DraftKings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited. Unless otherwise stated, amounts below are in U.S. dollars. DraftKings provides online sports betting, iGaming, daily fantasy sports, gaming software, and related offerings.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $769.7 million | $417.2 million | +84.5% |
| Cost of revenue | $521.7 million | $313.4 million | +66.5% |
| Gross profit (revenue less cost of revenue) | $247.9 million; 32.2% margin | $103.8 million; 24.9% margin | Margin +7.3 percentage points |
| Operating loss | $(389.8) million | $(515.6) million | Loss narrowed $125.8 million |
| Net loss | $(397.1) million | $(467.7) million | Loss narrowed $70.5 million |
| Adjusted EBITDA (non-GAAP) | $(221.6) million | $(289.5) million | Loss narrowed $67.9 million |
| Operating cash flow | $(201.5) million | $(356.7) million | Cash use reduced $155.2 million |
Online gaming revenue was $735.2 million, up 90.1%; gaming software revenue was $8.6 million, down from $13.5 million; other revenue was $25.9 million. Management attributed online gaming growth to 39.2% growth in monthly unique payers (MUPs), 35.4% growth in average revenue per MUP (ARPMUP), strong acquisition and retention, market launches, improved sportsbook hold, and lower promotional intensity. The filing’s text does not provide the underlying MUP or ARPMUP values.
Sales and marketing expense rose 21.1% to $389.1 million, while product and technology expense rose 8.3% to $88.1 million. General and administrative expense fell 25.9% to $160.5 million, primarily reflecting lower stock-based compensation. Stock-based compensation was $117.4 million, versus $187.1 million a year earlier.
At March 31, 2023, cash and cash equivalents were $1.088 billion, excluding cash held for users; cash reserved for users was $436.9 million. Cash, cash equivalents, and restricted cash totaled $1.525 billion, down $254.2 million during the quarter. Total current assets were $1.806 billion and current liabilities were $1.232 billion. Management said cash on hand was sufficient for current working capital and capital expenditure requirements for at least 12 months.
Convertible notes were $1.252 billion net of issuance costs, with $1.265 billion principal, zero coupon, and a March 2028 maturity. No amount was drawn on the $125 million revolving credit facility; net available capacity was $122.7 million. Lease liabilities totaled $70.4 million. Non-cancelable vendor and other purchase obligations totaled $1.617 billion, including $326.8 million due during the remainder of 2023.
Changes, outlook, and notable risks
- Q1 2023 revenue includes GNOG, acquired in May 2022; Q1 2022 excludes GNOG’s pre-acquisition operations, limiting comparability. The filing also presents unaudited pro forma Q1 2022 revenue of $449.1 million and net loss of $475.8 million.
- Cost of revenue fell to 67.8% of revenue from 75.1%. Management cited improved sportsbook hold and reduced promotions, partly offset by a mix shift toward sportsbook and iGaming, which generally have higher costs relative to revenue than mature DFS.
- Management’s stated path to improved profitability depends on revenue and gross-profit growth, efficient customer acquisition, retention and monetization, and scale benefits, while marketing and fixed costs stabilize or grow more slowly. The filing provides no specific numerical revenue, earnings, or cash-flow guidance.
- Net loss includes a $17.0 million loss from warrant-liability remeasurement, compared with a $12.7 million gain in Q1 2022. Q1 2022 also included $37.9 million of other income, primarily from fair-value changes in financial assets.
- Risks include competition, the need to obtain and maintain gaming licenses, market and economic conditions, access to financing, and litigation. The company reported a continuing SEC inquiry related to matters raised in the Hindenburg Report, an IRS audit involving fantasy-sports excise taxes and reporting/withholding, and pending patent and GNOG transaction lawsuits. A new putative class action alleges DraftKings Marketplace NFTs were unregistered securities; the company disputes the claims and cannot estimate potential losses.
- The company recorded a $63.6 million estimated contingent liability for indirect taxes. Several legal matters have indeterminate damages, and management could not estimate possible losses. Management stated that disclosure controls were effective at quarter-end.
Investor verification points
- Confirm how much revenue and player growth reflects GNOG, newly launched jurisdictions, and ongoing organic performance, given the year-over-year comparability limitation.
- Track whether improved hold rates and lower promotional intensity persist, and whether gross-margin gains can continue as sportsbook and iGaming expand.
- Assess the pace of operating cash use against management’s 12-month liquidity assessment and the significant vendor commitments and convertible-note obligations.
- Review Adjusted EBITDA alongside GAAP losses and stock-based compensation, which remains substantial; Adjusted EBITDA is a non-GAAP measure.
- Monitor outcomes of the SEC inquiry, IRS audit, NFT and other litigation, as well as licensing and regulatory developments; the filing does not quantify potential losses for several matters.