Good afternoon, everyone. Very pleased to have with us today Alan Ellingson, Chief Financial Officer of DraftKings. DraftKings is one of the leading sports entertainment and gaming platforms in North America. We're active in sports betting, iGaming, fantasy sports, lottery, horse racing, and most recently, the prediction markets. Company has approximately $507 million fully diluted shares out, trading around $25 for a market cap of $12.7 billion. Net debt is $835 million for a total enterprise value of $13.5 billion. What makes DraftKings especially interesting in today's conference is that it sits at the very intersection of several themes we've been discussing throughout the day: live sports, consumer engagement, technology, and changing competitive landscapes. Alan, thank you for joining us today.
Well, thanks for having me.
Starting high level, DraftKings has grown tremendously over the last several years. You went public through the great SPAC boom of 2020. How do you reflect on the company's evolution since then and the equity investment thesis for the stock today?
Yeah. We have had fantastic growth over the past, well, more than just the last few years. Going public in 2020, DraftKings' origin is actually 2012 with the fantasy era. Well over a decade of experience growing, expanding. If you look back to what we thought we would be today when we were in 2020, we were pointing at a $20 billion TAM and thinking that was where we would evolve to. Our most recent investor day, though, we've expanded the TAM. We're now thinking $55 billion-$80 billion, and it's getting exciting with some of the expansion in prediction markets. Not only are we growing aggressively, but the market is growing aggressively, and we're happy that our capabilities has allowed us to capture a meaningful share of that growth.
Absolutely. At the core business, we're almost eight years since PASPA was overturned. What does the near to medium-term organic growth outlook look like for mature states like New Jersey and Pennsylvania? How much of that future growth will come from deeper engagement versus just acquiring new customers?
Yeah. It's fascinating to watch how this industry continues to evolve and what we're noticing is even in our most mature jurisdictions like New Jersey, which as you mentioned, we've been in since 2018, we're still able to attract new customers with the growth of the product and the growth of the market. We're also able to engage with new customers by expanding our product offering into areas that they want to engage and they want to reach out. Whether it's sportsbook or iGaming or lottery or fantasy, when people engage with the DraftKings product, they want to tell a story about what they think is going to happen.
Sometimes that's a story of, "Here's what's going to happen in the football game tonight," or, "Here's who's going to win the NBA playoffs." Sometimes it's, "I'm going to buy a lottery ticket because I'm excited about the possibility for what it could mean for my future if the odd chances if I win." As we add more products, we're able to reach out, engage with more customers ways they want to. Our oldest cohorts, we see them growing in gross profit. Our newer cohorts, we see them onboarding and we're attracting new customers, and it's exciting. Last quarter, we launched a new product called Same Game Parlay for Golf. It allows people who like to engage with golf to expand how they bet.
As a result, we saw an expanded share of wallet for those players because it was a product that they'd never been able to engage with before. We continue to expand our product offering, and as we do, we continue to see more and more engagement from our customers, and that's an exciting dynamic.
Where is live betting penetration in the U.S. today versus a mature market like Europe, where it's roughly 70%? It's higher margin, live betting, isn't it?
Yeah. It's a lot lower than we think it could be in the future. It continues to expand year-over-year. Americans, typically, they love their sports, and there's a lot of different sports that they engage in, whether it's football or basketball or we're excited for World Cup and what World Cup can bring. They want a product that can engage with them at the speed of sports, and that means you've got to have a product that is responding very quickly and adapting to how they want. Nobody wants to look at a bet and see that it's grayed out because the app isn't ready or the book isn't prepared to offer odds. They want to see uptime, and so this is one of the areas where DraftKings has invested very heavily in the technology to maximize uptime availability.
Whether you're wanting to place a point-by-point bet on tennis, whether you want to bet pitch by pitch on baseball, or whether you just want to get a parlay down really quickly between plays on a football game, we want to enable you to be able to get that done. This is a huge investment for us, and it's materialized in a strong product offering. It's rated as top product by Eilers & Krejcik for two years going now. We're going to continue to improve because that's the experience that our customers want.
Speaking of World Cup, DraftKings is the only national operator with a fully translated Spanish app. Any thoughts on what we can expect in terms of handle or engagement? What have you got planned?
Look, we're viewing World Cup as a fantastic acquisition moment. About 18 months ago, we looked at the product offering and said, "If we wanted to win World Cup and we wanted to have the best product available," what does that mean?
What do we need to add to the product? We built out a roadmap, which included Spanish language, not just translated Spanish language through an app, but real natives coming in and saying, "How would this look if I wanted to feel like this was my language and this was my app?" We took the time to get the terms and conditions and get the language and get all the different flows working just perfectly because we do believe that this is a moment that we can reach out and get to a different community, and treat them in a way that they feel like this is more home for them than maybe if they were working through a secondary language. Excited for what will come.
I'm not going to go too far out and say what we think is going to happen, but World Cup is a unique opportunity that only comes every four years, and we plan appropriately to capitalize on it.
Sure. The industry today feels a lot more rational competitively than it did a few years ago. Three years ago, you had over two dozen operators in New Jersey. Today, it's half that. What do you think changed? Was it just the realization that scale advantages in what you're doing in terms of the tech was just harder to overcome?
Yeah. There's a lot of components to it. Some of the ones you mentioned, I think, rationalization of the operators. Remember when sportsbook first launched in some of these states, especially the states that offered unlimited licenses, you had 30-50 operators that were showing up and trying to compete for the same people. The easiest way to compete is on promotional intensity and on offers to new users. That isn't always profitable. At the end of the day, product wins out, companies need to turn around, and they need to get to a place where they're making the right decision for the bottom line as well as for the customer. At that point, it comes down to who can do it the best, who follows the data, who builds the best product, who invests in the back-end technology to give users the best experience.
I'm very proud of the fact that we're down to two operators that have about 80% of the market right now, and they're competing on product, and they're competing on technology, and they're competing on the ability to create the breadth of markets that customers want, and not just competing on promotional intensity. There's a whole graveyard of companies that thought they could win in sportsbook five, eight years ago. Now the best have risen to the top, and I'm very proud of what DraftKings has been able to do to be one of those operators.
That's very impressive. The market has become more cautious on the gaming sector, given dynamics around higher state taxes, prediction markets competition, and increasing investor focus on profitability. How does DraftKings continue delivering on its margins and earnings targets while still investing for growth?
Yeah. This is the balance that we have to continue to maintain because there's an investor expectations that we return profits to customers. I want to be really clear. DraftKings has created $500 million of adjusted EBITDA over the past two quarters, and much of that flows through to free cash flow, where we have a very high conversion rate from adjusted EBITDA to free cash flow. Our core business is extremely strong. When a new entrant comes in, like prediction markets, that has an opportunity to expand the TAM, capture new customers, especially in states where we don't have a sportsbook offering, we're going to invest to get there. It is a J-curve investment. We spend a little bit upfront to acquire the customers, and then those customers generate profits long term.
One of the things I love most about the Investor Day deck we put out a couple of months ago is there's a slide in the appendix that shows the gross profit by cohort year every year since we acquired the cohort. For the 2018 cohorts, you're going to have seven years of gross profit for that and every year thereafter. What you'll notice when you see that is for every single one of our annual cohorts, our gross profit for that cohort has gone up every single year-over-year. Because we know how to expand the profitability of customers once we have them on the platform. We know how to reach out to them and give them something that they want that's more than what they were getting the year before.
We know how to optimize our promo to those customers to not give them stuff that doesn't mean anything, but actually gives them promo that reinvests in a way that they want to be reinvested in. Not only do we have the broadest breadth of product available to them, but we also know how to treat them in a way that they want to be treated, whether that's a CRM outreach when the Yankees game is about to start to remind them the game is starting, whether that's a push notification, whether that's a promo boost. We reach the customers where they're at to the degree they want to and they feel comfortable. We do in a way that makes them want to keep coming back every single year in a way that's healthy and that works well with them.
We're very proud of that relationship and that trust that we've built with the customers. As a result, we understand that when something like prediction markets comes out, we invest in customers, we acquire customers, and then we learn to monetize them over time, and we get them to where we want. That's a fantastic opportunity. Every year when somebody says, "Well, it's time. The markets are going to stop creating these new opportunities," we find we get another opportunity, maybe not as a state launch, but a prediction market or a new product offering or a new derivative of a product that attracts new users.
We've got a fantastic roadmap over the next 18-24 months of what we want to launch and how we want to engage with customers. I'm pretty excited about what's going to happen for the next little while. Maybe it doesn't last forever. We've got eight years of history now proving that we can do this. I feel very confident that the next two to three years are going to continue that trend.
You're bringing all your products together through the super app, which depending on each state's regulatory framework, will have predictions in California, sportsbook in New York. How does that change customer behavior, and what are you seeing in the early days in terms of cross-selling and engagement across the ecosystem?
Yeah. This is kind of a fun evolution of DraftKings this year specifically, where historically we've had seven different apps with seven different intents for customers of how they could spend money. What we've realized as we've improved our technology and as we've cleaned up the behind the scenes is that it makes a ton of sense to customers to have one single place they can go to that just has all the offerings available to them. They don't want to open up the sportsbook app in California and realize, "Oh, I should've opened up the prediction app instead." They want to be able to buy a lottery ticket from the same app that they're placing a bet on the Knicks. They want to be able to spin the slots if they're in New Jersey, for example, from the same place that they play their fantasy games.
Not only does that give us an opportunity to cater the experience, you open up one app and you know that whatever's available wherever you are, you don't have to think about state lines. You don't have to think about jurisdictions. If it's available, you can see it in front of you. It also allows us to better utilize the national footprint for marketing that we have. We spend a lot of money on marketing each year because the money returns value. We acquire customers. Those customers generate profits over time.
There is a need to ensure that every dollar that gets spent on marketing has the highest return, and that means that if we spend money on an advertisement that shows in California because they're watching the Knicks game as well, they should be able to open up the DraftKings app and be able to do something with it. We want to make sure that those dollars we're spending it, we have the partnerships, it needs to be effective.
From the customer's perspective, how different is that California sports events contract from a New York sportsbook bet?
Today, there's a difference between it. Prediction markets have not fully developed to have the same depth of market that the sportsbook app does, but that difference gets narrower and narrower every single day. In fact, this week we launched milestone 2, our second phase of prediction market product, which in my mind is significantly better than what we had before. The super app is already integrated. If you're in California right now, open up the app, you're going to see prediction market products. It's the same app. It's DraftKings ' Sports & Casino. It's not sportsbook anymore. It's going to get better and better. We have a very firm goal as a company to narrow that over time as much as possible because we want to ensure that your experience, regardless of where you're at, is the best experience possible.
I've always seen this company as more of a technology company rather than consumer discretionary. How much of that competitive moat comes from pricing and risk management sophistication versus scale and the brand that you've built?
You've got to factor in both. We had an Investor Day, again, I mentioned back in March, we highlighted, you got marketing is a moat, technology is a moat, product is a moat. The last one which gets underplayed a lot is actually trust. It's the trust that the regulators have that we're going to treat the consumers in their jurisdictions right. It's the trust that the players have that they're going to get a fair return for their experience and that we're going to treat them right. We have a fantastic product. Our sports book product, our iGaming product has been rated the top product in the country for the past two years now. It's a biannual survey, every single time it comes out.
A lot of people don't see the technology behind it and what it does and how it affects the experience until the first time they're using a competitor product and they want to place a bet and the market's grayed out because the competitor can't price it at that moment because of what's happening on the field. We use this example a lot, and the value of the real-time. If you're watching a football game and, long pass down the field into the end zone and it gets disrupted, but there's a flag on the field, most companies will take down the markets because you don't know what the flag is, a pass interference, which means it's first and goal on the one-yard line, or if it's a holding call, which means it's second and 20 on the 35-yard line.
We have real-time data coming from the field, we can see where that flag is. If that flag's in the backfield, we know it's a holding call. We're going to leave the touchdown lines open. If the flag is in the end zone, we know it's likely to be a pass interference, we're going to take down the lines. That difference in experience is meaningful for bettors who are really engaged in the game and are watching. Having the technology to be able to do real-time play-by-play on every single game and give people the markets they want to bet on is important. That same technology is going to translate to us being able to price prediction market trading and give people the same experience in prediction markets that they're getting in sports betting.
That's going to be a critical differentiator over the next, six, eight, 12 months as people start to learn what prediction markets are and they try to evaluate that versus sports betting in the markets where both are available.
Also at the Investor Day, you went into detail on the broader market opportunity for predictions and how you compare the economics of it versus a traditional sportsbook. Can you just lay that out for this audience again, please?
Just general economics?
Yeah.
At the end of the day, when a customer is out there trying to engage in for money entertainment, they have a certain expectation of return to player, of how much money they're going to get back when they put money in. For a slot machine, you expect to get 96%, 97% back, and casinos are pretty public on those. For sports betting, typically, we have a metric we call net win margin, which is the amount of revenue we get as a percentage of the handle that's played. In Q1, that was about 7.8%. For prediction markets, generally speaking, the economics in aggregate are going to be roughly the same, that users expect to get a certain value back, a certain percentage back, a certain amount that they win versus what they lose.
As far as the economics of the prediction market goes, there are more players engaged in the supply chain, that have to split and share those economics between them. Our goal and our objective is to long-term have all of the pieces of the chain of the vertical integration to be able to capture all the economics. We have almost all the pieces right now. We recently did an acquisition of a company called Railbird, which is the exchange. We currently have partnerships for some of the other pieces that take up a little bit of the economics. We have the customers on the front end, we have the expertise on the back end to create the markets. We own the exchange, we believe we can capture all the economics long term.
There's not really any public company financials from a prediction markets operator. If a sportsbook can achieve 25%-30% EBITDA margins, where should a prediction markets operator land?
Currently, one of the headwinds we have on margins in sports book is going to be state taxes, as well as there are some revenue share agreements that we work through, with states for licensing, or to get access to their licenses. Prediction markets don't have any of these headwinds to margins. In theory, the margins for prediction markets could be meaningfully higher. It's early days. Definitely not going to go on a limb and say what margins could be. If you dig through our financials and look at some of the numbers that we have, and we do call out some of those things like state taxes and how much we pay in taxes each year. Prediction markets could have meaningfully better margins, assuming you can capture all the economics.
I think one of the real fascinating things about the prediction markets is this debate on federalism versus the state jurisdictions of gaming. What do you think the long-term regulatory framework or end state for sports prediction markets ultimately looks like? As you've engaged with the CFTC, what are some specific changes that you think would help create a more robust framework for that industry?
Yeah. I've learned long ago not to speculate on how the federal government and the state governments are going to interact long term. I do think that DraftKings, we've positioned ourselves in the absolute best place to take advantage of whatever happens. While the federal government has strong support for prediction markets and we're hearing very vocal advocacy from the CFTC, we will continue to push our product forward and launch and compete at the federal level. We're being very careful as we do so, though, because we very much respect our relationships with the states. We aren't launching prediction markets in any state where we're operating a sportsbook product for that very reason. We want to maintain those relationships. We believe that the sportsbook product, as I mentioned before, right now is a significantly better product offering and better catered to the customers.
We'll continue down this path. One of the things we've asked, we put a public letter to the CFTC about some of the changes we wanted to see from them as they go through a rulemaking process they're going right now. A couple of the components of that that are really important is, first and foremost, a lot of what's happening right now is the CFTC operating by lack of action rather than explicitly saying what the rules are. The CFTC choosing not to enforce a rule is not the same as them saying, "This is the rule, and we want to go forward with it." We've asked for them to be explicit about sports trading contracts being allowed rather than just them not enforcing anything against sports trading rules.
We've asked them to treat these options and these contracts more like equities and less like future contracts. That affects the collateralization requirements, the margin requirements, and a couple of other aspects of how they're treated. We also want just real clear transparency on the rules of engagement and how operators should be interacting and engaging. We believe there's a lot of potential right now. We believe that the markets have a huge opportunity to absorb this, and it's definitely filling a demand, as you can see by the rapid growth of the industry. We operate by the books, and we follow the rules, and we would like the rules to be explicitly defined so we can make sure that everybody's acting on a level playing field.
There's a couple more nuanced things we've asked for, but generally speaking, we want transparency, and transparency allows everybody to operate on equal footing. We've proven over the past decade now that when we have an equal footing, we can operate, and we can exceed, and we can beat. Our investment will pay off, our investment in technology and product will pay off if we're able to compete on an equal footing.
Just a few minutes left. Do we have any questions from the audience?
I do apologize, I talk somewhat fast. It comes from a decade of listening to podcasts at 1.5 speed.
Yeah. Over here on the right. Yep, please.
Hi. I'm a little new to this data set, but I've spent some time looking.
I'm sorry, can you speak closer to the mic, please?
Can you hear me?
Yeah, I can.
Okay. I'm new to this data, but I've spent some time doing due diligence. Owning the entire stack, in my perspective, feels like the ad server and the content owner and the third-party measurement all being owned by the same company. I'm just curious, how you guys are thinking about, I guess, not grading your own homework if you're owning the whole stack.
Well, as far as the markets go, especially the prediction markets, what we're trying to do is create parity to what we already do on the sportsbook side. For example, right now on the sportsbook side, you enter into the DraftKings app, and DraftKings on the back end is the house that's market making and is telling you what the odds are, and then you place the bet. Right now in prediction markets, you've got some of them who own the entry point, it's called the FCM. Like Kalshi owns the FCM, and then they have the exchange as well, but they don't necessarily do the market making. Robinhood and Susquehanna, they want to have an exchange in the market making and then maybe feed the FCM in as well. There's varying degrees of companies that own different aspects of the stack already.
We believe we can do it very well, and we want to be able to, and we think that the rules allow for it. If you get that point, it's not really grading your own homework. It's more like creating an experience where you've got the parking lot the customers can park in, you've got the store they can shop in, you've got the checkout stands where they can check out, and you've even got somebody who's taking their groceries to the car helping them to leave, rather than having four different companies that are doing each of those different things. It's about optimizing the experience to be as close as possible to experience that they're already familiar with, that they're getting on the sportsbook side right now.
A little bit less onerous than maybe in some other industries and more just what people are already used to and what are the barriers that they're facing to wanting to engage with the product more right now.
Do we have another hand up in the back here? Yep.
Thanks for the presentation. By the way, I use DraftKings a lot more than FanDuel, so don't worry about it. Just you drilled down quite a bit on Polymarket and Kalshi, the prediction markets, and I'm just wondering, there have been some very high-profile bets, if you want to call them, that have been placed on them, for example, on Maduro, on Khamenei. You start getting into situations where you're betting on people's lives, you're betting on other things in real world like elections. Where does your board of directors draw the line when they see something come out on one of these prediction markets and say, "Maybe we shouldn't have this up?"
It's a really good point. I'm glad you brought it up. One of the things that I highlighted that I'll continue to highlight is there is a need for everybody involved in this process to develop a sense of trust from who's engaging from the consumer side. That trust transcends just making sure you're avoiding insider trading and you're avoiding some of the shady things, but also the markets that you're allowing and creating the right environment for people to feel comfortable with it and what it is. Betting on wars and betting on deaths and these kind of things should not be allowed and will not be allowed.
Again, if you go into the rulemaking, this is one of the things we request of the CFTC is there needs to be some framework for what we should and shouldn't allow people to place money on because you don't want to incentivize bad behavior. If these things exist as they should exist, which is either as an entertainment product, which is what we're really special at, or as a hedge product, then you should be very clear about what kinds of activities you want to encourage hedging against and what kind of activities you want to encourage people to find entertaining. I think that there needs to be a lot of conversation about markets that should be allowed and should not be allowed.
There needs to be clearer rules about it, and I like to believe that DraftKings will be at the forefront of those conversations because that's how we already operate on the sports betting side, and there are just certain markets we don't allow. I look forward to continuing the engagement because what you raise is a valid critique of the industry as it currently stands and something you will not see on DraftKings' platform.
We have time for one more front and center here. Sorry, someone will come with a mic so they can hear us at home.
Can you hear me okay?
Yeah.
Super. By the way, empathizing with that question, sort of on a positive thing, I'm going to zero down on my question. I spent a fair amount of time with the CEO of Kalshi recently. One of the points that he made, which I thought was very thoughtful, was what you guys do is force a calibration in thinking that in a very polarized world, potentially gets people to think about it a different way, right? Because if you're polarized in the way you bet or calibrate, you probably don't do as well as if you're more nuanced. I guess my question would be, there are several dynamics here that I see in many situations like this. There's competition, there's collaboration. Then there's the dynamic of how that all affects the market. Specifically with Kalshi, how do you see yourself on all three pieces?
From a competitive viewpoint, from a potential collaboration viewpoint, potential how that dynamic will affect your TAM going forward?
Look, I do agree that forcing the conversation on things allows for a more rapid resolution of issues. Sometimes that's healthy, and sometimes you don't need to go to war to force a peace treaty. The question is, to what degree do we go too far? I'd hate to think we ever get to a spot where we go too far and then have to say we got to take a step back. I'd love to just step by step until we get to what's appropriate level and then stop. Sometimes you go too far and you can't unwind those things. As far as a competitive with Kalshi, we recognize a lot of what they're doing. We see their product out there. We know where they're winning and where we think we can do better on their product.
We are excited for what we plan on launching over the coming weeks and months and what we've already launched, and we think that we can go create a competitive offering that really caters well to the consumers of these products out there. We are excited. We have a lot of experience creating a product for consumers that like these products. We have a lot of experience marketing to them, understanding how to market to them, how to incite them to engage with the product. We'll see how the next few months play out as we start to roll out our product and engage. In the aggregate, this is an exciting industry. This is a huge opportunity. This is a chance for everyone in the U.S. to have access to a product that has been restricted to a smaller population.
This is an opportunity to force conversations with states about what it means to regulate these industries, it's a chance to talk to leagues and expand and to educate people. Those are all good things. Engagement is good. Sometimes companies will push the limits a little bit, and they get slapped, and then we talk about it, and we figure out what the right rules are, and we go forward. That's part of the healthy dynamic of the industry, and we're happy to be part of it. We're pleased to be able to participate and to engage and to have these dialogues happening. We'll see how it plays out. I hope we never go so far that we look and say, "Oh, everybody went too far. We've got to rein back."
I hope we can very thoughtfully take one step at a time until we understand what these industries should look like. To that point, I'm really happy the CFTC, the Commission itself has engaged in rulemaking for this because I think that that's the first step of really understanding what should and shouldn't be allowed and how participants should and shouldn't engage. Is just defining clear rules of the road that everybody can understand and look at and say, "Okay, this is how we're going to be engaging." It'll be fun to see how it plays out.
No, I like that. Just to go back, just to let it go. Just the point you made at the very beginning about trust. I think if trust is your barometer and you anchor the consumer around that will always be your guide because that will expand your market.
Absolutely.
If they trust you more, they'll do more business with you.
You should come up here. That's absolutely right.
I'm afraid we'll have to stop there to keep on schedule. Thank you.