DraftKings CEO Jason Robins opened his week with pleasantly surprising news when Massachusetts legislative leaders struck a deal just after 5 a.m. Monday that effectively legalized legalized sports betting in the Bay State.
It is safe to say that Robins ended his week on an equally strong note. On Friday, DraftKings reported a core business-to-customer (B2C) increase of 68% over the second quarter of 2022 amid increased bettor activity and a continued shift to parlay wagering. As a result, DraftKings had revenue of $466 million for the three-month period ended June 30, slightly exceeding the Zack’s consensus estimate of $438.2 million. DraftKings also reported a net loss of $0.50 per share, beating FactSet’s per share earnings expectations of $0.75.
DraftKings, which maintains global headquarters in Boston’s Back Bay neighborhood, has endured a trying year on equities markets, as its stock dipped under $10 a share in May, falling below the company’s 2020 IPO price. The earnings beat on Friday, however, sent shares surging more than 19%, pushing DraftKings to $19.50, its highest level since early April. On this date last year, DraftKings traded at $50 before reaching a 52-week high of $64 around the start of football season.
Boston online gambling play DraftKings stock jumps 18% after reporting a smaller-than-expected loss for Q2. CEO @JasonDRobins tells analysts his company is experiencing "no perceivable impact from broader macroeconomic pressures." $DKNG
— Aaron Pressman (@ampressman) August 5, 2022
“DraftKings had an excellent second quarter, exceeding expectations for revenue and adjusted EBITDA,” Robins said on an earnings call. “Customer engagement remains strong, and we continue to see no perceivable impact from broader macroeconomic pressures. Due to our ongoing investments in core online gaming technologies, we are in a strong position from a competitive perspective as we approach the beginning of the NFL season. We remain well-capitalized, ready to enter new markets as they become live, and confident in our ability to compete and win with customers.”
DraftKings’ sell-off over the last 12 months is in line with broader industry trends, as major tech companies have come under pressure from global inflationary trends. In June, the U.S. consumer price index accelerated by 9.1%, its highest annual increase in more than four decades. DraftKings has also been targeted by prominent short sellers, who have expressed skepticism about the company’s long-term profitability.
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DraftKings devoted a considerable portion of Friday’s earnings call to discussing enhancements that the company has made to its same-game parlay product.
Over the quarter, the company rolled out a parlay insurance feature and developed the capabilities for a bettor to void an individual leg of a same-game parlay without canceling the entire wager. In the relatively near future, DraftKings plans to roll out a new feature that will allow customers to combine multiple same-game parlays into a single offering, according to Robins.
DraftKings initially launched the same-game product last August, as it completed the migration to an in-house tech platform powered by SBTech. DraftKings its that it is still playing catch-up with arch rival historic PASPA decision. Still, Robins has been pleased with how the company has increased the ratio of parlay activity.
For the quarter, DraftKings increased its parlay bet mix by 1,700 basis points, or 1.7%, in comparison with the same period in 2021. DraftKings also rolled out same-game parlays for UFC wagering and microbets based on MLB pitch speeds and pitch counts during the quarter.
“We continue to add more markets, bring more in-house, and we’re focusing on how we market it in the app better,” Robins said. “Really, for us, it’s about having it feel native, not feel like something we’re pushing on the customer.”
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Robins noted that DraftKings is prepared for a volatile period over the first several weeks of the college football and NFL regular seasons. A significant amount of the company’s third-quarter revenue is derived from the final three weeks of September, he emphasized, when football wagering kicks into high gear.
While hold rates typically normalize over a full NFL season, they can vary considerably over a shorter period, according to DraftKings. An abnormal hold rate can have a pronounced effect on DraftKings’ third-quarter revenue, Robins added.
During the fourth quarter of 2020, DraftKings generated roughly $30 million in unanticipated revenue, primarily from atypically high hold rates in NFL and college football wagering. When hold rates are lower than expected, though, DraftKings can feel the brunt of the declines.
Bettors opened the 2020 NFL season on a hot streak, as favorites covered at a high rate for a period of several weeks. Consequently, DraftKings barely topped its internal hold forecasts for the third quarter that year. Across the industry, a sportsbook’s hold is typically interpreted as the revenue a company retains after all winning bets have been paid out.
On Friday’s call, DraftKings Chief Financial Officer Jason Park provided some color on how hold rate volatility should impact DraftKings’ third-quarter revenue generation for online sports betting (OSB). In total, DraftKings anticipates an online sports betting handle of $1 billion in NFL games for the season, Park noted.
Park previously addressed industry hold trends in May when he commented that DraftKings’ hold percentage hovered around the same rates as its peers, excluding FanDuel.
MoRE PArlAyS….
Draftkings CFO recently spoke about their product mix and their plan to drive more parlay and same game parlay action… pic.twitter.com/GVYjEuKaub
— Alfonso Straffon 🇨🇷🇺🇸🇲🇽 (@astraffon) May 21, 2022
Assuming there aren’t any unanticipated state launches in the third quarter, DraftKings should increase quarterly revenue by approximately 100% if hold rates are in line with company expectations. In last year’s third quarter, DraftKings generated revenue of $213 million, as the company increased monthly unique payers (MUPs) by 31% to 1.3 million. Revenue was negatively impacted by lower than usual hold rates, which resulted in $40 million less than company projections for the period.
DraftKings had a negative hold rate of around 10% for its three worst-performing weeks of this past NFL season, according to Park. The hold is considerably impacted by the moneyline spreads for the five most lopsided games of each week. Under a scenario in which an underdog wins in one or two of the five contests, DraftKings will likely experience a normal hold, he said. If the underdog loses in all five games, DraftKings will have a negative hold. But if an underdog wins on the moneyline in at least three of the five contests, DraftKings will produce a higher than anticipated hold rate.
“This rule of thumb is simplistic considering that specific spreads, over/unders, parlays, and relative game exposure have an impact, but it should give you a general sense for how revenue is trending for OSB,” Park said.
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DraftKings is also preparing for the launch of mobile sports betting in California launches online sports betting next year, Robins assumes that 2022 will represent the company’s peak for adjusted EBITDA losses.
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Despite the earnings beat, DraftKings still posted a net loss of $217.1 million, down from losses of $305.5 million in the year-ago quarter. DraftKings reported sales and marketing expenses of $197.5 million, pushing costs in the category above $518 million for the first six months of the year. By comparison, DraftKings spent $399 million on marketing in the first half of 2021.
Moving forward, DraftKings is increasing its fiscal year 2022 revenue guidance to a range of $2.08 billion to $2.18 billion from a range of $2.05 billion to $2.18 billion, which equates to year-over-year growth of 60% to 68%. DraftKings also projected full-year adjusted EBITDA guidance of between -$765 million and -$835 million, compared with previous loss estimates in the range of $810 million and $910 million for the fiscal year.
As of 12:30 p.m. ET Friday, DraftKings surrendered some of the gains from earlier in the morning session, trading at $18.38 per share, up 12% on the day.
