DraftKings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing is unaudited. DraftKings operates online sports betting, iGaming and daily fantasy sports, as well as retail sportsbook, media, marketplace and gaming software businesses. At quarter-end, it operated its sportsbook in 21 of 28 U.S. jurisdictions where online sports betting was legal; jurisdictional availability remains dependent on legislation, licensing and regulation.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $874.9 million | $466.2 million | $1,644.6 million | $883.4 million |
| Gross profit / margin | $364.6 million / 41.7% | $153.4 million / 32.9% | $612.5 million / 37.2% | $257.2 million / 29.1% |
| Operating loss | $69.0 million | $308.9 million | $458.8 million | $824.5 million |
| Net loss | $77.3 million | $217.1 million | $474.4 million | $684.8 million |
| Adjusted EBITDA (non-GAAP) | $73.0 million | $(118.1) million | $(148.6) million | $(407.6) million |
| Basic and diluted loss per share | $(0.17) | $(0.50) | $(1.03) | $(1.61) |
Growth and margins
- Q2 revenue rose 87.7%; six-month revenue rose 86.2%. Online gaming revenue increased 95.8% in Q2 and 93.1% for the six-month period.
- Management attributed growth to customer acquisition and retention, launches in additional jurisdictions, improved sportsbook hold and reduced promotional intensity. Q2 monthly unique payers rose 44.3% year over year and average revenue per monthly unique payer rose 33.4%; six-month increases were 41.4% and 35.7%, respectively. DFS payer declines partly offset gains.
- Cost of revenue fell as a share of revenue to 58.3% in Q2 from 67.1%, and to 62.8% for six months from 70.9%. Management cited improved hold and lower promotions, partly offset by a shift toward sportsbook and iGaming, which generally carry higher costs relative to mature DFS.
- Q2 general and administrative expense declined 27.4%, primarily due to lower stock-based compensation and transaction costs. Sales and marketing rose 5.0% in Q2 and 15.0% for six months; product and technology expense also increased.
Comparability: 2022 results exclude GNOG operations before its May 5, 2022 acquisition close. This affects year-over-year comparisons, particularly the six-month period.
Cash flow, liquidity and debt
- Cash and cash equivalents were $1.114 billion at June 30, 2023, excluding cash reserved for users of $381.1 million. Total cash, cash equivalents and restricted cash were $1.495 billion, down from $1.779 billion at year-end 2022.
- Six-month operating cash outflow was $219.2 million, compared with $529.3 million in 2022. Investing cash outflow was $27.0 million and financing cash outflow was $37.8 million. Total cash and restricted cash declined by $284.0 million.
- Management stated that cash on hand should meet working-capital and capital-expenditure needs for at least 12 months and that it believes the company is positioned to fund operations long-term.
- Convertible notes were $1.252 billion net of issuance costs, with a zero coupon and a March 2028 maturity, subject to earlier conversion, redemption or repurchase. The company had no revolver borrowings and $122.7 million of net available capacity on its $125 million credit line, which matures in December 2024; it reported compliance with covenants.
- Current assets were $1.719 billion and current liabilities $1.077 billion. Vendor purchase obligations totaled $1.577 billion, including $235.2 million due in the remainder of 2023. Lease liabilities totaled $67.7 million.
Outlook, risks and unusual items
- No specific financial guidance was provided in the supplied filing text. Management’s qualitative outlook is to grow revenue and gross profit as markets mature, improve customer monetization and retention, scale technology and operations, and manage fixed costs and market-entry spending. Profitability depends on contribution profit exceeding fixed costs.
- Q2 and six-month results include warrant remeasurement losses of $20.0 million and $37.1 million, respectively, versus gains in the comparable 2022 periods. The six-month 2022 tax benefit included a non-recurring $76.8 million partial valuation-allowance release related to GNOG purchase accounting; 2023 recorded tax provisions instead.
- Stock-based compensation was $206.6 million for the first six months; $670.4 million of unrecognized compensation expense remained, expected to be recognized over a weighted-average 2.8 years. The company also repurchased shares to cover withholding taxes on vested awards.
- Estimated contingent indirect-tax liability was $67.3 million, up from $60.3 million at year-end. The IRS is auditing prior tax years, including issues concerning fantasy-sports excise tax and information reporting and withholding.
- Pending matters include patent litigation, GNOG transaction-related shareholder litigation, claims over fantasy contest payouts, and litigation and a Massachusetts state inquiry concerning whether Marketplace NFTs are securities and whether the marketplace requires registration. The company says outcomes and potential losses cannot be estimated; adverse outcomes could cause damages, penalties, product changes or restrictions. The Hindenburg-related securities class action was dismissed with prejudice, while an SEC inquiry remains ongoing.
- Other identified risks include competition, gaming-license availability, regulation, customer acquisition costs, responsible-gaming and compliance obligations, and the company’s continuing losses and cash use. Management reported effective disclosure controls as of June 30, 2023 and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth, payer expansion and hold-rate improvements persist as promotions, market mix and sports outcomes change.
- Progress toward sustained positive Adjusted EBITDA and operating cash flow; Adjusted EBITDA is non-GAAP and excludes significant expenses such as stock compensation.
- Cash runway after user-reserved funds, ongoing operating cash burn, vendor commitments and planned market launches.
- Developments in the NFT-related litigation and inquiry, patent cases, GNOG litigation, IRS audit and indirect-tax exposure.
- Future dilution and compensation expense from equity awards, convertible notes and outstanding warrants, and the effect of jurisdictional regulation on growth and costs.