On the heels of g LeBron James as a brand ambassador at the start of February, DraftKings garnered headlines Thursday by reaching an agreement in principle to acquire digital lottery provider Jackpocket.
The $750 million cash-and-stock deal will enable DraftKings to gain access to the nation’s massive lottery market, while creating value through cross-selling opportunities with its Online Sports Betting (OSB) and iGaming products, the company noted in a statement. DraftKings will fund the purchase with approximately 55% in cash from the company’s balance sheet, with the remaining 45% of the consideration payable in the company’s Class A common stock. The purchase will not require a capital raise, DraftKings said in a statement.
Hours later, DraftKings CEO Jason Robins noted that he views Jackpocket in a similar vein to the company’s daily fantasy sports products, which existed long before the Supreme Court’s historic PASPA decision. While Jackpocket, the nation’s leading digital lottery app, might not drive top-line growth, Robins sees it as an opportunity to bring in new customers through the “natural overlap” of its current audience.
“I think as more time goes on and more states continue to launch OSB and iGaming, it will be the gift that keeps on giving,” Robins told analysts on the company’s 2023 fourth-quarter earnings call.
Hitting pocket jacks 485t2u
As DraftKings maintains a Top 2 position in the nation’s online ESPN BET for Barstool as the company’s sportsbook brand.
In 2021, DraftKings expanded into the content space by acquiring sports betting broadcast company VSiN in a deal estimated at approximately $100 million. A year later, DraftKings completed the acquisition of Golden Nugget Online Gaming, a deal that enabled the company to expand its suite of online casino offerings. The deal, DraftKings estimated at the time, will bring the company expected synergies of $300 million at maturity.
In of Jackpocket, DraftKings expects the acquisition to drive $260 million to $340 million of incremental revenue in 2026. The forecasts are based on conservative assumptions of no further OSB and iGaming legislation across the nation. The digital lottery vertical is growing at a rate of 15x in comparison than the broader U.S. lottery, according to DraftKings.
Jackpocket is the largest seller of lottery tickets in New York.
Jackpocket operates as a courier lottery service, where s are able to buy lottery tickets through its app. The tickets are purchased by the company on the ’s behalf. In July 2022, the NHL’s New York Islanders partnered with Jackpocket to buy 25,000 tickets ahead of a Mega Millions draw. Had any tickets won, the team would have split its share of the $1.3 billion pool with suite holders and season-ticket holders.
Lottery couriers face low political hurdles since companies such as Jackpocket are able to gain market access through partnerships with state lottery commissions, Robins explained. Conversely, iLottery providers need legislative approval before entering a state. A 2023 report from Spectrum Gaming Group, on behalf of Jackpocket, found that lottery couriers can “provide a bridge” for states that face “political hurdles to establishing an iLottery initiative.”
Jordan Bender, an analyst with JMP Securities, believes DraftKings has “unlocked an incremental cross-selling vertical” with the potential for integration of a single wallet between its other products.
Deutsche Bank analyst Carlo Santarelli remains more cautious noting that a $750 million purchase for a lottery product may be unwise when DraftKings’ core is in the process of moving from a negative EBITDA business to one that may soon become profitable.
Although Robins did not articulate any of the downside risks associated with the purchase, DraftKings discussed the risk factors with making a large acquisition in an annual SEC filing released Friday.
Management may not properly ascertain or assess the risks of new initiatives, and subsequent events may alter the risks that were evaluated at the time we decided to execute any new initiative. Developing and creating additional product offerings can also divert management’s attention from other business issues and opportunities….For instance, we have historically observed that revenue from our DFS product offering tends to decline in a state following the launch of our sportsbook product offering in that state. Furthermore, such expansion of our business increases the complexity of our business and places an additional burden on our management, operations, technical systems and financial resources.
Mixed results 544b1x
While DraftKings’ fourth-quarter revenue grew 43% year-over-year to a record $1.23 billion, revenue growth slowed for the second consecutive quarter. The company cited a period of unfavorable sports outcomes in November, a trend that also hampered DraftKings’ main rivals.
As NFL favorites came in at a high clip over the final two weeks of the month, the customer-friendly outcomes negatively impacted DraftKings fourth-quarter revenue by $175 million, according to CFO Jason Park. In a letter to shareholders, DraftKings described the sports outcomes as the worst it experienced in a single quarter since the company went public.
As a result, DraftKings suffered a rare miss on the revenue side, narrowly missing analysts’ targets of $1.24 billion. Nevertheless, metrics such as improved customer acquisition, retention, and engagement, resulted in a positive impact of $42 million to Adjusted EBITDA, Park noted.
In total, DraftKings ended the quarter with Adjusted EBITDA of $151 million, up from negative-$49.9 million in the year-ago quarter. For full-year 2023, Adjusted EBITDA improved by approximately $571 million, according to Park.
In Q4, $DKNG in its peak period only added $95.8M in cash to its balance sheet, taking into it generated $1.23B in revenue. Management did buy back $20M in shares, however SBC is 5.6X higher then the buy back. @astraffon @stevebrubaker pic.twitter.com/YL4KPX8nJK
— Blackmrprophet74, A (@Blackmrphophet) February 16, 2024
DraftKings defines Adjusted EBITDA as net income (loss) before the impact of interest income or expense (net), income tax provision or benefit, depreciation and amortization.
The calculation also includes other items such as: stock-based compensation, transaction-related costs, litigation, settlement and related costs, advocacy costs, gain or loss on remeasurement of warrant liabilities, and other non-recurring and non-operating costs.
On the quarter, DraftKings reported a net loss attributable to shareholders of $44.6 million, compared with a loss of $242.7 million in the same period in 2022. While DraftKings’ net loss per share of $0.10 represented an improvement from -$0.53 a year ago, the company still missed analysts’ expectations of GAAP earnings of $0.08 per share.
Bender described the results as an “unlucky miss” while describing the long-term impact of the Jackpocket acquisition as “overwhelmingly positive.”
Other highlights from the quarter:
- DraftKings’ metric known as “monthly unique payers” (MUPs) increased to 3.5 million average monthly unique paying customers in the fourth quarter of 2023, representing an increase of 37% from the same period in 2022.
- Another metric with the abbreviation “ARPMUPS” came in at $116, representing a 6% annual increase on the quarter. The increase was due to DraftKings’ structural sportsbook hold, offset by the customer-friendly sport outcomes. Had the sports outcomes been normal for the quarter, the increase would have been 22%, DraftKings estimates. ARPMUPs stand for “average revenue per MUP.”
- For the quarter, DraftKings reported a structural sportsbook hold of 10.4%, ahead of company expectations. The hold improved amid an increased parlay mix, according to Park. Meanwhile, promotional reinvestment for OSB and iGaming also improved, as the company’s mix of existing s versus new ones matured. Typically, when newly-launched OSB states come on onboard, promotional intensity ratchets.
Stock moves 4d3n
Also on Friday, DraftKings provided full-year guidance for 2024. DraftKings forecasted full-year revenue between $4.65 billion and $4.9 billion, up from previous guidance in the range of $4.5 billion and $4.8 billion. The guidance represents annual growth between 27% and 34%.
The company also guided to Adjusted EBITDA of $410 million and $510 million, compared with previous guidance of $350 million and $450 million. If achieved, DraftKings will generate full-year profitability for the first time in company history.
Analysts from FactSet estimate a full-year net loss of $0.29 per share on revenue of $4.67 billion.
"The controllables came in better than expected," Macquarie Group senior analyst Chad Beynon says on $DKNG. "In the fourth quarter, there were some customer-friendly outcomes. So what that means is the public actually did ok against the sportsbooks." pic.twitter.com/ddRolAbHqI
— Yahoo Finance (@YahooFinance) February 16, 2024
After releasing earnings results on Thursday evening, DraftKings’ shares tumbled in pre-market trading on Friday morning. DraftKings initially dropped 6% on Friday, falling below $42 a share. DraftKings rebounded Friday afternoon trading above $44 as of Noon ET.
While adjusting for hold from favorable sport outcomes, DraftKings is a business which “continues to surprise investors to the upside when it comes to profitability,” Macquarie analyst Chad Beynon wrote in a research note. After surging 209% in 2023, DraftKings’ shares are up more than 20% this year.
Though DraftKings is considerably above its 52-week low of $17.02, the company is still trading far below its all-time high of $74.38 in March 2021.
