DraftKings Inc. (NASDAQ:DKNG) Goldman Sachs 2022 Travel and Leisure Conference June 6, 2022 10:40 AM ET
Company Participants
Jason Robins – Co-Founder and Chief Executive Officer
Conference Call Participants
Stephen Grambling – Goldman Sachs
Stephen Grambling
All right. We are going to kick off our next session here with DraftKings and in many ways our next guest needs no introduction. We’re rapidly running through these firesides. So please join me in welcoming Jason Robins, Chief Executive Officer and Chairman of DraftKings. Jason, welcome. Good to see you in person here at 200 West again.
Jason Robins
Yes, thanks for having me.
Question-and-Answer Session
Q – Stephen Grambling
Maybe to kick things off, one of the most common questions that we get with the relation to sports betting and iGaming specifically is just trying to think about profitability, market share, the combination of those two things. So maybe to think about it holistically, what factors may influence how you think about the path to profitability and what broadly drives competitive advantage in online sports betting and iGaming?
Jason Robins
Yes, it’s a great question. So certainly I think the overall market has changed a lot and I think that actually plays to our strengths, which I’ll explain in a moment. But for, I don’t know, the last couple of years until about say four or five months, six months ago, seven months ago, market share was what we got asked at these conferences, how are you going to get your market share higher? Do you think that other players are going to take market share? Now it’s all about profitability. So I think that’s caused the overall kind of industry to focus more on it. What works for us well there is, we haven’t really changed our playbook and we think our playbook actually thrives in this type of environment. We’ve stayed disciplined even when there were some, I would say, undisciplined behaviors happening with competitors. And we just kept the same playbook of here’s what we do in a new state launches. Here’s what we think about in terms of timeline to profitability. Here’s what we think about payback periods for new users we acquire. Everything is managed on data. So each state, each product has its own CAC target based on LTV models, which ingest cohort data in real time and update.
So we think the reason that plays better in this environment is, if we’re doing things in a way we think are sustainable and we can do it better than others who are doing it in a way that’s sustainable, we win. If we’re in an environment where there’s unsustainable irrational behavior happening that may offset some of the advantage we think we have. So we feel like right now we’re in the best position we’ve been in really since sports betting started in the U.S.
Stephen Grambling
So I recognize that you’re kind of staying the course in a lot of ways as it relates to your strategy, but what are the things that you’re the most focused on this year as we think about new states, new jurisdictions, and also maybe new product that you’re working on?
Jason Robins
Well, we’re definitely staying the course in terms of the strategy on how we think about investments. I think there’s been a real strong energy put towards, well, we have to optimize faster. We have to do better. That’s what we should be doing at this stage of business. And that’s what the environment’s demanding we do. Certainly that’s led to us focusing on efficiencies more than we have been, not just with marketing, but with everything up and down the P&L from COGS to fixed costs. So that’s been a big focus for us. I think on the product side, really shifting from — last year we had the largest technology project we’d ever undertaken with migrating to our in-house sports betting tech and product platform. That was a 15 month long project, consumed a very large percentage of our engineering force.
Now, while there’s certainly clean up and things that — still some of those resources are focused on, a lot more attention can be placed on innovating, on winning with the consumer, on doing a lot of the things that we couldn’t do before because of the tech and platform constraints that we had. So I think that’s a big focus for us.
Thirdly, I would say a big focus area for us is continuing to make sure that some of the new areas that we’ve invested in, such our NFT marketplace get the right amount of attention, which is still obviously much less so than the rest of the business, but we’ve kind of carved them off, and have great plans there. And it all sort of links to what we’re doing overall, which is to build this platform that has this engine behind it, this CAC to LTV engine, where we strive to be the best in the world across any discretionary entertainment technology-driven platform at finding ways to efficiently get customers on the platform, and then monetizing and retaining them as strongly as possible once they’re there. So I think that combined with executing our plans across cost and efficiencies, I think has been the real focus for the company.
Stephen Grambling
That’s great. You also had an update to your Investor Day or another investor day, where you outlined more states becoming profitable. What has surprised you as you look at the performance on a step-by-step basis, whether we’re looking at the potential TAM or margins?
Jason Robins
I think a few things I would say. One is, and this has been more recent, is the ramp up of new states has gotten a lot faster. Now we were just having this discussion in a breakout where how much of that was driven by a lot of marketing, and how much of that will maybe normalize now that there’s less so. But I do think that there’s just a lot of momentum behind the industry and states — Arizona is always the great example we give, that just really surprised us in how quickly it ramped, and how fast the adult penetration was developing. Another thing I think that’s been pleasantly surprising to us has been the continued growth, even well into the iGaming market in New Jersey. In 2020, New Jersey grew triple-digits, which was still like on a sixth, seventh, eighth year or something like that.
And so everybody thought including us that might have been some pull forward and maybe it would be flat. In fact, if you look at our Investor Day that we put out in March of the following year, we were predicting effectively a flat New Jersey for the next year, and it actually ended up growing in the mid-30s. So that was great to see. Who knows that might have even been 50%, 60% plus in a more normalized environment. And then probably less surprising with something we’re always keeping an eye on is our cohort data. We had always heard and research has shown that gaming, especially online gaming holds up very well during times where there’s economic distress. And so that’s something that we needed to obviously be aware of, but also not take for granted. So we keep a very close eye on our cohort health and maybe less surprising and more just good to see that those trends that sort of reputation that gaming has is holding up. Our cohorts look as healthy as ever. We’re seeing absolutely no evidence of any impact of any kind of economic downturn affecting discretionary consumer spend within our category and on our platform.
Stephen Grambling
Now you alluded to maybe in a more normalized environment, it could have been up 50%. Does that mean — is that specifically related to promotions? And then…
Jason Robins
No, I meant just because it grew so much in 2020, some of that…
Stephen Grambling
If you had pulled forward…
Jason Robins
Yes, like if it’s going to average 50% or 60% or whatever it is percent, 70% over two years, like could you have thought maybe some of that got pulled forward into the other year.
Stephen Grambling
And so are you definitively seeing then a change in the promotional environment and is that specific to sports betting or iGaming or both?
Jason Robins
So in the more mature states, mature being still a relative term, given New Jersey’s not even four years old yet, definitely. I mean, a lot of that is what we’ve always said, which is so much of the promotions are geared towards new customers and as new customers become less and less of — if you look at your overall mix of handle, it’s less and less a percentage from new, then that’s naturally going to come down. Some of it’s come from some rationalization in the competitive environment. So it’s a combination of both.
In new states, it’s hard to know because there haven’t been — Ontario, but that was a bit of a different one given the state of the market. But some of the other big state launches, the most recent ones were really January. So it’ll be interesting to see when we get some of these upcoming ones that are on the path to launching how that looks.
Stephen Grambling
I think one of the other kind of areas of pushback that we hear is that when you first launch in any given state, really in the U.S. the first people who are going to jump on a platform are going to be kind of the best customers, the most likely to be sports betting, sports bettors or even sharps. But as you move on, maybe customer acquisition costs have to move up, the average LTV comes down. What are you generally then seeing? It sounds like in New Jersey, you haven’t seen that yet. But are you seeing any change in that pattern as you look at who that customer is, who’s the first to step foot in the door effectively or online and then who you get later on?
Jason Robins
For sure. Whether it’s first year, second year, when it — but for sure as you get to like a fourth year, you’re going to acquire a lower LTV customer. There’s always new people coming in the market, but we don’t actually — you mentioned that customer acquisition cost may come up. We don’t manage the business that way. We don’t say “Here’s what it has to be.” We say, “This is what it should be” based on the customers we’re acquiring. So as we see LTVs come down as we’re getting into that fourth, fifth, sixth year of a state, we’ll just adjust our CAC targets and have been doing so in more mature states accordingly. So we manage to the same paybacks, no matter what.
The other thing that’s interesting that I think could affect this market a little differently is that there is still a pretty prevalent illegal market. The switching costs for some of those people — or I guess shouldn’t say switching costs, but like the propensity to switch to legal market, some have, but a lot haven’t. And I think that’s going to continue to happen over time. So some of the biggest bettors are still pushing their action offshore. And I think getting some of those people in could help keep the LTVs higher than they might normally be in a typical Internet or a typical industry of this nature.
Stephen Grambling
And maybe just stepping back, who is the core customer that you’re going after? And how do you think that will broaden out over time?
Jason Robins
So what we’ve been — and this is a lot of why we did the Golden Nugget Online Gaming acquisition. We’ve segmented the audience in various ways, but one of the simple segments is sports fans and non-sports fans. Sports fans, obviously, we can go out after with sports betting, and then we can cross sell them and we’ve have been very effective at doing so into iGaming. But there’s people that maybe aren’t going to come through the sports funnel. And a lot of them view DraftKings as a sports-centric company, a sports-centric brand. But we also saw that once we were actually getting them, they were more likely to rate our products higher than maybe they thought going in. And we’re really retaining well. And so the retention in the product quality feedback was there. It was more of a brand issue.
And so it’s still very early days, but the hypothesis with Golden Nugget — and we did diligence to — look they’re clearly reaching a different segment, more female SKU, more slots players, older average age is that we can run the same types of marketing programs we are trying to run with DraftKings brand, but acquire them on the Golden Nugget for less cost and more efficiently, which very early days, so we don’t have anything to share yet, but I think we had enough during the diligence to feel pretty confident in saying — and that’s really been a big part, plus the synergies targets, part of which is marketing that we’ve set for the team on the integration. So that’s really, I think, going to allow us to increase our focus on broadening to the entire iGaming market as opposed to maybe the 50% that we were reaching well and then doing just okay with the other 50%.
Stephen Grambling
What are the next milestones for the Golden Nugget acquisition? What are the things that could come next? And how should we be thinking about the contribution?
Jason Robins
So I think the first step for us, which largely we already have done was to look at the headcount and make sure that the duplicate roles were synergized that people were allocated into the right parts of the org and that it’s set up in a way where we’re integrated from a people standpoint. I think the other big integration point is technology. That’s going to take a little longer but we are going to migrate all of Golden Nugget’s tech stack onto our own proprietary platforms, which should both generate incremental revenue and retention but also save money because they don’t have to pay a third party anymore for those.
Some of those are longer-term contracts, so it’s not going to create a synergy right away. But the next couple of years, we should start to see some real cost synergies on the platform side even if we migrate and see some revenue synergies earlier.
I think the other thing is the marketing stuff we talked about, really validating that thesis and showing that we can spend less total in marketing by taking the segment that we were not able to as cost effectively reach with DraftKings and do so for a more efficient CAC — with a more efficient CAC with Golden Nugget brand.
Stephen Grambling
And in your opening remarks, you talked about trying to be effectively a platform. And obviously, the business touches a lot of different stakeholders, whether it’s the leagues, media companies, the consumer directly. So I guess as we think about the convergence of these different industries, what do you view as kind of the future of that integration? And where does media play into that?
Jason Robins
Well, pretty much anywhere we do advertising is media. So it’s a big cost center in turn. The reason we’re spending cost there is because it’s driving activations and new players. So the more of that, that we can do ourselves, there’s a clear synergy there. In other words, rather than paying for the media, let’s get paid for the media. So that’s something the team is oriented around.
Obviously, we realized that given where we are, there’s areas that make a lot of sense for us to play like the more sports betting oriented media such as the VSiN acquisition that we made. We’ve been doing great with our Dan Le Batard rights and podcast in general, of which he’s high up there him, Carrabis, a couple of others have been like really high rankings.
So podcast is an area we think we could do really well in. I don’t think — you’re going to see us bidding on NFL rights, even if they were available next year. But I do think that those other sorts of areas that we know are more targeted, that we know, deliver good customers and that are very cost effective and cheap to create the initial infrastructure needed to get set up and aren’t going to really be a drag on costs. It’s more like as the revenue comes in, we can spend accordingly. Those are the areas we’re focused. So the idea is do it efficiently cannibalize the marketing that we’re spending and make some additional revenue along the way?
Stephen Grambling
Yes. I guess I think of a lot of the big network effects from other platforms has come from social.
Jason Robins
Social too.
Stephen Grambling
And certainly, DFS was kind of borne out of a social element. So how do you tie that into sports betting? I mean, is there a content that you’re working on now or product that you feel like can actually solve for that? And why haven’t we seen it in the U.K.
Jason Robins
Well, social media is maybe the best form of media because it’s user-generated, so you don’t have to pay for the content. We’ve integrated a ton of social features, and we’re really just getting started into our platform. So people — we just launched, I think, a week or two ago [Bet Groups], so people can form groups of friends and follow each other’s bets and with 1 click, if there’s a button that says tail or fade you can either take the same side or the other side of your friends bet. So lots of cool stuff like that. There’s a feed like almost sort of like a Twitter or Facebook type feed that people have, where people who are trying to build up and influence their base by posting their picks are making those. That’s really helped get attention around certain types of bets that maybe other people weren’t paying attention to because they see others that are posting, “Hey, I just made this parlay or I made this bet.”
As far as why it hasn’t been seen in the UK, I mean UK is — obviously, there’s a lot to be learned from watching the UK. You can get an almost time capsule and go back and say, all right, let me see how the story plays out. Great to have it. I think it’s also important to remember that the UK developed in a different time. You didn’t have social media in the same way you do now in the UK was first moving online. Social media didn’t really get huge until the last 15 years or so, and that was a good 5, 6 years in.
So I think just part of the strategy early on was not to invest in those areas. I haven’t really seen any one of the major players in the UK try to do it and it not work. It’s almost just like it never really got attention. And it’s a bet. I mean there’s no guarantee. I think it intuitively makes sense that it’s a social product, and that will play well.
And if we can facilitate that, we can create more stickiness and also expand wallet by having people that want to bet with and follow their friends. For sure, that’s a good hypothesis, but we have to test and figure out if it works. We’re still relative to other parts of the business. That’s a small piece of the R&D team.
Stephen Grambling
Right. I guess with the UK, it’s kind of like not a lot of people were using Facebook on flip phones.
Jason Robins
Exactly. Mobile is another example where the initial UK mobile experience, if you look at some of the original kind of iGaming and sports betting, I mean it took years for them to even get decent mobile products in place. It just wasn’t part of their DNA from the beginning. And I think a lot of them were born of — there’s a few exceptions like that 365, but a lot of them were like really brick-and-mortar as much as anything else. And then as their business shifted more online, they focus more and more there, but that wasn’t their DNA.
Stephen Grambling
Part of the DNA there, I feel like it was related to building out sports betting risk teams effectively. And in the U.S., because it’s a little bit newer, some folks have been outsourcing that, others have kind of built it themselves. How do you think about the need to have your own kind of risk management team? And then where do win rates potentially end up going over time if you do take more and more of that in-house?
Jason Robins
I think that if you are a major player, you have to have that kind of stuff in-house. It’s — I used to work at Capital One many years ago. And their core advantage was their credit modeling, risk modeling effectively. So I made the analogy because some people work with us now came from there, too, like that would be like them outsourcing that, like you can’t. So that was a big piece of bringing Golden — not Golden Nugget, excuse me, SBTech, buying SBTech and bringing our technology in-house in 2020.
Now that we’re migrated, we’re pricing control in a lot more of our markets. We’re still outsourcing some because we took a speed-to-market approach on everything. But having as much of the stuff that really matters be priced in-house is critical. And right now, we are pricing most of our action in-house. Same thing from like a customer risk management standpoint, that’s all in-house. We use third-party tools, particularly as it comes to like things like fraud and AML. But in terms of peer like are you a sharp or not, risk management, that needs to be all in-house.
Stephen Grambling
And so what does that mean in terms of where — what the right win rate is for this industry and then how that could dictate where margins end up over time?
Jason Robins
It’s a great question. And I think it changes over time. I think that as the market matures, the win rate should go up. And I think that when you’re in an earlier stage environment, not the worst thing in the world if you’re giving people a couple of extra winning experiences out of every 10 instead of trying to maximize how much margin you’re taking.
So it’s an area of focus for us, but very deliberately. What we’re not looking to do are things like taking money from people by forcing them into bets they don’t want or trying to direct them there. What we are doing is trying to get smart at eliminating the sharp action or limiting at least that we don’t want as much and then also making sure that we have a high parlay mix because people do like that.
That’s been something we’ve been pushing on a lot since we migrated still really early because we’re only about 8 months or so 9 months since we migrated. But every quarter, the parlay as a percentage of total debt mix goes up. So it’s just how you do it. And I think as an overall focus, I mean, we did the same thing in DFS. In DFS, our margins got substantially higher as the market mature because we just decided to make them higher.
And you can do that. I think the tricky part is how do you do that at the right time in the right way. And when I say the right way in a way where it’s not degrading from the customer experience, it’s just using data that you have to say, hey, it could take a little more margin here, and it’s not going to reduce the customer experience or cause any attrition or anything like that.
Stephen Grambling
Maybe zooming in on a specific market. You’re a couple of weeks into Canada. What are you seeing in that market? What makes it different relative to the U.S.?
Jason Robins
Well, we, I think, got asked a lot why didn’t you drop everything and make sure you got live in Ontario day 1, and we were up and running a little over a month after others. So it wasn’t like we were way behind. But the reason is, and it’s been playing out, I think, for everybody, for the most part, Ontario was not like a new state. It was not, hey, everybody starting from the same place, and first-mover advantage is really important. Ontario had an illegal — or I guess, gray market, I should say, not illegal market of operators for many, many years. And there was no like “penalty box.” So those operators just got licensed and continued operating.
So just like what we’ve been saying on the positive side in the U.S., like I think Ontario is a great data point to demonstrate that it is hard if you don’t have first-mover advantage.
I mean you have to have a good product and all that people will leave if it’s inferior. But once you got them, they’re sticky. And I think Ontario is proving that where you have some really good companies with good products that have been entering there. And eventually, I think everybody, if you’re doing a great job, we’ll get their fair share. But I don’t think it happens overnight. And I think that even if you look at for us, what we projected, we’ve said Ontario is a good 1,000 basis points less market share for us long term, and it’s for precisely this reason.
Stephen Grambling
What are the bigger states that you’re focused on then in the upcoming year that are already through legislation? And then what are the ones that you’re still looking at over the next, call it, 18 to 24 months?
Jason Robins
Well, the ones that are through legislation, there’s Maryland, there’s Ohio, Puerto Rico, all in the process of working through regulations and licensing. I think the expectation is that Maryland and Ohio are probably a 2023 launch. I think Ohio has set January of ’23 is the target. And then as far as those that are — by the way, just those alone, would bring the total U.S. population to 46% penetration, which is like really cool to see that we’re close to 50%.
We don’t even have the 3 largest states yet. So naturally, those states are going to be a big focus area for us starting with California. California is about 12.5% of the population. If we just got that one, we’d be near 60%, we’d be 58.5%, 65% has been our long-term target. So really important.
California has ballot referendum that we and 6 others in our coalition in the industry are behind and are supportive of. That will run on the November ballot. We just recently announced that we had enough signatures to qualify, which is a huge milestone.
So that’s pretty exciting. And I think if we’re able to pass in November, we could potentially be looking at a 2023 launch, hopefully ahead of NFL for California. Really great bill too. The tax rate, everything is set in a very reasonable way because you can actually write the whole piece of legislation on the ballot, which is nice. So there’s still licensing and other stuff that will have go to through the regulators, but a lot of that which could make it faster, who knows, is already defined through the legislation.
And then beyond that, the big states continue to be that aren’t live at a big area of focus. I think Texas will at least consider it in their upcoming legislative session. That’s prep work we’ve been doing on the sort of midsized our home state, Massachusetts, which is a great gaming state. I think one of, if not the highest lottery per capita states in the country. So that’s a great one. That’s an area we’re focusing on. But really, a lot of the biggest states that we think have both the population impact and also we think have a path to legislation are mostly — there’s a couple of others. North Carolina, I think, is on the cusp. We could get that one. That’s a top 10 state population-wise, I believe. Georgia, we didn’t get through this past year, but hopefully, that will come in a future year as well. But if you look at the top 10, already more than half the top 10 is in. If you look at the top 15, it’s — I think it’s few more there. So we’re always looking to pick off smaller states, but the big ones that will move the needle. I think it’s about those top 3 and then a handful of Georgia, North Carolina, Massachusetts and that kind of midsize.
Stephen Grambling
As we get to that 46%-ish mark or even higher in some of these big states launched, should the cost to enter that state go down? And then how are you thinking about incorporating those big potential state launches into your own planning as you think about liquidity and the path to profitability?
Jason Robins
So one of the things that we’ve shared is that as you get to about 33%, 35% of the population with legal sports betting, there can be a shift towards national advertising, which will be more efficient because it’s at a lower cost per impression. You just need enough people out there that can actually react to those impressions to make the math work.
So now that we’re kind of getting north of that, it should be a continued tailwind. We’ll still obviously heavy up locally in states when we launch, but you don’t need to do entire local plans the way it was before. We launched New Jersey. It was entirely local focused. Now so much of our advertising spend is shifting towards national. We don’t need to do making heavy up with like a 20% or 30% increase in the total impressions we’re putting into that market because we’re already getting great return on the national spend that we’re doing.
Stephen Grambling
This is changing gears again a little bit. But the labor market has been tight across the board. Obviously, the — within this space, a lot of the folks that have been employed are typically folks who are getting paid in stock, the stocks have been under pressure. How are you managing through that more difficult labor market? And how do you think about incentivizing people?
Jason Robins
It’s definitely something we’re paying attention to. I think that — the nice thing for us is people look at us less as sort of this company that maybe the multiple has to get back to where it was in order to go up. No, we just need to actually grow what’s underneath the multiple, and everybody understands that it’s going to be a profit multiple, not a revenue multiple. So we’re able to say to the team, if you do this and drive these numbers, here’s where we can get to first get back and then eventually get above to at these multiples. Also, there’s a lot of reasons beyond compensation that people want to look — want to work at DraftKings. It’s an exciting part of the overall technology industry to be in now because there’s just this clear path to growth and your change in laws and doing things that I think feel like more exciting than working at a lot of other companies out there.
So we’re really trying to lean into those things. But of course, we need to make sure we’re staying competitive. We’ve also had, on that note, a real kind of push towards. We got to differentiate. If we’re going to keep the overall comp costs in line and not going to grow that number a whole lot, how do we do a better job differentiating, making sure that the compensation is being directed differentially towards top performers, getting more aggressive with the bottom performers, making sure that people who are sort of skating by as B players that that’s not enough anymore, which doesn’t mean mass layoffs, but it might mean we’re going to pay them less than the market and somebody else may recruit them away, and we’re going to be okay with that because we’re going to focus on retaining our top people.
Stephen Grambling
That’s great. We have about a minute left. I may go to a question in the audience. Otherwise, I’ll throw one more out there. Well, this is going to be one I’ll try to peg you down here. But as you think about the liquidity and that path to profitability, is there any scenario where you think that you would need to tap other sources of capital? And how do you balance equity versus debt if that does come to fruition?
Jason Robins
So we’ve been very consistent that we have a multiyear plan that does not entail us needing to raise more capital. We’ve stress tested that plan under a variety of scenarios. Of course, there could always be some black swan type situation like what happened where sports shut down in 2020, if that were for a really extended period of time where maybe the math changes. But even then, there’s levers we can pull, we would shut off marketing we do. So it will be really hard to come up with a scenario where we would need to raise capital. So the plan is not to. If something strategic, of course, the bar being much higher now than it would have been 6, 7 months ago, something strategic comes up or you feel like it’s good for the business long term to do something, we would do it, but we don’t need to. And the plan is not to. The plan is that we should get profitable on the current capital we have. Everybody has rallied around that. We have a multiyear financial plan. Everyone is committed to the numbers, not just for this year but for next year and beyond, and that’s what we’re going to do.
Stephen Grambling
Awesome. Well, Jason, thank you so much for being here today. Next up, we will be changing gears with Hertz. So please join us on.
Jason Robins
Thanks for having me.
Stephen Grambling
Thank you.
Be the first to comment