DraftKings Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC on February 16, 2024 (the "2023 Annual Report"). Cautionary Statement Regarding Forward-Looking Statements This Report contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements depend upon events, risks and uncertainties that may be outside of our control. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would,” “forecast,” “propose,” and similar expressions or the negative of these words may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Our historical results are not necessarily indicative of the results that may be expected for any events in the future as our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this Report. Any statements contained herein that are not statements of historical fact may be forward-looking statements, such as: • factors relating to our business, operations and financial performance, including: • our ability to effectively compete in the global entertainment and gaming industries; • our ability to successfully acquire and integrate new operations; • our ability to obtain and maintain licenses with gaming authorities; • our inability to recognize deferred tax assets and tax loss carryforwards; • market and global conditions and economic factors beyond our control, as well as the potential impact of general economic conditions, including inflation and rising interest rates, on our liquidity, operations and personnel; • significant competition and competitive pressures from other companies worldwide in the industries in which we operate; • our ability to raise financing in the future; • our success in retaining or recruiting officers, key employees or directors; and • litigation and the ability to adequately protect our intellectual property rights. In addition to these risks, other factors that could cause or contribute to such differences include those set forth under the caption “Risk Factors” in our 2023 Annual Report. Due to the uncertain nature of these factors, management cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any of these statements to reflect events or circumstances occurring after the date of this Report, except as required by applicable law. New factors may emerge, and it is not possible to predict all factors that may affect our business and prospects. Our Business We are a digital sports entertainment and gaming company that provides users with online sports betting (“Sportsbook”), online casino (“iGaming”) and daily fantasy sports (“DFS”) product offerings, as well as retail sportsbook, media and other consumer product offerings. We are also involved in the design and development of sports betting and casino gaming software for online and retail sportsbooks and iGaming operators. 23 Our mission is to make life more exciting by responsibly creating the world’s favorite real-money games and betting experiences. We accomplish this by creating an environment where our users can find enjoyment and fulfillment through Sportsbook, iGaming and DFS, as well as media and other online consumer product offerings. We are also highly focused on our responsibility as a steward of this new era in real-money gaming. Our ethics guide our decision making, with respect to both the tradition and integrity of sports and our investments in regulatory compliance and consumer protection. We continue to make deliberate and substantial investments in support of our mission and long-term growth. For example, we have invested in our product offerings and technology in order to continuously launch new product innovations; improve marketing, merchandising, and operational efficiency through data science; and deliver a great user experience. We also make significant investments in sales and marketing and incentives to grow and retain our paid user base, including personalized cross-product offers and promotions, and promote brand awareness to attract the “skin-in-the-game” sports fan. Together, these investments have enabled us to create a leading product built on scalable technology, while attracting a user base that has resulted in the rapid growth of our business. Our priorities are to (a) continue to invest in our product offerings, (b) launch our product offerings in new jurisdictions, (c) create replicable and predictable state-level unit economics in sports betting and iGaming and (d) expand our other online consumer product offerings. When we launch our Sportsbook and iGaming product offerings in a new jurisdiction, we invest heavily in user acquisition, retention and cross-selling until the new jurisdiction provides a critical mass of users engaged across our product offerings. Our current technology is highly scalable with relatively minimal incremental spend required to launch our product offerings in new jurisdictions. We will continue to manage our fixed-cost base in conjunction with our market entry plans and focus our variable spend on marketing, user experience and support and regulatory compliance to become the product of choice for users and to maintain favorable relationships with regulators. We also expect to improve our profitability over time as our revenue and gross profit expand as states mature, and our variable marketing expenses and fixed costs stabilize or grow at a slower rate. We are continuing to increase our profits by utilizing the efficient customer acquisition that is enabled by the transition from local to regional to national advertising, maintaining strong customer retention, improving monetization from increased frequency of customer play and higher hold percentage, as well as scaling benefits from investments in our product offerings and technology and general and administrative functions. In any given period, we expect to achieve profitability on a consolidated Adjusted EBITDA basis when total contribution profit exceeds the fixed costs of our business, which depends, in part, on the percentage of the U.S. adult population that has access to our product offerings and the other factors summarized in the section entitled “Cautionary Statement Regarding Forward-Looking Statements”. Financial Highlights and Trends The following table sets forth a summary of our financial results for the periods indicated: Three months ended March 31, (amounts in thousands) 2024 2023 Revenue $ 1,174,996 $ 769,652 Net Loss (142,568) (397,148) Adjusted EBITDA (1) 22,390 (221,611) (1) Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Information” below for additional information about this measure and a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with U.S. GAAP. Revenue increased by $405.3 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to the strong performance of our Sportsbook and iGaming product offerings as a result of robust customer acquisition and retention, the successful launches of our Sportsbook product offering in additional jurisdictions, and improved promotional reinvestment for Sportsbook and iGaming. 24 Key Performance Indicators Monthly Unique Payers (“MUPs”). We define MUPs as the number of unique paid users per month who had one or more real-money, paid engagements across one or more of our Sportsbook, iGaming, DFS, or Marketplace product offerings via our technology. For reported periods longer than one month, we average the MUPs for the months in the reported period. Although the number of unique paid users includes those users that have participated in a real-money, paid engagement using only promotional incentives (which has not been a material number of users to date), which are fungible with other funds deposited into their wallets on our technology, it does not include users who have made a deposit but have not yet had a real-money, paid engagement. MUPs is a key indicator of the scale of our online gaming user base and awareness of our brand. We believe that year-over-year growth in MUPs is also generally indicative of the long-term revenue growth potential of our online gaming product offerings, although MUPs in individual periods may be less indicative of our longer-term expectations. We expect the number of MUPs to grow as we attract, retain and re-engage users in new and existing jurisdictions and expand our product offerings to appeal to a wider audience. The chart below presents our average MUPs for the three months ended March 31, 2023 and 2024: 25 Average Revenue per MUP (“ARPMUP”). We define and calculate ARPMUP as the average monthly revenue, excluding revenue from gaming software services, for a reporting period, divided by the average number of MUPs for the same period. ARPMUP is a key indicator of our ability to drive usage and monetization of our product offerings. The chart below presents our ARPMUP for the three months ended March 31, 2023 and 2024: The increase in MUPs for the three months ended March 31, 2024, compared to the same period in 2023, primarily reflects strong unique payer retention and acquisition across our Sportsbook and iGaming product offerings, as well as the expansion of our Sportsbook product offering into new states, partially offset by a decline in DFS MUPs. ARPMUP increased in the three months ended March 31, 2024, compared to the same period in 2023, primarily due to structural improvement in our Sportsbook hold rate and improved promotional reinvestment for Sportsbook and iGaming. Non-GAAP Information This Report includes Adjusted EBITDA, which is a non-GAAP financial measure that we use to supplement our results presented in accordance with U.S. GAAP. We believe Adjusted EBITDA is useful in evaluating our operating performance, similar to measures reported by our publicly-listed U.S. competitors, and regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA is not intended to be a substitute for any U.S. GAAP financial measure. As calculated, it may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense (net), income tax provision or benefit, and depreciation and amortization, and further adjusted for the following items: stock-based compensation; transaction-related costs; litigation, settlement and related costs; advocacy and other related legal expenses; gain or loss on remeasurement of warrant liabilities; and other non-recurring and non-operating costs or income, as described in the reconciliation below. We include non-GAAP financial measures because they are used by management to evaluate our core operating performance and trends and to make decisions regarding the allocation of capital and new investments. Adjusted EBITDA excludes certain expenses that are required in accordance with U.S. GAAP because they are non-recurring items (for example, in the case of transaction-related costs and advocacy and other related legal expenses), non-cash expenditures (for example, in the case of depreciation and amortization, remeasurement of warrant liabilities and stock-based compensation), or non-operating items which are not related to our underlying business performance (for example, in the case of interest income and expense and litigation, settlement and related costs). 26 Adjusted EBITDA The table below presents our Adjusted EBITDA reconciled to our net loss, which is the most directly comparable financial measure calculated in accordance with U.S. GAAP, for the periods indicated: Three months ended March 31, (amounts in thousands) 2024 2023 Net loss $ (142,568) $ (397,148) Adjusted for: Depreciation and amortization (1) 53,180 48,213 Interest (income) expense, net (14,418) (11,140) Income tax (benefit) provision (351) 1,368 Stock-based compensation (2) 93,535 117,400 Transaction-related costs (3) 4,908 — Litigation, settlement, and related costs (4) 9,320 2,563 Advocacy and other related legal expenses (5) 285 — Loss on remeasurement of warrant liabilities 18,094 17,035 Other non-recurring costs and non-operating (income) costs (6) 405 98 Adjusted EBITDA $ 22,390 $ (221,611) (1) The amounts include the amortization of acquired intangible assets of $29.3 million and $29.8 million for the three months ended March 31, 2024 and 2023, respectively. (2) Reflects stock-based compensation expenses resulting from the issuance of awards under incentive plans. (3) Includes capital markets advisory, consulting, accounting and legal expenses related to evaluation, negotiation and integration costs incurred in connection with transactions under consideration and pending or completed transactions and offerings, including costs relating to the Jackpocket transaction in 2024. (4) Primarily includes external legal costs related to litigation and litigation settlement costs deemed unrelated to our core business operations. (5) Reflects non-recurring and non-ordinary course costs relating to advocacy efforts and other legal expenses in jurisdictions where we do not operate certain product offerings and are actively seeking licensure, or similar approval, for those product offerings. This adjustment excludes (i) costs relating to advocacy efforts and other legal expenses in jurisdictions where we do not operate that are incurred in the ordinary course of business and (ii) costs relating to advocacy efforts and other legal expenses incurred in jurisdictions where related legislation has been passed and we currently operate. (6) Primarily includes the change in fair value of certain financial assets, as well as our equity method share of investee’s losses and other costs relating to non-recurring and non-operating items. 27 Results of Operations Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023 The following table sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods: Three months ended March 31, (amounts in thousands, except percentages) 2024 2023 $ Change % Change Revenue $ 1,174,996 $ 769,652 $ 405,344 52.7 % Cost of revenue 710,069 521,740 188,329 36.1 % Sales and marketing 340,699 389,133 (48,434) (12.4) % Product and technology 88,815 88,088 727 0.8 % General and administrative 174,251 160,476 13,775 8.6 % Loss from operations (138,838) (389,785) 250,947 (64.4) % Interest income (expense), net 14,418 11,140 3,278 29.4 % Loss on remeasurement of warrant liabilities (18,094) (17,035) (1,059) 6.2 % Other (loss) gain, net (735) 19 (754) (3,968.4) % Loss before income tax (benefit) provision and (income) loss from equity method investment (143,249) (395,661) 252,412 (63.8) % Income tax (benefit) provision (351) 1,368 (1,719) (125.7) % (Income) loss from equity method investment (330) 119 (449) (377.3) % Net Loss $ (142,568) $ (397,148) $ 254,580 (64.1) % Revenu e. Revenue increased by $405.3 million, or 52.7%, to $1,175.0 million in the three months ended March 31, 2024, from $769.7 million in the three months ended March 31, 2023. The increase was primarily attributable to our online gaming revenues, which increased $417.0 million, or 56.7%, to $1,152.2 million in the three months ended March 31, 2024, from $735.2 million in the three months ended March 31, 2023, due to MUPs increasing by 22.8% and ARPMUP increasing by 25.0% as compared to the three months ended March 31, 2023. The increase in MUPs was due to strong player retention and acquisition across our Sportsbook and iGaming product offerings, as well as the expansion of our Sportsbook product offering into new jurisdictions. The increase in ARPMUP was due to structural improvement in our Sportsbook hold percentage and improved promotional reinvestment for our Sportsbook and iGaming product offering. Cost of Revenue . Cost of revenue increased $188.3 million, or 36.1%, to $710.1 million in the three months ended March 31, 2024, from $521.7 million in the three months ended March 31, 2023. This increase was in part due to revenue growth from our expanded product and jurisdictional footprint, including the launch of our Sportsbook product offering in Ohio, Massachusetts, Kentucky, and Maine throughout 2023 as well as Vermont and North Carolina in 2024. In particular, the cost of revenue increase was primarily attributable to an increase in our variable expenses, such as product taxes and payment processing fees, which increased $124.6 million and $25.6 million, respectively. The remaining increase was primarily attributable to an increase in our variable platform costs resulting from additional customer activity. Cost of revenue as a percentage of revenue decreased by 7.4 percentage points to 60.4% in the three months ended March 31, 2024, as compared to 67.8% in the three months ended March 31, 2023, reflecting, in part, structural improvement in our Sportsbook hold rate and improved promotional reinvestment for our Sportsbook and iGaming product offerings, partially offset by a change in revenue mix from our more mature DFS product offering to our Sportsbook and iGaming product offerings, which, in general, produce revenue at a higher cost per revenue dollar relative to our more mature DFS product offering. Sales and Marketing. Sales and marketing expense decreased $48.4 million, or 12.4%, to $340.7 million in the three months ended March 31, 2024, from $389.1 million in the three months ended March 31, 2023. The decrease was partially attributable to lower advertising costs of $22.5 million, as well as reduced stock-based compensation expense of $6.1 million. Product and Technology. Product and technology expense increased $0.7 million, or 0.8%, to $88.8 million in the three months ended March 31, 2024, from $88.1 million in the three months ended March 31, 2023. General and Administrative. General and administrative expense increased $13.8 million, or 8.6%, to $174.3 million in the three months ended March 31, 2024, from $160.5 million in the three months ended March 31, 2023. This increase was 28 primarily driven by an increase in transaction-related costs of $4.9 million and an increase in non-core litigation costs of $6.8 million partially offset by a decrease in stock-based compensation expense of $7.2 million. Interest Income (Expense), net. We recorded net income interest of $14.4 million in the three months ended March 31, 2024, compared to $11.1 million in the three months ended March 31, 2023, due to fluctuations in cash balances and interest rates. Loss on Remeasurement of Warrant Liabilities. We recorded a loss on remeasurement of warrant liabilities of $18.1 million in the three months ended March 31, 2024, compared to a loss of $17.0 million in the three months ended March 31, 2023, due to changes in the underlying share price of our Class A common stock. Other (Loss) Gain, net . We recorded a loss of $0.7 million in the three months ended March 31, 2024, as compared to a gain of $0.0 million in the three months ended March 31, 2023. Net Loss. Net loss decreased by $254.6 million to $142.6 million in the three months ended March 31, 2024, as compared to a net loss of $397.1 million in the three months ended March 31, 2023, for the reasons discussed above. Liquidity and Capital Resources We had $1.2 billion in cash and cash equivalents as of March 31, 2024 (excluding restricted cash and cash reserved for users, which we segregate on behalf of our paid users for all jurisdictions and product offerings). We believe our cash on hand is sufficient to meet our current working capital and capital expenditure requirements for a period of at least twelve months. We will continue to evaluate our long-term operating performance and cash needs and believe we are well positioned to continue to fund the operations of our business long-term. Debt. In March 2021, we issued zero-coupon convertible senior notes in an aggregate principal amount of $1,265.0 million (the “Convertible Notes”). The Convertible Notes mature on March 15, 2028, subject to earlier conversion, redemption or repurchase. In connection with the pricing of the Convertible Notes and the exercise of the option to purchase additional Convertible Notes, we entered into privately negotiated capped call transactions (the “Capped Call Transactions”). The Capped Call Transactions are expected generally to reduce potential dilution to DraftKings Inc.’s Class A common stock upon any conversion of the Convertible Notes. The net cost of $124.0 million incurred to enter into the Capped Call Transactions was recorded as a reduction to additional paid-in capital on the Company’s consolidated balance sheet. As of March 31, 2024, the Convertible Notes, net of issuance costs, balance was $1,254.4 million . Leases . We have lease arrangements for certain corporate office facilities, data centers, and motor vehicles. As of March 31, 2024, the Company had lease obli gations of $90.2 million, with $11.3 million payabl e within 12 months. Other Purchase Obligations . We have certain non-cancelable contracts with vendors, licensors and others requiring us to make future cash payments. As of March 31, 2024, these purchase obligations were $1,329.4 million, with $368.6 million payable in the remainder of 2024. Cash Flows The following table summarizes our cash flows for the periods indicated: Three months ended March 31, (amounts in thousands) 2024 2023 Net cash used in operating activities $ (70,395) $ (201,492) Net cash used in investing activities (39,199) (27,564) Net cash used in financing activities (30,642) (25,166) Net decrease in cash and cash equivalents, restricted cash, and cash reserved for users (140,236) (254,222) Cash and cash equivalents, restricted cash, and cash reserved for users at beginning of period 1,623,493 1,778,825 Cash and cash equivalents, restricted cash, and cash reserved for users at end of period $ 1,483,257 $ 1,524,603 Operating Activities . Net cash used in operating activities in the three months ended March 31, 2024 improved $131.1 million to $70.4 million, compared to $201.5 million in the three months ended March 31, 2023, mainly reflecting an improvement in net loss, net of non-cash items, of $237.7 million, offset by changes in operating assets and liabilities. 29 Investing Activities. Net cash used in investing activities during the three months ended March 31, 2024 increased by $11.6 million to $39.2 million from $27.6 million during the same period in 2023, mainly reflecting an increase in cash paid for acquisition of gaming licenses of $10.2 million. Financing Activities. Net cash used in financing activities during the three months ended March 31, 2024 increased by $5.5 million to $30.6 million from $25.2 million during the same period in 2023, primarily reflecting increased cost of purchasing treasury stock related to the satisfaction of withholding taxes due upon the vesting of restricted stock units. Commitments and Contingencies Refer to Note 11 of our unaudited condensed consolidated financial statements included elsewhere in this Report for a summary of our commitments as of March 31, 2024. Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates. During the three months ended March 31, 2024, there were no changes to the critical accounting estimates discussed in the 2023 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in our exposure to market risk during the three months ended March 31, 2024. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the 2023 Annual Report.