ASML Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 15 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the DraftKings Q3 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Staunton Dodge, Chief Legal Officer, please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today. Certain statements we make during this call may constitute forward looking statements that are subject to risks, uncertainties and other factors as discussed further in our SEC filings that could cause our actual results To differ materially from our historical results or from our forecasts, we assume no responsibility to update forward looking statements other than as required by law. During this call, management will also discuss certain non GAAP financial measures that we believe may be useful in evaluating DraftKings operating performance. These measures should not be considered in isolation or as a substitute for DraftKings' financial results prepared in accordance with GAAP. Reconciliations of these non GAAP measures to the most directly comparable GAAP measures are available in our earnings release and presentation, which can be found on our website and in our quarterly report on Form 10 Q filed with the SEC.

Speaker 1

Hosting the call today, We have Jason Robbins, Co Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business and Jason Park, Chief Financial Officer of DraftKings will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robbins.

Speaker 2

Good morning and thank you all for joining. The 1st 3 quarters of 2023 have been outstanding for DraftKings. We have made thoughtful investments in our product throughout the year and are winning with our customers, and our team executed tremendously around the start of NFL and college football season. Importantly, we remain focused on our core value drivers, acquiring customers efficiently, retaining and monetizing our existing customers, Entering new jurisdictions and building an efficient and scaled organization. I'm pleased to share that this strong execution and focus resulted in another excellent quarter.

Speaker 2

Revenue and adjusted EBITDA exceeded our expectations and our momentum continued into the Q4 with the start of the basketball and hockey season. We are raising our expectations for fiscal year 2023 and introducing initial guidance for fiscal year 2024. In 2024, We expect revenue of $4,500,000,000 to $4,800,000,000 and positive adjusted EBITDA of $350,000,000 to $450,000,000 We also expect to generate meaningfully positive free cash flow in fiscal year 2024. As we look back on the Q3 in 2023, Here are our key takeaways. 1st, we are winning.

Speaker 2

Our revenue in the quarter increased 57% year over year and we We've efficiently added over 1,000 basis points of combined OSB B and I Gaming shares since the Q2 of 2022, which we are very proud of. 2nd, our investments in product and technology are paying off. We have created what we believe is the strongest product in the industry and are seeing overall engagement on our app and structural hold percentage continue to increase. Importantly, we have a clear roadmap to extend our product advantage over the coming years. 3rd, our older states are generating significant contribution profit and newer states are generating positive contribution profit faster than previous states.

Speaker 2

4th, we expect attractive adjusted EBITDA flow through percentage on incremental revenue as we believe our organization is largely at scale and therefore has a long runway of margin improvement. Finally, the best is yet to come. We are excited for the future and look forward to presenting our latest views on the U. S. Opportunity, sources of competitive differentiation, core business drivers, including additional details on unit economics and our multiyear financial outlook at our Investor Day on November 14.

Speaker 2

With that, I will turn it over to Jason Park.

Speaker 3

Thank you, Jason. I'll hit the highlights, including our very strong Q3 performance, increased 2023 guidance and our initial expectations for 2024. Please note that all income statement measures discussed except for revenue are on a non GAAP adjusted EBITDA basis. As Jason mentioned, the organization is executing very well and that is showing up in our results. We achieved $790,000,000 of revenue in the which is 57% higher than our Q3 2022 revenue and our adjusted EBITDA of negative $153,000,000 improved by 111,000,000 on a year over year basis.

Speaker 3

Customer retention and engagement far exceeded our expectations as customers enjoyed our live same game parlay offering as as well as our live and player prop markets. MLB was a bright spot throughout the Q3 and we successfully transitioned many of those customers into the football season. Customer acquisition was also healthy and exceeded expectations. For example, we have already acquired more than 5% of the adult population in Kentucky following the launch of our sports book product in that state on September 28. Structural hold was above 9.5% during the quarter and well ahead of expectations as we continue to improve our parlay mix and optimize our trading capability.

Speaker 3

Our actual sports book hold percentage was approximately 9%, inclusive of customer friendly sport outcomes, primarily in college football and the NFL. Promotional reinvestment as a percentage of GGR outperformed our expectations due to stronger than anticipated retention of existing customers, which resulted in a slightly higher mix of existing customers versus new customers. Promotions as a percentage of GGR continued to improve on a year over year basis for our OSB and iGaming states. Our adjusted gross margin was in line with expectations and increased almost 300 basis points year over year. Strong handle growth combined with improving structural sports book hold rates and better promotional reinvestment for OSB and iGaming contributed to higher adjusted gross margin.

Speaker 3

External marketing and fixed expenses were consistent with our plans as we executed our football season kickoff and continued to exert discipline against our compensation expenses and vendor related costs. We're very pleased with our results in our more mature OSB and iGaming states. In the states that launched from 2018 through 2021, we continued to drive very strong handle and revenue growth year over year with a corresponding improvement in adjusted gross margin rate, while our external marketing costs decreased at a double digit rate. Our strong Q3 results and our visibility into continued improvement have enabled us to significantly raise our expectations for 2023 revenue and adjusted EBITDA. We are improving our full year 2023 revenue guidance range to $3,670,000,000 to 3,720,000,000 or by $195,000,000 at the midpoint.

Speaker 3

We are also improving our full year 2023 adjusted EBITDA guidance range to negative $95,000,000 to negative $115,000,000 or by $100,000,000 at the midpoint. The bridge from the 2023 revenue and adjusted EBITDA guidance that we shared in August to our 2023 guidance as of today includes stronger customer retention, Acquisition and engagement and structural sports book hold improvement, partially offset by customer friendly sport outcomes in the Q3 and our expected launch in May. You can see the details of the bridge in the earnings presentation we posted to our website. In terms of our full year, we are increasing our 2023 Gross margin rate guidance to 43.5 percent to 45%. We now expect contribution profit, which we define as adjusted gross Profit less external marketing to approach $800,000,000 in fiscal year 2023.

Speaker 3

We continue to expect fixed costs to grow less than 10% and external marketing to be consistent with prior guidance even when including our investment in me. With regard to our balance sheet, we ended the Q2 with $1,100,000,000 of cash and now plan to end the year with more than $1,200,000,000 of cash. As a reminder, we expect approximately $120,000,000 of capital expenditures End capitalized software development costs for fiscal year 2023 and changes in net working capital to be a modest source of cash. We expect this level of CapEx to continue in 2024. Moving on to our full year 2024 guidance, We are poised for a rapid increase in adjusted EBITDA due to continued strong revenue growth coupled with a scaled fixed cost structure.

Speaker 3

For 2024, we expect revenue in the range of $4,500,000,000 to $4,800,000,000 or nearly $1,000,000,000 of incremental revenue growth compared to the midpoint of our fiscal 2023 revenue guidance and more than double our revenue from 2022. Our guidance range for 2024 adjusted EBITDA is $350,000,000 to $450,000,000 which equates to more than $500,000,000 of year over year growth compared to the midpoint of our fiscal year 2023 adjusted EBITDA guidance and more than $1,100,000,000 of adjusted EBITDA improvement since 2022. Our guidance range for 2024 includes investments to launch approximately 5% of the adult population. In addition, based on the midpoints of our fiscal year 2023 and 2024 guidance ranges, we expect year over year Adjusted EBITDA flow through percentage up 53%, which we look forward to delivering. In sum, we had an excellent third quarter and are very excited about the We look forward to sharing more details at our upcoming Investor Day.

Speaker 3

That concludes our remarks and we will now open the line

Operator

Our first question comes from Shaun Kelley with Bank of America. Your line

Speaker 4

Hi, good morning everyone and thank you for taking my questions. I just wanted to start with sales and marketing. I think one of the Many things we learned this quarter was seeing your overall sales and marketing actually declined year over year and I believe implying external marketing down even more during the quarter. As we look out to next year, I think that pattern actually continues. And I was just wondering if you could elaborate a little bit on what's enabling you to do that Still make the investments that you hope to and sort of just talk to us a little bit about both mix, meaning new customers Acquired versus existing and also seasonality, if you could, just how should we think about external marketing across the year?

Speaker 4

Thank you.

Speaker 2

Thanks, Sean. So you're correct that we do expect to further decline in external marketing next year and that is inclusive of Potential launches in North Carolina as well as some other states. So, all specifically the states that have legalized, not any new states were And I think the biggest reason why is that as our existing states mature, we see less and less We are still continuing to acquire customers even in our oldest state vintages. So we do still have marketing spend allocated to those, but It's certainly not nearly at the same level as in the 1st year, 2, 3 of a state. So as states mature, that comes down.

Speaker 2

And so just Generally, as the business is maturing, we're seeing that happen, which is what we expected. Of course, if we see some very significant New states come online next year that could change, but right now based on the kind of launch that we States that we expect to launch, we're forecasting an external marketing decline next year.

Operator

Thank you. One moment for our next question. Our next question comes from Jeff Greff with JPMorgan. Your line is open.

Speaker 5

Good morning, guys.

Operator

Sorry, Joe. Sorry about that.

Speaker 5

I've been getting that since 3rd grade.

Speaker 2

Hey, Joe.

Speaker 5

When you look out to 2024 and you look at when you roll up your guidance and Your forecast and when you look at OSB older states and newer states, is there a more meaningful contribution coming from the Full contribution coming from the older states or how are you looking at between the different cohorts and vintages?

Speaker 2

Yes, it's a great question. We actually are going to dive in To that very specific topic in much more granular detail at our Investor Day on 14th, so very much look forward to sharing detail there. And I think the way you could think about it is, if you look at sort of the relative population sizes of the different vintages and then think about the Charity curve, obviously, the older states are still growing. So on a per population per capita basis, they will be larger. And then if you kind of think about how big each vintage is based on the percentage of population, and then also think about the mix of Whether it's just OSB or OSB and iGaming, that will give you a picture of how much, but we actually are going to go into much more specific detail on this on 14th.

Speaker 2

And I was very sternly warned by my IR team not to front run the Investor Day, so I won't. But it's a great question and look forward to sharing more with you in a couple of weeks.

Operator

Great. Thanks, guys. One moment for our next question. Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Speaker 6

Hey, thanks. Clearly, there's been

Speaker 7

a lot of concerns or questions about the competitive environment, whether new entrants or existing folks who perhaps need to protect share. How are you planning for promotions into 2024 versus 2023 in the guidance that you provided? And could there be a reallocation from marketing savings that you're discussing?

Speaker 2

We continue excuse me, it's a great question. We continue to expect to see Decline in promotions, I know that there are a couple of states that report them that different data can be extrapolated, but it's always tricky to kind of look at a couple of things. We actually saw a decline year over year in promotion rate for our overall OSB and I Gaming business in Q3. Obviously, as you know, we saw a gross margin increase of about 300 bps year over year. Next year, we forecasted a 200 bps to 300 bps gross Margin increase and that's mostly from promotional decline.

Speaker 2

There's a little bit of hold rate increase in there too. But Definitely, we'll stay disciplined. We've seen multiple waves of competition. Last time we saw a huge wave of competition, we stayed We didn't increase our promotion rate, and I don't think we expect to do that this time. So we certainly contemplated a variety of scenarios in our guidance and at this point I think we have a decent amount of experience in historical data on that, different types of competition that might emerge.

Speaker 2

But I think the important thing for us is just to continue what we've done all along, which is to stay disciplined, to focus on bringing down promotion rate through optimization and then just naturally, I think, Continuing to see the user base mature since so much of that promotion goes to new customers. And I think if we continue to do that and Well, the trends that we've been seeing for the last 7, 8 quarters will continue.

Speaker 8

Sounds good. Thank you.

Operator

One moment for our next question. Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Speaker 7

Hey, guys. Thank you. Jason, when you guys think about your guidance for 2024 within the context of the share gains that you guys I've shown consistently, but really stepped up in the 3Q. How are you thinking about, I think, relative to the 33 is You guys had in the release that's blended across both channels. How do you guys think about that share within the context of next year's net revenue and EBITDA guidance?

Speaker 7

Flattish, moving up, etcetera.

Speaker 2

Yes. It's a great question. I mean, what we've always sort of typically guided the Same way, which is we look at historical cohorts and data and project forward based on that. So implicitly, that generally implies a flat And I think a lot of why we outperformed this year by such a significant margin was just our share increase. Certainly not banking on that for next year.

Speaker 2

We're confident that we have some opportunity there and we believe that we can. But As far as what's embedded in the guidance, our methodology hasn't changed. We look at historical cohorts, which kind of implicitly implies flat share in any projection going forward.

Speaker 7

Great. Thank you. And then obviously, based on your scale at this point and the flow through that you guys expect to receive or generate going forward. I guess the next question kind of becomes looking back to your March Analyst Day when I think you guys laid out Gross margins of like 56% at a steady state and some of the buckets, platform processing, etcetera, That would kind of contribute to that. How do you think about like kind of the evolution of maybe whittling down some of those Costs, whether it be within processing or revenue share and how far are we from having that as kind of a talking point around improving that gross margin?

Speaker 3

Hey, Carlo, it's Jason Park. Yes, so great question on the flow through and I'll start sort of on the bottom end The income statement and Jason had already alluded to improving or declining external marketing costs within the 2024 time period. And what I'd also add is we're going to we've had a great 18 months of just exerting excellent discipline on our fixed costs. We'll Then into the cost of goods sold part, we guided to a 200 to 300 basis point improvement in gross margin rate, Primarily as the promo reinvestment continues to improve and we do, we do have multiple initiatives throughout the cost of goods Sold structure, whether those primarily around vendor related, negotiations and continuing to achieve scale through volume discounts, And those are embedded within our gross margin rate guidance as well and I think provide long runway of continued improvement both at the gross margin level and the EBITDA margin line.

Speaker 2

Yes. And I think, as Jason mentioned, definitely the largest driver of gross margin improvement is continued just maturity of the base, which brings promotion rate down. But certainly, in addition to some of the negotiations, we also just have existing contracts Volume threshold that we expect over time trip that will bring gross margins down. That's one of the benefits of having scale.

Speaker 7

Yes, Jason. And that's kind of where I was going with that. Like what is that timeframe in the next year

Speaker 3

or 2? Or is that kind

Speaker 7

of just ongoing and rolling?

Speaker 2

I think it's ongoing really. I mean at certain point you cap out, but I would imagine that Google gets better rates on vendors So I think just as you get bigger, you continue to be able to get leverage in those areas because you can afford to pay more even if it's less on Percentage revenue basis and that's generally how all these things work is that as volume goes up, the rate comes down. And So, yes, I do think it's just kind of an ongoing thing. We have a team that focuses on this pretty much all year round and is continually looking for ways to optimize the COGS structure.

Speaker 7

Great. Thank you both.

Operator

One moment for our next question. Our next question comes from David Katz with Jefferies. Your line is open.

Speaker 8

Hi, morning everyone. Thanks for taking my question. I'd like to talk about something that just It has never come up until now, which is your cash flow statement. If we start to think about what next year brings with the 'twenty four guidance, And I think in the prepared remarks, you talked about keeping CapEx at a similar $120,000,000 level. You do start to pile up, you start to accumulate some cash.

Speaker 8

And I'd love to get a sense for how you think about Managing around that, obviously, you want to keep yourself positioned for a state like Florida or California or whatever may happen. But Can you just maybe give us a little more color on how you're thinking about that?

Speaker 2

Yes. It's a great question. And It's something we've actually been spending increasing time going through looking at all different options including organic investments We can make opportunities for capital structure optimization buybacks, looking at Just basically how do we deliver the maximum value over the long term shareholders? So that is a great question. It's something that we feel fortunate that We now really are in a position to have real value creation from optimally making those decisions to now we've been, as you said, focused on getting to this point.

Speaker 2

But Definitely feel very good about our trajectory on the cash flow side and we'll have more to say as we think it through, but definitely a great question and something that we're

Operator

Okay. Thank you. One moment for our next question. Our next question comes from Joe Stauff with Susquehanna. Your line is open.

Speaker 9

Thank you. Good morning, guys. Two questions. I was just wondering in your guide for 2024, Jason, you had mentioned, I guess, within the 2 the gross margin improvement, you had an assumption for an improvement in structural hold. What is that?

Speaker 9

And then wondering if you could just comment on the level of adult penetration end user growth that you're getting In Mass and Ohio, obviously, you get to 7% pretty quick. Is it fair to assume that that's now higher? I mean, just call it 2 months into the You have sports calendar.

Speaker 2

So, great questions. On the hold side, we've forecasted basically that we continue on Same level of structural hold rate we're on today. Obviously, there's some opportunities we think to potentially increase that, but right now that's We have line of sight too. So that's what we put in. And I'm sorry, what was the second question?

Speaker 9

Yes. Just to comment on trying to estimate So adult penetration, how many more customers are out there, user growth, etcetera. And you had given Ohio in Mass in terms of where you'd been, you got to 7% pretty quickly. And I'm wondering where that is now?

Speaker 2

Yes, it's another great question. I mean, we haven't found a ceiling yet in the oldest states. We continue to acquire customers. Even in a state like New Jersey, which is our first state that we launched Obviously, it's bordering a lot of other states that have since launched. We continue to have healthy customer acquisition.

Speaker 2

So hard to say where the We're well into the double digits in terms of adult population penetration in some of our oldest states. So I think it really has a lot to do with how we We continue to evolve the product. If we continue to make the product more appealing to a wider audience and continue to find ways to innovate to reach more customers, Yes. I think it can continue to go up over a long period of time, but certainly at this point, we have not found the ceiling yet.

Speaker 1

Thanks, Jason.

Operator

Thank you. One moment for our next question. Our next question comes from Dan Politzer with Wells Fargo. Your line is open.

Speaker 7

Hey, good morning, everybody. I was hoping that you could talk a little bit more about hold, maybe as you see it philosophically or the long term. I mean, is there kind of a target or upper limit you see relative to the kind of mid-nine level you're at now? And I guess maybe along with that, how do you think about the trade

Speaker 2

Yes. I mean, I think this is something that we'll just always continue to be analyzing and optimizing. And It's almost a tricky question to think about in that sense because it really depends on where you're getting hold increase from. If you continue to create products That the customer wants and they have demand, they have higher hold, then that can do a great job, I think, of continuing to raise your hold. And I think on the other side of it, if you're raising hold by either forcing people into things that they really don't want or Making your pricing worse than the market, I think that that's obviously potentially going to have a negative impact on LTV.

Speaker 2

So We're very focused on the customer and on creating we think and we've seen this with a number of products we've created from SGP to cash out. We have a new one that we're going to be talking about at our Investor Day that we're launching, which I love that I'm really excited about that kind of fits this double Objective of being great for the customer and holding better than the average. So I think we have a long runway on that front. And it's really about focusing on the Customer and maximizing the LTV. So in the end, if we do see that anything, whether it's sort of just the concept that holds higher or product or anything that we've introduced is having an adverse effect on LTVs and obviously we'll try to turn the dials accordingly.

Speaker 2

But, that's really what the team is Hold is obviously a variable, promotions are a variable, but retention is the most important variable. So, very much focused Across all value creation drivers across the LTV spectrum and I think that hold is something that again it's a little tricky It depends on how you're doing it, but I do think there's a lot more room for upside there than not.

Operator

Got it. Thank you. One moment for our next question. Our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Speaker 10

Hi, good morning. On iGaming, despite still early days on legalization, has your confidence increased over the past year How big of a driver iGaming can be for total company revenues and maybe also importantly, total company profitability? And then just separately, with some of your competitors using VetVision for streaming NFL games this year, can you discuss your updated thoughts on

Speaker 2

So, great questions. On the first one, I mean, iGaming is probably the one piece of our business I point to that's under talked about, namely because we're only in 11% of the population Now 87% is still not legalized, huge opportunity there. Obviously, still tremendous opportunity with A little bit around half of the U. S. Population not having legal sports betting in all our oldest markets still growing too.

Speaker 2

But iGaming, As we've noted in the past, we believe has roughly 2 times the TAM on a per capita basis, as online sports betting. So tremendous opportunity. And I do think you'll start to see more momentum in the States in the coming years. It's just as we thought in the beginning, sports is kind of leading the charge. But Definitely feel like that's an under talked about opportunity and glad that you're bringing it up and something that we much like the It's market feel we're very well positioned in having the number one position in the market at this point.

Speaker 2

And then as far as the question on Streaming in the app, it's something we did look at and continue to look at. I mean, one of the exciting parts of where we're at right now as a company and As an industry, there's still so much innovation out there and there's so many things that we can do to create value for the customer and for the business. And We had a really full product roadmap going into NFL. Didn't end up prioritizing that one, but it's something we continue to evaluate. And Like I said, I think the fact that there's things that people feel are value creating out there that we probably would agree are value creating out there that still didn't make the cut because we have many other really exciting things that we believe are adding value and generating the results that we've generated.

Speaker 2

It's just a really special time right now in the evolution the market to be at where there's so much great opportunity and so much innovation. And, I think this is a great example of just this long Product roadmap we have of things that we know and have confidence will deliver value. And it's just a matter of time before we can get to it all.

Operator

Perfect. Thank you. One moment for our next question. Our next question comes from Barry Jonas with Chua Securities. Your line is open.

Speaker 2

Hey, guys. Good morning. Can you maybe talk about your expectations for the next wave of states to legalize OSB and where you could get access? Thanks. Yes.

Speaker 2

Great question. It's hard to say. Obviously, if you look at the map, A lot of the biggest states outside of the top 3 have already legalized. Obviously, Georgia is still one that's in that top ten that has had some momentum in the last couple of years and hopeful that we get some traction there this year. Obviously, the big prizes of California, Texas and Florida are still out there, but those might be a little longer PATH with Texas not meeting again until 2025 and Florida and California requiring ballot initiatives.

Speaker 2

Those are really kind of the big states in terms of population left out there. And I would say probably the clearest path now of them is in Georgia, but Still really hard to say what the timing and likelihood of that is. And then more on the midsized states, we had good traction Progress in Minnesota last year, I think that could be one that's in play. Missouri, I think there continues to be a lot of interesting routes. There's Some complications there too, but I think there's potential for that one.

Speaker 2

And then like every year, there's always some States that we didn't anticipate going into the legislative session and all of a sudden there's some momentum around and we usually figure that out either Towards the end of the year, early next year as people are starting to think about introducing bills in the upcoming sessions, many of which start in Q1. So We'll know a lot more in the next 3 or 4 months, but definitely think we'll get some more states this year and those are a handful of the ones that we have our eye on. Great. And then just for a follow-up, with ESPN bet coming online mid football season, do you expect some trialing from your user base? And is this at all reflected in your guidance explicitly?

Speaker 2

Thanks. We've seen so many waves of competition now and We've really always had a highly competitive market. It's not like we haven't had fierce competition pretty much from the start. We always expect that there will be competitors that will come and try to give our customers an experience and we have to just give them a better experience. And Certainly, there are people that will go take promos and that will happen.

Speaker 2

But in the end, we believe that most customers will gravitate to the best product, the best So we're going to stay disciplined and I think it will probably play out in a very similar fashion to other times. But we've contemplated all sorts of scenarios in our guidance. That's why it's guidance with a range. We definitely have thought through, what we think the competitive environment Different flavors that could look like and we feel that based on now that we've been through this a few times, not only do we have Managing it. We also have a lot of data.

Speaker 2

So we feel pretty confident that our guidance range is going to encompass any variety of scenarios that could possibly emerge on the competitive front. Great. Thanks so much.

Operator

One moment for our next question. Our next question comes from Robin Farley with UBS. Your line is open.

Speaker 11

Great. Thanks. I have two questions. One is kind of a follow-up to the topic just prior. It sounded like you were saying your forward guidance Based on kind of flat market share with where you are at a given point.

Speaker 11

And I guess I'm just wondering, to what degree you might have factored in that There were some competitors that either closed up shop or sort of temporarily, but would be coming back. And so Is there a factor in there when you think about market share next year compared to this quarter? Or are you thinking that that's the Share this quarter was not impacted, didn't benefit from that at all. And then my other question is, it's just I'm wondering if you could give us a sense of Any difference in consumer behavior between an OSB customer and an iGaming customer? Because we can see the cumulative aggregate Revenues by state, but you would see kind of what's happening on a per person basis, just thinking about like any consumer behavior there, more strength or

Speaker 2

Yes, great question. I mean, on the first question, Probably the best way to think about it is the guidance kind of is implicitly just due to the methodology going to gravitate Towards a flattish share and it wouldn't necessarily be like a flat share to the moment, right? Because we're looking at Historical cohorts and seasonal data. So it really would encompass more of a steady state share over a recent period of time than like a point in time like this month share type of thing. So that's how I would think about it.

Speaker 2

And then as I noted, I think really the range itself contemplates a variety of different scenarios and competitive impacts, including any impacts that we might seek to share to customer behavior. But Really based on historical data, we feel like we have all those scenarios properly encapsulated in the guidance range. So that's really how I think about it. And Really, I think there's also an element of just us having confidence that Customers in our cohorts have been sticky through multiple waves of competition and, flat share to me would be a disappointment. We've been gaining share.

Speaker 2

I expect us that our team is going to be dissatisfied if we don't continue to gain share. That doesn't mean that we're necessarily going to guide to that. As I noted, we're not. But in some ways, you might think of flat share as actually a disappointment in some You know, kind of impact that we weren't anticipating in that sense. But, I think for us really the goal is always And I think it's just a matter of how we forecast in the guidance methodology that we choose that you end up with the sort of flattish share implicit assumption in there.

Speaker 2

And I'm sorry, what was your the second question was on Igaming and OSB customers, I think?

Speaker 11

Yes. Kind of the consumer behavior, if one or the other is looking a little bit different in the last few months?

Speaker 2

Yes. The key difference between the iGaming and OSB customer is really the OSB customer is very seasonal and event driven. There are Certainly, people that bet on sports throughout the year, but the fact of the matter is that the sport calendar changes throughout the year. So you're just going to have more betting in times of heavy Like right now versus dead of summer or something like that. IGaming is kind of there and is the same all the time.

Speaker 2

So while certainly we have Overall activity differences because more customers on the platform for sport mean more cross selling to iGaming. On the individual customer basis, their behavior isn't going to change a whole lot There's some seasonality to it, but people tend to during holiday times have more downtime and things like that. But it's much more, much less pronounced And the OSB customer are much more steady throughout the year.

Speaker 11

Okay, great. Thank you.

Operator

One moment for our next question. Our next question comes from Bernie McTiernan with Needham and Company. Your line is open.

Speaker 12

Great. Good morning. Thanks for taking the question. Revenue growth has just been really explosive over the last couple of years, but the guidance for 2024 has The year over year growth stepping down. What are some of the tailwinds that have been supporting the revenue growth slowing as we move from 2023 to 2024?

Speaker 2

Yes. I think it's really just the size of the base increase. I mean, if you look at the absolute revenue growth, it's actually close to $1,000,000,000 in our guide for next So very healthy growth. Just certainly as the base gets bigger, that percentage is going to be harder to keep in the 50%, 60% plus range. So I think that's really the big thing.

Speaker 2

Obviously, there's an effect on new states that can Either increase or if there's a lack of new states decrease that. So that's something as you think about long term TAM always to keep an eye on. But I think really what we're seeing next year, because we still do see very healthy growth across all of our state cohorts, it's just a matter of we're Coming off of a very large base of revenue and adding $1,000,000,000 of revenue doesn't give the same percentage or nearly $1,000,000,000 I should say, doesn't give Same percentage increase as it did in the past.

Speaker 12

Understood. Thanks, Jason.

Operator

One moment for our next question. Our next question comes from Grant Montoya with Barclays. Your line is open.

Speaker 10

Hey, good morning, everybody. Thanks for taking my question. So just one on iGaming, another quarter of sequential market share growth there. I'm curious if If you call out sort of your OSB share, OSB momentum cross sell as the main driver of that sequential share lift, How much growth in comparison to that are you getting from penetration in the Golden side and sort of getting more of those older customers, those slots customers and growth from that angle. And if you saw any benefit in the quarter From disruption at a certain competitor that had headline stuff in the news.

Speaker 2

Yes. So I think really the iGaming business, I mentioned this a Few questions ago, I think is under talked about. It's just such a strong business, steady growth, and we just continue to be able to cross sell better and Acquire more efficiently as we get more data and test more things. So I think there's a ton of upside as you see more states legalize iGaming there. We don't have We acquire a lot of the customers because such a large percentage of our share does come from cross sell.

Speaker 2

The other thing I note that we got a little bit of boost John, we launched Golden Nugget in Pennsylvania. That was the first state that Golden Nugget is actually on the DraftKings platform. So Very excited about that. We saw some really strong early results there and continue to feel really positive on the trajectory there. And then we do expect to see more benefit from continuing to migrate Golden Nugget in other states.

Speaker 2

Pennsylvania was a new launch. We Haven't migrated any states yet. That's all on the docket over the next couple of quarters. We're going to migrate pretty much we're going to migrate every state, for Golden Nugget Online Gaming. So, Really, I think that's something that also contributed to a little bit of the share increase and hopefully there's some more juice in that as we migrate these other And continue to optimize the IK payments.

Speaker 2

Great. Thank you.

Operator

One moment for our next question. Our next question comes from Clark Lampton with BTIG. Your line is open.

Speaker 6

Thanks. Good morning. I appreciate the question. I actually wanted to follow-up on some of the comments that were just made around Golden Nugget. I know you launched the standalone app in Pennsylvania.

Speaker 6

I suspect, kind of as you were saying, that means the Tech Stack migration is done or at least most of the heavy lifting It's behind us. If I heard right, it also sounds like with direct cost guidance next year that there really isn't much in terms of savings contemplated. Could you remind us, I guess, as you're moving the legacy product onto the Golden Nugget stack, is this something that's really going to benefit Share, are there other efficiencies that accrue to you guys, I guess, from moving on to that stack? Or is it mainly, I guess, so to the share and then exploring, I guess, sort of first party versus third party product mix opportunities? Thanks.

Speaker 2

Yes. So it's a great question. We actually will get cost of goods sold synergy. There's some Timing things with contracts that, have certain timeframes that affect the timing of when those synergies will actually fully What we determined was they're not very material to next year, but they are there and we do expect to see some impact On the cost savings side and then as you also alluded to, I think there's some upside on the revenue and share side as well, Given that we have pretty consistent data showing that our product and our platform converts new Better monetizes existing customers better retains better. So really feel like there's some upside there as well.

Speaker 2

And Golden Nugget is one that same kind of story. We haven't built in a massive share increase or anything there. It will be interesting to see what we can do with that brand. Obviously, we have high hopes and are very excited about the migration coming up. And hopefully, there's some upside in For us, it's certainly been a contributor.

Speaker 2

I mean, as I noted, we did gain share on the DraftKings brand too. But when you combine the two brands, we're almost at 30% share now in gaming, which is if you think about where we thought we could cap out a year or 2 ago is lower than that. So, we're pretty bullish on the iGaming opportunity and Feel like lots of exciting potential tailwinds in the 2024 product roadmap there.

Speaker 6

Does it enable you guys to be a little bit more aggressive, I guess, with first party products next year also? Or should we think about, I guess, sort of the same Relative mix that we saw sort of this year and in the past?

Speaker 2

I mean, certainly as the iGaming business grows and you can amortize those investments over a much larger Revenue base is going to make more and more sense to invest in 1st party products and bringing more and more things in house even on some of these tail games and things like long I should say and things like that. So, iGaming is such that we'll always have 3rd party partners. There's just certain content, whether it's We don't have the rights to or otherwise that you want that others have. But I think as we continue to be able to build that base, and have a larger revenue base To amortize our product investments over, it's going to make more and more sense to try to bring some of the longer tail games in house. And Of course, we're always and that hasn't changed and won't change trying to innovate and come up with new games that are differentiated and gain market share and also will have the effect of, of cannibalizing 3rd party games as well.

Speaker 2

So that's always something we're doing. But I do think that as we increase the size of it, there will be just an economic Argument that emerges on some of the longer tail games, it doesn't exist today.

Speaker 6

Yes. Makes sense. Thank you.

Operator

One moment for our next question. Our next question comes from Michael Graham of Canaccord. Your line is open.

Speaker 13

Thank you. I want to follow-up on the product development topic for a minute. You've had such a great pace of innovation Over the last couple of years like can that accelerate over the next couple? And related to that, one of the things we've seen historically from the Great big tech giants, I'm thinking like Netflix, Google, Facebook, they've been able to institutionalize Engineering led product development ethos that has really enabled them to kind of extend leadership over time. I'm just wondering How prominent that is in your strategic thinking?

Speaker 2

I mean, that is absolutely essential on our strategic thinking. We've said pretty much From day 1, that product wins and that is 1st and foremost the thing that we feel like has to be At the absolute forefront of the industry in order to be the best. Obviously, there are a lot of other things that go into customer experience, marketing, analytics, many other elements Important and we invest across those 2, but really the heart and soul of the organization is product and technology. And I think you're You're right that, that's something that we really feel like over the last several years has been a differentiator, really from day 1 has been a differentiator for us. And as far as the first part of your question, the pace of innovation, I actually expect it to increase.

Speaker 2

A lot of the work that we had to do once We had acquired our own technology platform and then some of the cleanup afterwards. That was really ongoing until late into 2021. So It's really been less than 2 years that we've kind of had just full runway,

Speaker 6

not to

Speaker 2

mention the fact that there's many other infrastructure investments that We had to make over time that now positioned us to just more rapidly innovate. So we're always balancing, whether it's implementation AI to improve developer efficiency on our PAM. We're building out an API driven structure so that Teams outside of the PAM team can unlock different features in there and integrate products in a better way. We're just always trying to think about not only how do we innovate for Customer, but also velocity and pace of innovation. How do we make our teams more efficient?

Speaker 2

How do we make them quicker? And some of that, as you said, is cultural for sure. But there is also an infrastructure investment piece of just making it easier. I mean, as it gets the organization gets larger or more jurisdictions, the natural tendency So there's just a constant, I think push on our end to not accept that and to try to drive more efficiency so that we can innovate at a faster velocity.

Speaker 13

Thank you, Jason.

Operator

One moment for our next question. Our next question comes from Jed Kelly with Oppenheimer. Your line is open.

Speaker 12

Hey, great. Thanks for taking my question. Just going back to hold, as you engage more customers playing more sports, Layer on more Parlay products. Does that reduce the volatility around your ability to forecast hold? Like does it become more consistent?

Speaker 12

And then just in line just with the 4Q guidance, does that assume that the percentages you saw, the whole percentages in October, do you expect that to

Speaker 2

So on the first question, I think really just as we get more data and as the market matures, everything, whether it's Hold rate or any other metric of the business, the forecasting gets tighter and tighter, which is great. I do think We're already pretty tight on hold forecast in terms of expected hold. There's just sport outcome. And as far as your question on mix and how it affects it, Really, as time goes on, having more variety, meaning more sports, more different types of bets will certainly make it more steady. So As live betting grows, as more sports get adoption, all of that, it's exactly what you think, like the more concentrated And one type of bet or one sport anything is, the more susceptible you are to sport outcome effects.

Speaker 2

So as time goes on and as the base Sure. And as more people play more things and try more products, we do expect that volatility to decrease. And also as we see more iGaming, I Same thing. More iGaming states will also just smooth it out because the hold rate does not vary as much on iGaming based on any sort of outcome driven event. So That's a couple of ways to think about it.

Speaker 2

As far as the Q4 guide, we've assumed structural hold. It's the same. We did see some favorable support outcomes kind of the opposite of 3 in October. So I wouldn't necessarily say the exact hold in October is what we expected the remainder of the year, but we believe that structural hold will be In line and we sort of always take an outcome agnostic approach when we're forecasting, but then appropriately build into our guidance range, All sorts of different scenarios that might occur.

Speaker 12

Thanks. Great quarter.

Operator

Thank you. One moment for our next question. Our next question comes from Ryan Sigdahl with Craig Hallum Capital Group. Your line is open.

Speaker 3

Hey, good morning. DraftKings hasn't participated directly via its DFS business, but any thoughts on Michigan, New York, Florida, All cracking down on Pick'em and player props via DFS and some of your competition there? And secondly to that, could that potentially

Speaker 2

It's a good question. I definitely think that Cracking down on the legal market is a good thing for us. And the AGA, I believe, I hope I don't mess this number up, I said that just in legal betting states alone, there's about $4,000,000,000 right now of revenue leakage that's happening into the illegal market. So it's a real issue and Probably costing states close to $1,000,000,000 in tax revenues at this point. So, definitely a big deal and something that we're happy to see Dave's doing, but we haven't really thought about any direct impacts on the business.

Speaker 2

It's not something we contemplate in our guidance. And I think depending on the situation, there could be potential for some of that revenue that's leaking into the legal market to come back into the legal market. And if that happens, we We certainly hope that we get our fair share of it.

Speaker 3

Impressive performance, guys. Good luck.

Operator

Thank you. One moment for our next question. Our next question comes from Jordan Bender with JMP Securities. Your line is open.

Speaker 12

Great. Good morning. For the market share gains in recent quarters, I was wondering if you guys had a sense of how much of that is true player conversion coming from other apps versus Finding new players in existing space versus even hold rates pushing up GGR share and just overall growing the market? Thank you.

Speaker 2

I think it's a combination of multiple things. I mean, internally, we see all of our metrics going in the right direction. Retention rates are up, hold rates up, Promotional reinvestment rate across OSB and I Gaming is down. All of that independent of any sort of Competitor of wallet, dynamics, all of that is true. So, just sort of based on that math, yes, That certainly led to a reasonable amount of the share increase.

Speaker 2

It's really hard to say, how much of it's that, how much of it's new Players coming into the market and not disproportionately acquiring those players relative to competition and then retaining those players better relative to competition versus truly Stealing players from competitors. We don't really know. We certainly know that, among Some players that they have tried multiple apps and, we think that getting them to decide that we're the best and we're the place they want to concentrate their play is an advantage, but it's Hard to say historically how much of share gain has been driven by one factor or another.

Speaker 12

Great. And then for my follow-up, Jason Park, I I believe you said you're assuming next year 5% legalization that's legalized, not launched yet. Is that to say you guys are moving away from assuming incremental Within your revenue guidance?

Speaker 3

That's correct. Our revenue guidance includes Assumed launches of states that in total represent 5% of the population.

Speaker 12

Thank you very much.

Operator

One moment for our next question. Our next question comes from Stephen Glenglow with Citi Cowen. Your line is open.

Speaker 8

Yes, thanks for the question. DraftKings took pretty significant OSB share in New Jersey in Q3 and the state license, I think, got to like almost 49%. Can you just provide some more color on what's driving that? What you're doing with the VIP activity there? If you can quantify on the revenue upside for the How much was driven by New Jersey?

Speaker 8

And then do you expect this market share to be maintained in Q4 and 2024? Thank you.

Speaker 2

Yes, very good question. New Jersey has been a real great story for us. It was our first state. It continues to be one of our largest states. But Early on, we got off to a hot start and then we candidly in our first state had a weaker product at that point and we lost a lot of share to the competition It ended up dropping down quite a bit relative to where we are today.

Speaker 2

And I think the team is really focused on building out that Great experience driven by a great product and we're winning across segments from the most casual to VIP in New Jersey. All of our segments are performing well. Customer acquisition continues to be very strong in New Jersey. Whoever thought that once New York and Connecticut and everywhere else and then Pennsylvania launched that New Jersey would Not have any growth anymore was wrong. Continue to see quite a bit of customer acquisition and growth in New Jersey.

Speaker 2

And iGaming has Been around for like a decade there and continues to grow at a steady clip. So I think when you kind of put all that together, New Jersey has obviously always been a big focal point And we knew that there was a lot of opportunity to recapture there given that it was our first state and we've made so many enhancements to our products in some of the early days and We're very grateful that many customers have given us a shot and have seen a lot of the product and experience improvements that we've made.

Speaker 8

Thank you.

Operator

One moment for our next question. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Speaker 9

Thanks for taking my question. Understanding that the focus remains in North America, given some settling out in some international markets, given regulation changes, Has anything changed just in terms of the risk reward, kind of looking outside of North America, given where your product is right now and where the balance sheet is?

Speaker 2

We obviously are aware of the global gaming market. And I think long term, there's a lot of upside for us there. We believe that Product and technology investments and other operational infrastructure, marketing infrastructure we're building will be very portable throughout the globe. That said, We also understand that the largest market in the world is developing right now, and we're in a really strong position. And a lot of what we feel has helped us and benefited us has And our singular focus here.

Speaker 2

So, that's something that we're very cognizant of. And, as we think about longer term It's really important that we always keep that in mind and continue to make sure that the focus is here. And if we can figure out over time a way To find other ways to capitalize on the global opportunity, we will, but certainly would never do so at the expense of our focus in the U. S, which obviously we think is Just the tremendous opportunity in front of us. And as I said, I think a lot of what's benefited us is having that focus and we don't want to give that up easily.

Speaker 12

Thanks. Appreciate it.

Operator

One moment for our next question. Our next question comes from John DeCree with CBRE. Your line is open.

Speaker 14

Good morning, everyone. I've covered a lot of ground. Maybe just one question on maybe some insights into consumer behavior From where you guys sit, I don't know if you could talk a little bit about what you're seeing as states mature versus new states that launch The customer evolves in terms of average bet or average deposit size, those kind of metrics that you look at and How they've been trending? I guess with the notion that new states are you're penetrating quicker, they're reaching contribution Quicker, are they just starting at a more sophisticated or more mature point than older vintages? So kind of a broad question, but curious if you Can you talk about any of those trends?

Speaker 2

Yes. It's a really fascinating question and there's a lot of different Data and insight that can be gathered from looking at all the different states, it's an interesting one. If I kind of to more stay at a high level answer your question, as you noted, the penetration rate has definitely increased penetration The adult population in terms of how fast that's happening. As a result, you might imagine, we're acquiring a larger base of customers, Going deeper, therefore, also means that we're not just acquiring some of the same types of customers we acquired very early in other markets. We're also acquiring some of the that we acquired later in other markets.

Speaker 2

But overall, it's still that initial cohort is incredibly valuable. And We've really seen most of that show up in increased CAC efficiency just because such a large influx of new customers has really brought the CAC down for us A lot of the new states in the early days. So that's something we're definitely seeing. And as far as the other dynamics go, there's also improvements in things that we've made to Product and the way that we do CRM that have affected things. So we're seeing customers in new states come in generally with a higher starting parlay mix because It's easier to kind of get people accustomed to coming in on some of these new products we've launched versus older states, getting people to Retrain behaviors to try different products when they're used to using the product in a certain way.

Speaker 2

And I think that has the opposite effect. It increases the immediate monetization and things like that. So, a lot of moving levers there, but overall, I think you're kind of seeing those 2 high level factors impact things, the product Improvements in CRM, improvements we made are increasing some of the metrics coming out of the gates, but you're also just seeing so much faster ramp in the population penetration that we're Capturing more casual customers with some of the more diehard customers in there in that early phase as well. Both of them are, I think, overall, resulting in a net very positive impact For us, we're seeing great caps relative to where we saw in the early days of launching new states and the LTVs continue to be incredibly strong from those early cohorts.

Speaker 14

Understood. Thanks, Jason. I appreciate the additional color.

Operator

Ladies and gentlemen, this concludes the Q and A portion of today's conference. I'd like to turn the call back over to Jason Robbins for any closing remarks.

Speaker 2

Thank you all for joining us on today's call. Really excited about 2023 Shaping up to be an excellent year for DraftKings. So proud of the team for our Q3 results and looking forward to close the year with Bang And really equally, if not more excited about 2024 and beyond, lots of great things ahead on the product side and Also very excited to be having a very meaningfully positive adjusted EBITDA year for the first time. So lots of good milestones ahead. We're excited about the opportunity and we look forward to sharing additional insights at our Investor Day on November 14.

Speaker 2

Hope everybody has a great rest of the next couple of weeks. We'll see you again on November 14. Thanks.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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ASML Q3 2023
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