DraftKings Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. DraftKings operates consumer-facing daily fantasy sports, sportsbook and iGaming products (B2C), and sports betting and casino software (B2B). The GNOG acquisition was completed on May 5, 2022, after quarter-end; the filing is for the predecessor company’s results before that transaction.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $417.2 | $312.3 |
| Gross profit / gross margin | $103.8 / 24.9% | $129.1 / 41.3% |
| Operating loss | $(515.6) | $(324.8) |
| Net loss | $(467.7) | $(346.3) |
| Loss per share, basic and diluted | $(1.14) | $(0.87) |
| Adjusted EBITDA (non-GAAP) | $(289.5) | $(139.3) |
| Cash used in operating activities | $(356.7) | $(59.7) |
- Revenue grew 33.6%. Online gaming revenue was $386.7 million, up 41.8%; B2B revenue declined to $13.5 million from $31.4 million.
- B2C Adjusted EBITDA was $(269.2) million, versus $(141.4) million; B2B Adjusted EBITDA was $(20.3) million, versus positive $2.1 million.
- Sales and marketing expense rose to $321.5 million from $228.7 million. Cost of revenue increased faster than revenue, and B2C cost of revenue rose to 70.1% of B2C revenue from 53.9%.
- At March 31, cash and cash equivalents were $1.773 billion, plus $464.9 million reserved for users. Total cash, cash equivalents and restricted cash were $2.238 billion, down $392.1 million during the quarter.
- Convertible notes had $1.249 billion carrying value and $1.265 billion principal, are zero-coupon and mature March 15, 2028. No revolving-credit borrowings were outstanding; approximately $56.0 million was available, subject to facility terms. Current liabilities were $912.9 million and total liabilities $2.361 billion.
- Non-cancelable vendor and other purchase obligations totaled $1.913 billion, including $349.1 million due in the remainder of 2022. Lease liabilities totaled $67.4 million; an additional office lease with approximately $33.7 million of obligations had not yet commenced.
Material changes and management commentary
Management attributed B2C growth to customer acquisition and retention, increased engagement, and Sportsbook and iGaming launches in additional jurisdictions. Monthly unique payers increased 29.2% and average revenue per monthly unique payer increased 10.5% year over year. Growth was partly offset by planned launch promotions, particularly in New York, and atypically low sportsbook hold rates, primarily associated with NCAA basketball wagering.
Management said higher product taxes, payment processing fees, platform costs and revenue shares contributed to the increase in cost of revenue. It described continued investment in products, technology, marketing and new jurisdictions as central to its growth strategy. It expects profitability over time through marketing efficiencies, scale and cost optimization, but the filing provides no specific forecast or timetable. Management stated that cash on hand was sufficient for working capital and capital expenditure needs for at least twelve months.
Outlook, risks and unusual items
- Growth and profitability depend on market access, licensing, customer engagement, promotional spending and the ability to achieve sustainable state-level economics. Sportsbook and iGaming generally carry higher costs per revenue dollar than the more mature DFS product.
- Sports cancellations or schedule changes, renewed COVID-19 disruption, weaker consumer spending, competition and regulatory changes could adversely affect activity and results.
- Material litigation includes DFS-related claims, multiple patent disputes, securities and shareholder derivative actions, and an ongoing SEC inquiry. The company generally could not estimate possible losses; it believes the proceedings are not expected to materially affect financial condition, though results in a particular period could be affected. An IRS audit also remains open on issues including fantasy-sports excise taxes and reporting/withholding.
- Q1 included a $37.4 million gain, primarily from fair-value changes in certain financial assets, and a $12.7 million gain from remeasurement of warrant liabilities. Stock-based compensation was $187.1 million, including a $20.7 million cumulative catch-up adjustment related to updated expectations for certain performance awards.
- GNOG closed after quarter-end in an all-stock transaction. Approximately 29.3 million DraftKings Class A shares were issued; preliminary purchase accounting was still being finalized. The company reported disclosure controls were effective as of March 31, 2022.
Investor verification points
- Track operating cash burn and whether liquidity remains adequate against vendor commitments, expansion spending and the post-quarter GNOG integration.
- Assess whether revenue growth can translate into improving gross margin and Adjusted EBITDA as promotional intensity and launch costs evolve.
- Review customer growth and monetization alongside low hold-rate effects, promotional incentives and product mix.
- Verify GNOG purchase accounting, integration costs and the impact of the shares issued on ownership and per-share measures.
- Monitor litigation, the SEC inquiry, the IRS audit, gaming-market access and license requirements for developments or financial estimates.