DraftKings Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. DraftKings operates consumer sports betting, iGaming and daily fantasy sports products, plus a B2B gaming-software business. It acquired Golden Nugget Online Gaming (GNOG) on May 5, 2022, in an all-stock transaction. Reported results include GNOG only from the closing date; management said GNOG’s post-close revenue and earnings could not practicably be separated.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $466.2 million | $297.6 million | $883.4 million | $609.9 million |
| Net loss | $217.1 million | $305.5 million | $684.8 million | $651.9 million |
| Adjusted EBITDA (non-GAAP) | $(118.1) million | $(95.3) million | $(407.6) million | $(234.6) million |
| Operating cash flow | Not separately stated | Not separately stated | $(529.3) million | $(176.4) million |
Q2 revenue increased 56.6% year over year, led by B2C growth; online gaming revenue rose 68.1%. Management attributed growth to customer acquisition and retention, launches in additional jurisdictions, stronger engagement and a shift toward Sportsbook and iGaming. Q2 B2B revenue declined $16.0 million year over year. For the first half, revenue grew 44.8%, while net loss widened 5.1% and Adjusted EBITDA loss increased substantially.
Q2 cost of revenue was $312.8 million, implying gross profit of approximately $153.4 million and gross margin of 32.9%, versus approximately $110.6 million and 37.2% in Q2 2021. DraftKings cited higher product taxes, payment-processing fees, platform and revenue-share costs, and promotional investment in new markets. B2C cost of revenue was 62.1% of B2C revenue in Q2, up from 56.7%. Q2 operating loss was $308.9 million.
Q2 net loss improved from the prior year, but included an $81.2 million income tax benefit, including a non-recurring $76.8 million benefit from a partial release of the U.S. deferred-tax valuation allowance associated with GNOG purchase accounting. First-half net loss also included $32.3 million of other income, primarily fair-value gains on financial assets, and a $27.0 million warrant remeasurement gain. These items affect period-to-period comparisons.
Cash, debt and liquidity
At June 30, 2022, cash and cash equivalents were $1.514 billion, excluding $426.2 million reserved for users. Total cash, cash equivalents and restricted cash were $1.941 billion. First-half operating cash use was $529.3 million; investing cash use was $147.5 million, including acquisition-related spending; financing cash use was $12.5 million. Cash and cash equivalents declined from $2.153 billion at year-end 2021.
Convertible notes had $1.265 billion aggregate principal, carry a zero coupon and mature March 15, 2028; the notes are convertible subject to specified conditions. No amount was drawn on the $60 million revolving credit facility at June 30, and approximately $56 million was available, excluding letters of credit. The facility matured August 28, 2022. Management stated cash on hand was sufficient for at least twelve months of working-capital and capital-expenditure requirements.
Other commitments included $1.914 billion of future minimum payments under non-cancelable vendor contracts, with $267.7 million due in the remainder of 2022, and $83.9 million of operating lease liabilities. These obligations are not equivalent to funded debt.
Outlook, commentary and risks
The filing provides no numerical revenue, earnings or cash-flow guidance. Management described a strategy of continued product investment and geographic expansion, developing repeatable state-level unit economics, improving marketing efficiency and seeking scale benefits and cost synergies. It said Adjusted EBITDA profitability depends on contribution profit exceeding fixed costs, among other factors.
Material risks include sustained operating losses and cash burn; intense competition and promotional spending; regulatory approvals and licensing across jurisdictions; variable sports results and possible event disruptions; and the need to integrate GNOG. Management also noted inflation, consumer-spending and COVID-19 uncertainties. Numerous patent disputes, securities and derivative litigation, a remaining Florida DFS claim, an IRS audit and indirect-tax exposures remain unresolved; the filing generally says outcomes cannot be predicted and loss ranges cannot be estimated. The indirect-tax contingent liability was $52.7 million at June 30, 2022.
Unusual and relevant items include the GNOG acquisition’s preliminary purchase-price allocation, which recorded $278.4 million of goodwill and $307.0 million of acquired intangible assets; $14.4 million of GNOG transaction costs for the first half; and $322.6 million of stock-based compensation for the first half. The three senior executives’ voluntary base-salary reductions to $1 for fiscal 2022 were disclosed as an August 4, 2022 event after quarter-end.
Important facts for investors to verify
- Assess underlying growth and margins without the partial-period GNOG contribution, and distinguish reported results from the unaudited pro forma figures.
- Track customer acquisition, retention, promotional intensity, hold rates and the path to improved B2C unit economics.
- Reconcile Adjusted EBITDA to GAAP losses and evaluate the impact of stock compensation, tax benefits, warrant remeasurement and fair-value gains.
- Monitor operating cash burn, available liquidity, the revolving facility’s post-quarter status and the timing of substantial vendor commitments.
- Follow GNOG integration, final purchase accounting, regulatory and licensing developments, and the outcomes of litigation, the SEC inquiry and tax matters.