiencies that we're achieving. So it's really up and down the P&L. And, JP, do you want to take the second question?

Yeah, you know, a great question on art muff deconstruction. First off, I'd just remind you that that Q1 art muff was impacted by that roughly $25 million sport outcome hold result. So, you know, when I think about normalized art muff year over year, I adjust for last year's hold and this year's hold in terms of a growth rate. In terms of, you know, deconstructing it a bit more in terms of frequency or bet size, we're seeing it in both places. We're seeing our existing players, which give you a great baseline on a true full quarter versus full quarter, increasing frequency. You know, every customer is a little bit different, but we're seeing health in both frequency and average bet size.

Okay, great. Thanks, guys. Thank you.

Our next question is from Dan Hollitser from Wells Fargo.

Hey, guys. Good morning. Just a couple of state-specific questions. I was wondering if you could maybe quantify the drag New York was in the quarter. You know, what would it have been at New York and also in Illinois to the extent you can talk about any impact from the mobile registration restriction being lifted? Thanks.

Well, you are right that those two things were EBITDA headwinds in the quarter. We think that both will lead to revenue outperformance down the road. So both are good things, but in the quarter, certainly had negative EBITDA impact. You know, at this time, we're not quantifying that specifically. We think that sharing how much we're investing in individual states would be of a competitively sensitive nature. So we haven't done that. But you can certainly conclude that they were meaningful and that our adjusted EBITDA would have been meaningfully better if we had not had those two events.

Got it. Thanks.

You're welcome. Our next question is from Chad Bainon from Maguire.

Morning. Thanks for taking my question. Wondering if you could touch broadly on trends within DFS, either growth or contribution. I believe in the back half of the year you noted that, you know, it was still growing. I think it's probably more of a growth business during the NFL. But wondering how that business has changed and kind of how that's contributing to your 2022 guidance. Thanks.

That's a good question. What we sometimes see with DFS is when a state launches, there's so much excitement around sports betting that there's a bit of cannibalization, and we did see that in New York. Now, in other states, we've seen that level off or even come back, which is why Daily Fantasy Sports continues to be a growing product. But too early to say whether that will continue in New York. We have no reason to think it will be different than other states, though. But certainly given the size of the DFS customer base and revenue in New York, it did have a meaningful impact on the quarter. And I think going forward, we're not necessarily assuming it will come back, but both based on historical trends as well as innovations and expansion of that product, such as the F1 racing games that we added, we do think there's no reason to believe that DFS will not continue to grow. But certainly, you know, based on cadence of state launch timing, there can be in-quarter impacts to DFS, which are meaningfully cannibalistic because a new state often comes with lots of excitement over sports betting. And it also depends on the time of year. As you noted, football is a really great time for DFS, early NBA season. Back half of the NBA season tends to be a little lighter. So I think that New York launch, coupled with that, led to a little bit of softness in DFS in the quarter, which, again, we're not assuming will come back. But based on historical trends, we believe it will.

Thank you.

Our next question is from Steven Goygula from Talon.

Thanks for the question. Jason, following four NFL seasons, the industry remains concentrated around you, FanDuel, and BetMGM, with some fragmentation largely around the remaining operators on a state-by-state basis. You know, with the backdrop of depressed share prices, do you see further consolidation in industry coming near term? And given the scrutiny around your EBITDA losses and liquidity to reach profitability, how does DraftKings Balance explore further M&A with executing on your current playbook? Thanks.

It's a great question. I think that, you know, certainly it is quite possible that there'll be further consolidation. I think that, you know, from our standpoint, we just made a very significant acquisition in Golden Nugget Online Gaming. We're very excited about that. And I think that's a template that fits the profile of what types of things we'd look for. Something that's strategically complimentary, not just a pure consolidation play. Something that comes with a great team, which we're very excited about, Thomas and Warren and the team, as well as, of course, Tillman and the contributions that he'll make. And then also a strong business, a healthy business. Golden Nugget Online Gaming is not one of these businesses that was burning a it didn't come with a drag on our EBITDA of any significance. So those are the types of things that we would look for. I obviously can't speak to what other operators who might be considering themselves consolidators would look for, but that's the type of thing that we would look for.

I appreciate that. And then if I can just squeeze in one more, would you provide any update on what you're seeing on iGaming legislation or do you see any catalysts to increase states going live with iGaming over the next 12 to 24 months? Thanks.

Yeah, that's another great question. So we've obviously seen tremendous momentum in the sports betting legislative world. iGaming, we've seen several bills introduced, but haven't seen much movement since Connecticut legalized back in Q4 of last year, or launched, I should say, back in Q4 of last year. So, you know, we are continuing to press forward there, but as we've always said, we expect sports betting to be the main focus for legislators, and then as those states, you know, get more comfortable, I think more iGaming bills will come through, and that's been a pretty consistent view we've had for a while, and we've actually been pleased to see that there's been some acceleration there, given that several states have just decided to do sports betting and iGaming together, but, you know, we continue to believe that it'll be sports betting-led for the next, you know, year or two, and that more and more momentum will begin to build around iGaming over the coming years.

I appreciate all your color.

Thank you. Thank you. Our next question is from Robert Fishman from Moffitt Nathanson.

Good morning. Can you expand on how building out your media vertical with the new personalities and the exclusive content that they bring helps drive the incremental engagement to your platform? and maybe how you measure the return on this investment. And then on a related note, is your preference to keep building out your media strategy organically, or are you open to new formal partnerships with media companies or even expanding the existing ones? Thank you.

Thank you for asking. So I think we've always thought there were strong synergies between media and what we traditionally do on the gaming side. it's no secret that a lot of our customer acquisition comes from the marketing we do on media channels. So being able to drive some of that traffic organically, I think is of great interest to us. And at the same time, we want the business to be able to stand on its own and to be able to, you know, make a profit. So that's the media business. So that's really how we're looking at it as Can we build a business that works on both ends, both as a business that makes money and generates positive cash flow, as well as a business that will help create great synergies for us on the customer acquisition and retention side? As far as how, we are exploring and are actively partaking in all those routes. Some of what we do is organic. We also have great partnerships with several media outlets. We also have content partnerships with companies like Meadowlark Media. And I think for us, we recognize that there's a large world out there, and there's a lot of value in cross-pollination with content. So we remain very flexible on that front. I think there are certainly large-scale all the way down to medium-scale partnerships that we would consider that would add to some of the organic efforts that we're putting into this space.

Thank you very much. Our next question is from Noah Nevers from Goldman Sachs.

Good morning. This is Noah Nevers for Stephen Grambling. Thanks for taking the question. As we look towards this summer and fall, are there any differences in the sports calendar we should be aware of? One that comes to mind is the World Cup, which you touched on a bit. Any color on what those events could look like in terms of betting activity or hold? And then I have one follow-up.

Sure. Yeah, it's a great question. So I think the World Cup is the big one. I think there should be some decent betting on it, obviously, around the world. Soccer is a much more popular sport at this point than in the U.S., but it's been growing with popularity in the U.S., and I think that the World Cup often spikes that interest. So we do have some hope that we'll see an increased volume there this year, and we'll just have to see. you know, naturally there are other things that are a little bit different here and there, you know, extra weeks of seasons and days and games, but nothing, you know, else that I see is very material.

Got it. Thanks. And can you remind us of the NOLs you're caring for at this point in time? You want to take that one, Jason?

Yeah, I'll have to get back to you on the latest and greatest number.

Got it. Thanks. I'll hop back in the queue. Best of luck.

Thank you. Our next question is from Ryan from Craig Halliam Capital Group.

Great. Thanks for taking our question. Looking at guidance for Ontario and GNOG, it seems to imply minimal net revenue from Ontario. One, is that right? And then two, if you can deconstruct the two on revenue and loss expectations, that'd be great. Thanks.

Thank you. I think at this point we are not planning to deconstruct the two because particularly with GNOG, I mean, we just closed it yesterday. And while we've certainly done a lot of diligence, there is some variance there. And so we felt it was better to kind of manage the two together as far as impact. I do want to point out that even when you take the most conservative end of our guidance for those two, we are still, even with those impacts, which were not contemplated in our guidance last quarter, we're still better with our new guidance plus those impacts than we were last quarter. So great to see that some of the cost efficiencies that we're identifying are able to effectively fund new state or in this case province launches as well as the absorption of an acquisition. So we're going to continue to look for ways to try to neutralize the impact of new state launches through identification of further cost efficiencies up and down the business.

Great. One more, if I may. New York, I would assume it was decremental to average ARPM up. Are you able to quantify that?

Thanks. So, New York, we're not quantifying any specific state impacts at this point. I do think you are correct that due to it being a, you know, a launch quarter and having promotional investment that there was some negative impact, that said. We've also seen a fairly high level of handle per active come from New York as well. So it may not have been as significant as you think, but it certainly did have some impact.

And our next question is from Barry Jones from Truist Securities.

Great. Thank you. Jason, how are you thinking about DraftKings entering Nevada retail and OSB now?

Well, we've been very interested in Nevada, and right now we're exploring opportunities there. It's obviously a state that attracts a lot of attention because of its association with gaming. There's a decent-sized market there in terms of online sports betting. That said, There's also, you know, some things that make it a little bit less integrated with our business, such as the need to have in-person registration to open a mobile account, as well as some processes that make it difficult to connect wallets and apps with the rest of the country. But we are certainly interested in Nevada. We are looking into it. And, you know, I think that if the opportunity presents itself, we'd love to be able to offer customers in Nevada our products.

Great. Thank you.

You're welcome.

Just to jump in on the question on NOLs, I was just checking, ensuring that we do not disclose the latest NOL number for the queue, but if you refer back to our 10-K filed in mid-February, that was just around $800 million.

Our next question is from Clark Lampin from BTIG.

Hi, guys. Thanks. Good morning. I have one on Marketplace. Jason, you talked about marketplace really hitting its stride around the NFL season. I'm going to guess that that's not because you expect an inflection and sort of more memorabilia-oriented NFTs, but maybe it's the utility-focused ones that you were talking about. So could you give us a sense of, you know, maybe one, whether that's accurate, two, you know, the way in which some of those utility-oriented NFTs could actually integrate with the gaming-focused businesses? Thanks.

Thank you. Yeah, I think you're exactly right. So a few things. One, we just recently developed some in-house content creation capabilities and also built some back-end infrastructure to be able to tie benefits on sports betting and daily fantasy and even iGaming to ownership of NFT content we create and The way we're seeing the market move, it really is important to have utility. There are certainly some that are working purely as collectibles, and that'll continue to be a segment of the market. But I think a lot of the growth will be in utility-based NFTs. The second thing is, in addition to our in-house content we're producing, we also just a little while ago announced a partnership with the NFLPA to create NFT-based fantasy games. So We think given the size of our fantasy audience and the success we've had early on with NFTs, that'll be a really big product for us and could be something that really opens up to a much larger audience.

And our next question is from Robin Farley from UBS.

Great, thanks. I was wondering if there's a way to quantify how much of the lower hold was maybe kind of marketing, like offering more favorable odds rather than just purely the sport outcomes, if you could give us a sense of that. Thanks.

Sure. What we've shared is that about $25 million of revenue hit came from purely sport outcomes. So, you know, that's the number we've shared. And I think other things, you know, you can attribute if you are identifying any other questions around hold to other factors. But $25 million was the impact that came from game outcomes, which, you know, interestingly was the other way in Q1 last year. So as you look at year-over-year comps, you know, it's affected not only by that $25 million hit from game outcomes this year, but also favorable game outcomes in Q1 of 2021 that had a positive impact on hold.

So you're not breaking out anything new withhold that's related to kind of marketing odds, anything like that?

No, we typically don't share those types of details as some of the promotional marketing tactics we've tested into over many years are things that we deem to be very competitively advantaged for us. So we don't typically get into breaking down that element of the business.

Great. And then also the comment on the call, I think you talked about handle proactive was up in every state. And I know your ARPMAP was up, but just going back to the states where it was in both periods, of that for net gaming revenue per user on that sort of comparable, like same state basis.

Sorry, you broke up a little at the end there. Can you repeat that last part of the question?

Oh, sure. In the opening comments, there was a mention that handle proactive was up in every state, right? In other words, states that were legal in both periods. And so we're just wondering how that would look for net gaming revenue. Just thinking about, you know, there are some states that had net NGR declines, even though handle and GGR was up. And so just wondering if that's showing up on a per user basis as well for you.

No, you know, the reason that we saw in ARPMOP, one of our KPIs is based on net revenue. So the increase we saw there year over year is definitely, you know, reflective of the positive momentum we see in growth of net gaming revenue in each state. Of course, with anything, there's always, you know, places where one or two here or there may be up or down, but You know, usually those are for explainable reasons. So, for example, in Illinois, where we had, you know, the relaunch of mobile registration, there was a much more, you know, aggressive new user push with contra-revenue-generated promotions that didn't exist in Q1 of last year. But for the most part, the ARPMAP increase, which is NGR, is cross-cored and cross-state.

Okay, great. Thank you.

Our next question is from Joe Grupp from JP Morgan.

Good morning, guys. You mentioned that the year-over-year growth in MUP was driven by retention. I was hoping you can help quantify that on everything excluding DFS in the quarter and how that trended in the 1Q relative to the past few quarters. And then my second question is probably more for Jason Park. Can you talk about the relationship between EBITDA losses and cash burn? I know this quarter the cash burn was a little bit higher than EBITDA losses. Some of that can be explained by CapEx and some other investing activities. How do you see that trending over the next year? Thank you.

So on the first question, you know, ARPMAP was definitely up due to both retention and an increase in player handle growth. So it was both that contributed to that, and we haven't at this time deconstructed those, but we can share that both contributed to that. As far as the product level question, same story. All products were generally up, but DFS, as we noted earlier, did see some cannibalization. So you can infer based on that that if we had excluded DFS, ARPMOP growth would have been higher.

Yeah, and in terms of your question on EBITDA to free cash flow conversion, I think you listed out a few of the buckets. Capitalized software, which is really DraftKings primary capex, should be fairly steady if you look at the quarterly trends for the last few years. I think that's a very extrapolatable number going forward. Other than that, you'll see some one-time upfront state licenses, impact-free cash flow, and any... Significant vesting of employee stock, which you saw around the low teen million impact in Q1, but that will purely depend on timing of vesting. I would say that those are the three big things to look for for EBITDA to free cash flow conversion.

Great.

Thank you.

And we have no further questions at this time. I'll now turn it back over to Jason Robbins for final remarks.

Well, thank you all for joining us on today's call. We had an excellent first quarter. We continue to be very excited about 2022 and look forward to speaking with you all over the next few weeks. The company continues to be focused on strong top-line growth and also on cost optimization, and we're really excited about a number of initiatives we have underway in both those categories and look forward to sharing more with you in the coming quarter. I hope you all stay safe and well, and thank you for joining us today.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect.