DraftKings Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. DraftKings operates consumer sports betting, iGaming and daily fantasy sports products (B2C), and gaming software services (B2B). The May 5, 2022 all-stock acquisition of Golden Nugget Online Gaming (GNOG) means 2022 results include GNOG only from closing; comparisons are not fully like-for-like.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $501.9 million | $212.8 million | $1,385.3 million | $822.7 million |
| Gross profit / margin | $129.2 million / 25.7% | $42.1 million / 19.8% | $386.5 million / 27.9% | $281.7 million / 34.2% |
| Operating loss | $(455.0) million | $(546.5) million | $(1,279.5) million | $(1,192.9) million |
| Net loss | $(450.5) million | $(545.0) million | $(1,135.3) million | $(1,196.9) million |
| Adjusted EBITDA (non-GAAP) | $(264.2) million | $(313.6) million | $(671.9) million | $(548.2) million |
| Basic and diluted loss per share | $(1.00) | $(1.35) | $(2.63) | $(2.98) |
Q3 revenue rose 135.9%, primarily from B2C growth; B2B revenue declined. Nine-month revenue increased 68.4%. Online gaming revenue was $468.5 million in Q3 and $1,289.3 million for the nine months. Q3 gross margin improved year over year, while nine-month gross margin declined. B2C cost of revenue was 69.7% of B2C revenue in Q3 versus 72.5% a year earlier, but 67.2% for the nine months versus 59.7%.
Management attributed growth to user acquisition and retention, launches in additional jurisdictions, a shift toward Sportsbook and iGaming, reduced promotions and, in Q3, unusually strong Sportsbook hold rates, especially on NFL wagering. Q3 monthly unique payers increased 22.3% and average revenue per monthly unique payer increased 114.0%; for the nine months, the increases were 27.0% and 43.5%, respectively.
Cash, debt and commitments
- At September 30, cash and cash equivalents were $1,382.7 million; an additional $581.4 million was reserved for users. Combined cash, cash equivalents and restricted cash were $1,964.0 million.
- Operating cash use was $477.1 million for the nine months, versus $247.3 million in 2021. Investing cash use was $171.9 million. Cash, cash equivalents and restricted cash decreased $665.8 million over the period.
- Convertible notes had a $1,250.4 million carrying value, bear zero coupon interest and mature March 15, 2028. No principal was outstanding on the $60 million revolving credit facility; reported net borrowing capacity was $56.0 million. The facility was scheduled to mature November 26, 2022.
- Operating lease liabilities totaled $81.7 million. Non-cancelable vendor commitments totaled $1,831.6 million, including $164.2 million due in the remainder of 2022.
- Management said available cash should fund current working-capital and capital-expenditure needs for at least 12 months. It provided no specific revenue or earnings guidance in the supplied filing text.
Changes, outlook and notable items
- Q3 net loss and Adjusted EBITDA loss narrowed year over year. For the nine months, net loss narrowed, but Adjusted EBITDA loss widened, reflecting continued investment and operating costs.
- The nine-month 2022 tax benefit of $77.6 million included a $76.8 million discrete benefit related to a partial release of the U.S. valuation allowance following preliminary GNOG purchase accounting. It is not a recurring operating contribution.
- Q3 other income included recovery of a tax-liability indemnity; nine-month other income included fair-value gains on certain financial assets. Warrant remeasurement was a $6.8 million Q3 loss but a $20.2 million nine-month gain.
- GNOG consideration was valued at $603.5 million, including approximately 29.3 million DraftKings shares; the preliminary allocation included $278.4 million of goodwill. Final purchase accounting remained subject to adjustment.
- Management’s stated priorities include product investment, entering new markets, improving state-level unit economics and pursuing profitability through marketing efficiency, scale and cost synergies. Results remain sensitive to market access, regulation, sports schedules, consumer spending, competition and promotional intensity.
- Risk matters include securities litigation and an SEC inquiry relating to allegations in the Hindenburg Report, GNOG transaction shareholder suits, patent litigation, an IRS audit involving fantasy-sports excise taxes and reporting, and a Florida DFS claim. The company said it could not estimate potential losses for several proceedings.
- Executives agreed after quarter-end to defer vesting of a long-term incentive award tranche affecting approximately 4 million shares, with vesting expected about one year after its performance condition is met.
Important facts for investors to verify
- Whether user growth and revenue per payer can persist if unusually strong Q3 betting hold rates normalize or promotional spending changes.
- How quickly losses and operating cash use decline, given nine-month operating cash outflow of $477.1 million and Adjusted EBITDA loss of $671.9 million.
- The timing and cash impact of the $1.832 billion vendor commitments, alongside available unrestricted cash and the revolving facility’s November 2022 maturity.
- GNOG integration, final purchase-price allocation, realized synergies and the effect of acquisition-related share issuance on dilution.
- Potential outcomes of regulatory, tax and legal matters, including the SEC inquiry; the filing does not provide clear loss estimates for several cases.