DraftKings Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparative periods are 2022. Dollar amounts below are in millions unless noted. The company operates online Sportsbook, iGaming and daily fantasy sports, alongside retail, media and other offerings. It reports as one operating segment. Comparisons with 2022 are affected by GNOG operations being included only from May 5, 2022.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $790.0 | $501.9 | $2,434.5 | $1,385.3 |
| Gross profit (revenue less cost of revenue) | $246.5 | $129.2 | $859.0 | $386.5 |
| Gross margin | 31.2% | 25.7% | 35.3% | 27.9% |
| Operating loss | $(286.6) | $(455.0) | $(745.4) | $(1,279.5) |
| Net loss | $(283.1) | $(450.5) | $(757.5) | $(1,135.3) |
| Adjusted EBITDA (non-GAAP) | $(153.4) | $(264.2) | $(302.1) | $(671.9) |
| Basic and diluted loss per share | $(0.61) | $(1.00) | $(1.64) | $(2.63) |
Q3 revenue rose 57.4% year over year; nine-month revenue rose 75.7%. Online gaming was the principal growth driver, with revenue up 64.0% in Q3 and 82.5% for the nine months. Management attributed growth to customer acquisition and retention, expansion into jurisdictions, improved Sportsbook hold and promotional reinvestment. Average monthly unique payers (MUPs) increased 40.0% in Q3 and 40.9% for the nine months; average revenue per MUP rose 14.0% and 25.8%, respectively. Absolute MUP and revenue-per-MUP values are not clear in the supplied filing text.
Cost of revenue increased in dollars with activity but declined as a share of revenue: 68.8% versus 74.3% in Q3 and 64.7% versus 72.1% for the nine months. Sales and marketing fell 2.6% in Q3 but rose 8.2% year to date. General and administrative expense declined 29.8% in Q3 and 27.6% year to date, mainly reflecting lower stock-based compensation and, for the nine months, lower transaction and advocacy costs. Despite narrower losses, the company remained loss-making.
Cash, liquidity and debt
- At September 30, 2023, cash and cash equivalents were $1,111.6; an additional $476.0 was reserved for users. Total cash, cash equivalents and restricted cash were $1,587.6.
- For the first nine months, operating cash outflow was $73.8, investing outflow $66.9 and financing outflow $50.5. Cash and restricted cash decreased $191.2.
- Convertible notes had a $1,265.0 principal amount, mature March 15, 2028 and were carried net at $1,253.1. The notes are zero-coupon; estimated fair value was $963.8 at quarter-end.
- No borrowings were outstanding under the $125.0 revolving credit facility; net available capacity was $122.7. The facility matures in December 2024, and the company reported covenant compliance.
- Management said cash on hand was sufficient for working capital and capital expenditures for at least 12 months. Lease obligations totaled $89.1; vendor purchase obligations totaled $1,485.7, including $126.7 payable in the remainder of 2023.
Outlook, risks and unusual items
The filing provides no specific quantitative revenue, earnings or Adjusted EBITDA guidance. Management’s stated strategy is to invest in products, technology and new-market launches, improve jurisdiction-level economics, and pursue profitability as markets mature, retention and monetization improve, and cost growth moderates. Results are subject to sports-season seasonality, market access and licensing, competition, customer acquisition costs and promotional spending.
Key exposures include multiple unresolved patent disputes and other litigation, including claims concerning the GNOG transaction and DraftKings Marketplace NFTs; the company says it cannot estimate possible losses for several matters. The SEC’s inquiry related to allegations in the Hindenburg Report remains ongoing; the related federal securities class action was dismissed with prejudice in January 2023. An IRS audit includes unresolved issues involving fantasy-sports excise tax and information reporting/withholding. Indirect-tax contingency liability was $68.3, up from $60.3 at year-end 2022.
Unusual or non-cash factors affecting comparisons include warrant remeasurement losses of $44.8 for the first nine months of 2023 versus a gain of $20.2 in 2022, and a $76.8 discrete tax benefit in Q2 2022 related to GNOG purchase accounting. Stock-based compensation was $284.9 for the first nine months of 2023; $602.4 of unrecognized compensation expense remained, expected to be recognized over a weighted-average 2.7 years.
Important facts for investors to verify
- Whether customer growth, Sportsbook hold and promotional reinvestment support revenue and margin gains without a disproportionate increase in marketing or other variable costs.
- Progress toward positive Adjusted EBITDA and operating cash flow, including the treatment and persistence of excluded non-GAAP expenses.
- Cash available for corporate use after excluding user-reserved funds, and funding needs against the $1.49 billion of vendor purchase obligations.
- Potential dilution and repayment or conversion outcomes for the $1.265 billion convertible notes, plus share-based compensation and warrant effects.
- Developments in gaming regulation, tax audits and litigation—especially Marketplace NFT and patent matters—and their potential financial or operating impact.