Good day, and welcome to the DraftKings Fourth Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Stanton Dodge, Chief Legal Officer. You may begin.

Good morning, everyone, and thanks for joining us today. Statements we make during this call that are not statements of historical fact, constitute forward-looking statements that are sure to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. For more information, please refer to the risks, uncertainties and other factors discussed in our SEC filings. During the call, management will also discuss certain non-GAAP measures that we believe may be useful in evaluating DraftKings' operating performance. These measures should not be considered in isolation or as a substitute to DraftKing's financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our annual report on Form 10-K that was filed today with the SEC and our earnings presentation, both of which are available on our website at investors.draftkings.com. Hosting the call today are Jason Robins, Co-Founder, Chief Executive Officer and Chairman of DraftKings, who will share some opening remarks and an update on our business; and Jason Park, Chief Financial Officer of DraftKings, who will provide a review of our financials. We will then open up the line to questions. I will now turn the call over to Jason Robins.

Good morning, everyone. I hope you are all doing well. Before I share my thoughts on the fourth quarter, I want to thank everyone at DraftKings for their tremendous effort and contributions to our success. We had an incredible 2021, and our dedicated employees continued to deliver during an ongoing and challenging pandemic. I also want to thank our loyal customers for their continued support. At DraftKings, we are always striving to put our customers at the center of everything we do. On today's call, I will cover the following topics. First, I'll discuss our financial achievements. We outperformed our expectations for both revenue and adjusted EBITDA in the fourth quarter, capping off a year in which five of our states were contribution profit positive. We're off to a tremendous start in 2022 as well. Customer acquisition in new states has been accelerating while continuing to pay back on a gross profit basis in the two- to three-year time frame. As of today, 10 states are either already contribution profit positive or on track to achieve that milestone in 2022. Overall, we expect DraftKings to be contribution profit positive for FY '22. And if we were to have frozen new state launches at the end of 2021, we expect that DraftKings would have been able to achieve EBITDA profitability as an enterprise in Q4 of this year. Second, we continue to see rapid expansion of the OSB and iGaming TAM in the U.S. This is being driven by both new jurisdictions legalizing OSB and iGaming as well as continued healthy growth in existing states. Overall, in 2021, seven states enacted legislation for mobile sports betting, and we launched in five states last year with the other two states subsequently launching in 2022. In iGaming, one state enacted legislation in which…

Thank you, Jason, and good morning, everyone. We are pleased to announce that we generated $473 million in revenue for the quarter, an increase of 47% versus Q4 2020. Our revenue performance was significantly better than the midpoint of our guidance for the quarter, which was $437 million. Our B2C business generated $458 million for the quarter, an increase of 58% versus Q4 2020. OSB hold was not a driver of overperformance versus our guidance. Our guidance on November 4 had included $25 million of core hold in October and November and December combined were fairly typical. Given that hold was neutral relative to the guidance we shared in November, the $36 million organic outperformance versus our guidance was due to strength across customer acquisition, retention and monetization. In our B2C business, we continued to drive strong growth through player acquisition and retention, as measured through MUPs, as well as player engagement and monetization as measured through ARPMUP. B2C Monthly Unique Payers in the quarter increased 32% year-over-year to approximately 2.0 million, which brings our full year MUPs to 1.49 million, which is up 69% versus prior year. The increase reflects excellent player retention in states where we were live with our OSB and iGaming product offerings in Q4 2020 as well as the expansion of our OSB and iGaming product offerings into new states. Results reflected typical intraquarter seasonality, with October and November higher from a MUPs perspective, followed by a modest decline in December. As a reminder, a MUP is a monthly unique player, and therefore, our number of annual active players is higher based on how many months per year a MUP plays. Average Revenue per Monthly Unique Payer, or ARPMUP, was $77 in Q4, representing a 19% increase versus $65 for the same period in 2020,…

[Operator Instructions]. Our first question comes from Michael Graham with Canaccord. Your line is open.

Hey, thanks very much, and thanks for all the detail. I just wanted to ask two. The first one is just any quick update on in New York, how you're sort of dealing with the high tax rate there and sort of passing that along to the players. And then for a more involved question, just on ARPMUP, the performance there was so strong. Maybe just a little more color on the mix of factors from engagement or product or cross-selling? Just a little bit more color on sort of what you're seeing under the hood that's driving such good performance there.

Thanks, Michael. Two questions. So the first one on New York. There's been some chatter of New York considering in this upcoming legislative session adjusting the tax rate down. I think the approach we're taking is a wait-and-see on that. And I think if that happens, depending on where it lands, then we'll adjust accordingly. And if it doesn't happen, then we'll adjust accordingly. So I think we're kind of taking a wait-and-see approach to this legislative session. And in New York, customer acquisition has been so efficient and the early player cohort results have been so strong that we're hopeful that, with an appropriate tax rate, it can be a very profitable market for us. But if not, we'll make the necessary adjustments to ensure that it meets the two- to three-year payback and that it is a very profitable market for us in the long run. As far as ARPMUP goes, few things that play there. One, we continue to see mix shift into OSB and iGaming from legacy DFS. That's been helpful. Second, we've improved our product dramatically over the last six months or so after migrating onto our own proprietary tech platform. We've seen an uptick in parlay mix. We've seen an uptick in live betting. So lots of good things there. And then lastly, I think that, really, the ability for us to cross-sell and to engage and activate customers continues to get better as our CRM programs have more and more test data, and we optimize those.

All right. Thanks so much, Jason.

Thank you.

Our next question comes from Joe Stauff with Susquehanna. Your line is open.

Thank you. Good morning, Jason. Good morning, Jason. I wanted to ask relative to your EBITDA guidance -- EBITDA loss guidance in 2022, what sort of, say, promotional and advertising underlying environment are you assuming with respect to that guidance? And then the second piece to that is, I guess it's fair to assume that in the handful of states/province that you'll launch maybe later this year. I know you don't like to guide until you're actually in there. But one would think, say, the midpoint of that EBITDA loss guidance, the $875 million, is likely to be wider. Is that fair? And is there any magnitude you could give us?

So on the first question, the new states that we've launched recently, including, of course, New York and Louisiana this year and then a few last year, we'll continue to invest in those in customer acquisition. Typically, the first year, sometimes two years, of customer acquisition are the strongest cohorts that you acquire. And I think it's really important that we continue to invest there. As noted earlier, we're keeping an eye on the New York legislative session. And I think depending on what happens there with the tax rate, we may make some adjustments. But as of now, we are basing it on what we know. And then as far as new states, as you noted, we don't really get into the habit of saying, here's what we expect to happen because we don't know when new states are going to launch. Obviously, Ontario has some clarity around it. But most other states that have legalized, namely Ohio, Puerto Rico and Maryland, have not yet set dates. So I think for now, we're going to wait and see on that. And I think there's a number of factors that could drive EBITDA better or worse than what we're guiding to right now. I think there's some upside, and there's, of course, the possibility of new states where we'd invest. So hard to say what the net impact will be, given all the moving parts.

Thank you.

Our next question comes from Shaun Kelley with Bank of America. Your line is open.

Hi, guys, good morning. Jason, I just wanted to dig into some of the comments on the reaching breakeven or profitability in 4Q '23. I guess my key question is, if we already use the same assumptions -- and you're incorporating some growth in these numbers, which we appreciate. Under the same assumptions, would you be full year profitable in 2024? And is that -- or is that too ambitious? And sort of as the follow-up to that, would external marketing expense dollars actually start to decline as we get out into that period, let's call it, 4Q '23 or 2024? Or are we just seeing leverage, meaning declining as a percentage of sales, but not necessarily declining in absolute dollars, to get to some of those assumptions? Thanks.

Yes, good question. So as we noted, we would expect, if we had frozen state launches at the end of last year, we'd be profitable by this year fourth quarter. And given, as you mentioned, normal 7% to 9% legalization of the population on OSB, 3% to 4% on iGaming, we'd expect to be profitable by the fourth quarter. As far as the entire year for '24, I think the expectation is we would either be profitable or close to it. Obviously, the further out we go, the more moving parts. But based on the assumptions we're making, it would be pretty much in that zone of either profitable or very close to profitable. And then as far as the question around marketing, we're not providing specific guidance around what marketing will be. But certainly, there will be a very strong impact from leverage. I think you can expect some slowdown in fixed costs as well. And obviously, the revenue growth we expect to continue to be strong. So I think that's really the primary driver there. But whether or not we make some optimizations to marketing, it will depend on how our testing goes.

Thank you very much.

Our next question comes from Thomas Allen with Morgan Stanley. Your line is open.

Thanks. So two questions for me. First question, fourth quarter revenues were well ahead and EBITDA beat. One pushback we've heard is on where MUPs were a little bit lower at around 2 million, versus you guys had talked to on the third quarter call around 2.1 million. Can you discuss that a little bit? Second question, Jason Park, I think I heard you say that you have sufficient capital until you have positive free cash flow. So there's definitely a concern in the market that you may need to raise capital. So can you just address that?

Thomas. First of all, very prescient report by you, almost nailing our EBITDA guidance, that was good. But I think as far as the MUPs go, we had said we had $2.1 million in September. Last quarter's average was actually lower. We haven't guided to MUPs, typically, so we didn't provide a guide. But I mean, it was pretty much on target with consensus, only like 3 or 4 analysts, I think, even predicting MUPs. And I think we were a couple of points short, but we were right where we wanted to be. But we haven't provided guidance there. And of course, it's an average of all 3 months. So as you get into certain months with different sport mixes and further into the NFL season, it can vary. But if you look at the quarter, last quarter, we actually went up in MUPs quarter-over-quarter, and we certainly went up year-over-year. And then I apologize, what was the other question? Oh, on capital and free cash flow. So we have said all along and continue to say that we expect that we have enough capital on the balance sheet to get to free cash flow positive. Nothing has changed there. Obviously, we would have to have a meaningful improvement in year-over-year losses starting in '23, which is what we expect, very similar to, I think, what you wrote in your report. But our plan, our multiyear plan that we have, does not require any additional capital raise.

[Operator Instructions]. Our next question comes from Stephen Gambling with Goldman Sachs.

Grambling, but close. Follow-up on MUPs. I think I heard you reference 1.7 million actives at the Super Bowl. How does this compare to last year? As optically, it does look like it's down sequentially from fourth quarter even as New York opened.

Well, it was way up from last year. I mean, remember, that was 1 day. If you look at the quarterly MUPs, it's going to be higher than any 1 day would be, or at least the monthly would be. Obviously, there's some seasonality in there as football ended in February. But that was 1 day that was by far the most we've ever had in 1 day, and it's not even close. We haven't disclosed specific number last year from Super Bowl, but that's something we can consider doing at our upcoming Investor Day, but I can tell you it was up extraordinarily higher year-over-year versus last Super Bowl.

And if I can sneak 1 other very quick one in. I guess on the guidance, EBITDA loss guidance, I guess, what is the underlying assumption on the broader promotional intensity?

Our assumption is that we continue to run very similar new customer promos to what we've run in the past, and that we run similar retention-based promotions around key moments like the start of NFL season. So nothing's really changed there. And I think as we've noted in the past, as states mature, just based on the fact that a higher percentage of promotion is spent on new customers than repeat, you should expect to see natural decline. And then, of course, the mix of new versus mature or more mature, I should say, states will affect the overall. But I think that you can kind of assume it looked like -- or it will look like what it's looked like in the past.

Our next question comes from Jed Kelly with Oppenheimer.

Just with your guide to contribution profit neutral, it kind of implies you're spending a lot of money on technology, G&A. How much of these investments are going to revenue channels that we would consider outside of gaming or gambling? And then is there anything you could give us what your total contribution profit was in '21?

So on the first question, very little is going outside of our DFS, OSB and iGaming products. Our expectation is that the new verticals are breakeven or better. So I don't think you should expect to see any real negative impact to EBITDA from anything new that we're investing in organically at the moment. As far as how -- why, I think if you kind of take a step back and look at the competitive picture, and we've always said that we believe that product is where you win. We’re in a position where our top 2 competitors have thousands of engineers, have much more mature markets in Europe that they've built up a team around for many, many years. So our strategy was to really pull forward a lot of the product and technology hiring that we needed to do. As we go forward, I think you should expect to see a meaningful slowdown in fixed costs over the next several years because, really, for us, it was about trying to pull forward and achieve a higher level of scale. Maybe a little ahead of where the revenue is, but knowing we had growth, I mean, we more than doubled year-over-year last year, we don't expect it to take more than a year or 2 to grow into that. But it's really a reflection of, if we felt like products and technology was going to be the most important thing winning long term, we had to be on a more level playing field with those we are competing with. And then what was the other question?

Contribution profit for '21.

We'll have more information on that at our upcoming Investor Day. What we said so far is that we will be positive contribution profit in 2022, but we'll have more information on what 2021 looked like in our upcoming Investor Day on March 3.

Our next question comes from Carlo Santarelli with Deutsche Bank.

So guys, you provided a lot of color. I was just hoping kind of to more or less understand the definition and see where kind of the contribution profit, if you could bridge the commentary around contribution profit for 2022 relative to the EBITDA guidance and just kind of address some of the major buckets there that maybe we're not appreciating entirely in that kind of definition or nomenclature that you guys use.

Sure. So contribution profit is gross profit minus the external marketing, so the advertising that's oriented towards customer acquisition. And we include all of it. So it's not just the local advertising, any national advertising, DFS advertising, we're doing is all included in that number. And as we've said, we expect to be contribution profit positive in 2021 based on the states that we're in today -- 2022, excuse me, based on the states that we're in today. I think that the logical assumption is that the remaining costs are fixed costs. And as I noted in the last question, we felt like, in order to be competitive and feel like we're actually out competing our top rivals right now. But in order to get there, we had to staff up on the product and technology side. We still have less engineers than some of our top competitors. But I think we've been able to ship product and rapidly evolve our products faster than anyone else in the market, and that's partly due to our focus on the U.S. We don't have to use some of those engineers to focus on products overseas. So I think that's been very helpful. And I think we feel like now, we're in a position where we can moderate fixed cost growth and really allow the revenue scale and the contribution profit from states to kick in and drive improvements to the bottom line, probably starting later this year and certainly into 2023.

Great. That's helpful. And just longer term, the external marketing as a percentage of net revenue, you guys are still targeting like around 10%?

Yes, that's about right. We'll have more information on that in our upcoming Investor Day, but that's about right.

Our next question comes from David Katz with Jefferies.

If you could just spend a minute on Canada specifically because if I'm correct, that's incremental to the numbers that you've laid out today. And I'm just wondering if the calculus there in terms of that market entry is it's not a regular state. If the calculus changes there in any way, one way or the other, and how we might work that into our models here.

Definitely, it's different. There's been a gray market there for many years, which a lot of the operators will be competing with have already been operating in and have already had time to build customer bases. So as noted in last year's Investor Day, we are not projecting the same level of market share in Ontario or in Canada in general that we are projecting in the U.S. just because we don't have that early-mover advantage that we have in the U.S. I think the way we'll approach it is the same way we approach everything else that we do. It's going to be analytically based. We're going to target 2- to 3-year paybacks. And I think, depending on what we see in the data, we'll adjust accordingly. But it should be a good market, it has iGaming, it has sports betting, and we already have a decently sized user base of DFS customers there. So we're pretty excited about Ontario.

Our next question comes from Dan Politzer with Wells Fargo.

I just want to follow up on Ontario. How do you think about the promotional environment there versus a big market that we're saying launch such as New York? What are -- are there any differences in terms of what you'd spend maybe there, just given the population and maybe differences in regulations?

Yes. It's something I think we're still evaluating. Obviously, Ontario is a very large population. It's -- I think it would be the fifth-largest state by population if it were in the U.S. So it's a pretty meaningful population. And of course, it has iGaming. So I think that improves the overall TAM available to us. So just like we will with external marketing, we're going to do a lot of testing, and we're going to base whatever decisions we make on what the data tells us.

And then just a quick clarification on the fourth quarter EBITDA becoming positive. Does that assume a launch in Ontario and Maryland will be some of the other jurisdictions you haven't already launched in?

No. We -- so to be clear, we've said that if we did not launch any states after the end of 2021, we would have been EBITDA positive in the end of -- in Q4 of 2022. So the intent is not to be based on -- we've launched now in New York and Louisiana. But what we've also said is that if you assume a normal legalization trend of 7% to 9% in OSB and 3% to 4% in iGaming, that we would expect to be EBITDA positive by Q4 of '23. So I think you can assume that Ontario is included in that, and it will obviously depend on any other states or jurisdictions that open up. And -- if that ends up being higher, that's a good thing because it means that the TAM is larger, but we won't get there on the EBITDA positive side because there'll be more investment. If it ends up being a slower pace of legalization, which ironically is probably not great because it means that the TAM isn't growing as quickly, we would actually expect to achieve EBITDA profitability on a faster basis.

Our next question comes from Joe Greff with JPMorgan.

Question is this. Most of my questions on the business have been asked and answered. But why aren't insiders buying the stock? And will insiders buy the stock?

Well, of course, we can't talk about what will happen, but we have had several insiders buy the stock. Many members of our Board...

Outside of Directors, I'm talking about inside executives.

Well, I've been exercising options, as has several other members of our executive team, which is in effect, buying stock. So I think as long as there's options to be exercised, that would probably be the first stop for most executives. But I can't speak for everyone else. Also, as you know, there's wash rules. So based on 10b5 programs that have not been active the last few months but were active within the 6-month time frame, it's not possible for executives to buy shares right now. But we can certainly exercise options and we have been.

Our next question comes from Robert Fishman with MoffettNathanson.

I have a follow-up on advertising. We've seen how sports betting advertising is already 1 of the top local TV categories in the legalized markets. And now that New York is live and you continue to scale across the U.S., can you discuss your plans to ramp up on the national advertising piece? And how do you think about the balance of local versus national ad spend this year?

It's a great question. We've said in the past that we expect to achieve optimal -- excuse me, more efficiency on the advertising side because, of course, advertising at the national level is much less expensive in many channels like television on a cost per impression basis than local. We have already started, starting last NFL season, shifting some of our spend into national. We crossed that threshold with the launch of New York of about 1/3. So I think you'll continue to see more. And what's nice is that those national ads that we run, with each new state that legalizes, it's not like we have to put more national advertising out there. It actually reaches that population and was always reaching that population. The difference is now, they can sign up for the app. So I think you'll continue to see some tailwinds coming from just more state legalization and a continued shift into national. Of course, with state launches, we'll always have some heavy up on the local side, and there are certain channels that will always be local, like outdoor digital. But I think the national advertising will continue to grow as a percentage of the portfolio, and that should have a tailwind effect on the overall efficiency.

Our next question comes from Ben Chaiken with Credit Suisse.

Kind of on the lines of Carlo's question, the implied SG&A bucket, as you're bridging from contribution profit to EBITDA, which you can infer from the '22 guide, or ballpark. Is that fixed? Or does that growth inflation? How should we think about that?

Well, we've already made a number of market adjustments. Obviously, it's a tough labor market to deal with that. I don't expect that we'll have -- obviously, who knows? It's -- I don't have a crystal ball, but I don't expect, based on what we know today, that we'll will have any more impact to labor cost due to inflation. As I noted earlier, we had to really hire up quickly in order to be competitive with some of the more at-scale European competitors that had, much larger than we did 2 years ago, product and engineering teams. We feel like now we're in a position where we can be very competitive, actually outcompete on product and technology. And we feel like outside of some things like customer service, obviously grows as new states open. Outside of some of the smaller categories like that, we expect much more moderate fixed cost growth starting 2023 forward.

Got you. Okay. That's helpful. And then 1 more. You may have kind of implicitly answered it, but you guided overall 4Q '23 EBITDA to be positive, but that included some incremental states even after New York. I guess just for like illustrative purposes, how should we think about that time line if things remained static?

Well, you mean if no more states legalize?

Yes.

Yes, I think it would be faster. So really, as we've talked about in the past, with a 2- to 3-year path to profitability in states, that first year and sometimes part at least of the second year, are meaningful investments for us as we ramp up our customer bases in those states. So were there to be more states in rapid succession, I think it would push out profitability a little. And were there to be less in the example you gave, I think it would accelerate profitability.

And our last question comes from Bernie McTernan with Needham and Company.

It seems like as markets keep launching, they're further along the TAM curve, which New York is the latest example of with Ontario in the already very much established gray market. How far along this curve do you think it could launch relative to the $5 billion market opportunity that you guys called out before at the 100% -- assuming 100% regulation?

Very hard to say. We don't have any experience yet in Canada. So -- but I think the -- in terms of quantifying. But I think the effect you talked about, absolutely, we believe to be the case. There's already a large built up market. To some extent, that's true in the U.S., too, where there have been a legal operators and bookmakers that are local for many, many years. And I think that what you're seeing is that, with overall increased awareness, and really, we think the overall sort of weight of advertising, even though it seems more competitive, I actually think it's helped us. I think DraftKings does a differentially better job converting new users. And I think 1 of the reasons you see such a faster pace to 100,000 users in recent states like Arizona and New York, it's because of the competitive advertising, ironically. So I think a lot of that is actually accelerating our ability to launch faster and to grow faster. And it might even lead to a faster path to profitability in states. We'll have to see.

That's all the time we have for questions. I'd like to turn the call back over to Jason Robins for closing remarks.

Thank you all for joining us on today's call. We are very excited about 2022, and we look forward to speaking with you at our virtual Investor Day on March 3. I hope all of you stay safe and well. Thank you.

This concludes the program. You may now disconnect. Everyone, have a great day.