NRG Energy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2024

There are 15 speakers on the call.

Operator

Good day, and welcome to the DraftKings Q4 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Stanton Dodge, Chief Legal Officer.

Operator

You may begin.

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.

Speaker 1

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 annual report on Form 10 ks filed with the SEC. 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, who 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. Last year at this time, we shared our first end of year letter. In that letter, I described DraftKings as a company that would thrive when business conditions became more challenging. I wrote that our culture and people positioned us well to execute, which effectively made 2023 a proven year for DraftKings. As you've seen, our team rose to the occasion.

Speaker 2

Revenue increased 64% year over fiscal year 2023 even with very customer friendly outcomes in late November. More importantly, we improved adjusted EBITDA in fiscal year 2023 by nearly $600,000,000 year over year and posted our first two adjusted EBITDA positive quarters in company history. Beyond our financial highlights, we improved our product and customer experience and also made a number of operational improvements to better serve our customers and operate more efficiently. We gained share, including taking the number one position in combined OSB and iGaming gross gaming revenue share in the U. S.

Speaker 2

For the Q3. We focused on our core value drivers and empowered our leaders to set aspirational goals and drive their teams to meet and exceed those goals. We leaned heavily on data and analytics, giving us the confidence to cut expenses in some areas and double down in others. This year, our focus will largely be on essentially the same items. We are still in the early innings of the U.

Speaker 2

S. Online gaming industry and there is still share that can be gained through innovation and operational excellence. We will continue to focus on product and customer experience as key differentiators. We will continue to leverage our scale to invest in important areas while also focusing heavily on efficiency and optimization. And we will continue to focus on the core value drivers of our business.

Speaker 2

Having superior lifetime values and customer acquisition costs is the ultimate competitive advantage and we have a number of initiatives planned to enhance both in 2024 and beyond. We also continue to face new competition as we consistently have over the years. In the past, we've been able to drive growth and gain share while simultaneously becoming more efficient. But importantly, we do not take any of our recent success for granted. We have the right team in place and are working hard to maintain our edge.

Speaker 2

Going into 2024, there are 3 main opportunities on my mind. The first is continuing to foster our entrepreneurial culture and empower our great people to pursue big opportunities. The second is developing our next crop of leaders and giving them opportunities that allow them to stretch, grow and contribute at higher levels. The third is leveraging our free cash flow, which we expect to generate in order to maximize value for our shareholders. We are excited to have an agreement to bring Jackpocket into the DraftKings family and enter the rapidly growing U.

Speaker 2

S. Digital lottery vertical. Importantly, this is not just a new product for our customers to enjoy, but really a way to strengthen our core OSB and I gaming position in the U. S. By optimizing our overall LTV and CAC.

Speaker 2

We look forward to working together to provide tremendous and differentiated value to the combined customer base. In closing, 2023 was a fantastic year for DraftKings, yet I believe that 2024 will be even better. I am unbelievably excited about the plans we have in place to continue serving our customers and growing our business. Most importantly, I am excited about the quality of the team we have in place and I have no doubt that we will continue to execute very effectively against our key priorities this year. We will work tirelessly to produce great results and build on the incredible momentum we generated in 2023.

Speaker 2

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

Speaker 3

Thank you, Jason. I'll hit the highlights, including our full year 2023 Q4 performance and our updated guidance 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. In fiscal year 2023, revenue grew 64% versus 2022 and adjusted EBITDA improved year over year by nearly $600,000,000 versus 2022, which resulted in year over year adjusted EBITDA flow through percentage of 40%.

Speaker 3

Adjusted gross margin increased nearly 200 basis points as we delivered higher sports book hold percentage and improved our promotional reinvestment for OSB and iGaming. Adjusted sales and marketing expense grew 3% as we reduced marketing in our more mature states and transitioned further into more efficient national marketing. In the 4th quarter, we continued to generate great performance across our core value drivers and produced more than $1,200,000,000 of revenue and $151,000,000 of positive adjusted EBITDA. Better customer acquisition, retention and engagement resulted in higher than expected handle for the quarter and positively impacted revenue and adjusted EBITDA by $93,000,000 $42,000,000 respectively. Structural sports book hold percentage was 10.4% and well ahead of expectations as we continue to improve our parlay mix and optimize our trading capabilities.

Speaker 3

This trend positively impacted revenue and adjusted EBITDA by $53,000,000 $38,000,000 respectively. As you are well aware of by now, sport outcomes were very customer friendly in the Q4, primarily in the final 2 weeks of November, while December was consistent with expectations. Our actual sports book hold percentage for the Q4 was 9.2% due to sport outcomes, which were a headwind to revenue and adjusted EBITDA of $175,000,000 $126,000,000 respectively compared to our expectations. 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. In November of 2023, we guided fiscal year 2024 revenue of $4,500,000,000 to $4,800,000,000 and adjusted EBITDA of $350,000,000 to 450,000,000 dollars Today, we are improving our fiscal year 2024 revenue guidance range to $4,650,000,000 to 4,900,000,000 and our adjusted EBITDA guidance range to $410,000,000 to $510,000,000 Customer acquisition, retention and engagement in Q4 and Q1 to date has continued to exceed expectations due to ongoing product innovation and marketing optimization initiatives.

Speaker 3

These trends account for $90,000,000 of the revenue improvement and $35,000,000 of the adjusted EBITDA improvement. Higher structural sports book hold percentage as a result of continued year over year bet mix improvement as well as improvements in trading and risk management accounts for $35,000,000 of the revenue improvement and $25,000,000 of the adjusted EBITDA improvement. From an intra year perspective in 2024, we expect 1st quarter revenue to increase approximately 45% year over year and second through 4th quarter revenue to each grow year over year in the 20% to 30% range. We expect adjusted EBITDA to be approximately breakeven in the first quarter, nearly $150,000,000 in the second quarter and above $300,000,000 in the 4th quarter. Importantly, we are also now guiding free cash flow.

Speaker 3

We expect to generate between $310,000,000 $410,000,000 in free cash flow in 2024 based on approximately $120,000,000 of annual CapEx and capitalized software development costs as well as a modest source of cash from changes in net working capital and interest income. Therefore, we will end the year with approximately $1,600,000,000 of cash before using approximately $413,000,000 to fund our proposed acquisition of Jackpocket. Looking further ahead, at our Investor Day and the letter we released last night, we expect to generate positive and increasing free cash flow starting this year and are beginning to explore ways to optimize our capital structure. Our expectation for sustainable revenue growth and adjusted EBITDA margin expansion over the next several years offers us a number of options to maximize long term returns for our shareholders. That concludes our remarks and we will now open the line for questions.

Operator

Thank you. Our first question comes from David Katz with Jefferies. Your line is open.

Speaker 4

Hi, good morning, everyone. Thanks for taking my question. Good morning. What I wanted to morning, and congrats on the quarter. So I wanted to delve a little further into sort of what the next phase really looks like.

Speaker 4

And if you could talk about the kinds of product advancement, the kinds of features and functionality where your focus is in play, part of what's next for domestic sports betting, Where is it all going to come from, I suppose?

Speaker 2

It's a very good question, very big picture. I think it sounds like product is sort of part of your question. I definitely think in play is a huge opportunity as you noted, Still very early stages of that developing and I think there's a lot both on the product side and also on the broadcast side that can be done to make that experience better and more accessible to or at least more interesting to a larger audience. I still think there's a lot of room to move on just organic growth of parlays and other sorts of things. I mean, remember we just launched Progressive Parlay recently, so that product is still very early in its development and should continue to drive strong parlay mix increase.

Speaker 2

And then there's a number of other initiatives that we have that we'll be rolling out throughout the year that I'm not going to steal my product team's thunder on, but we have lots of good stuff planned. I think really key thing to remember is it's still super early days. A lot of the things that we think will happen over the coming years will greatly change the way that the product and the customer experience works. It's going to evolve quite a bit. And I think it's a pretty exciting time and, still very early stages, so lots of room to grow.

Speaker 4

Thank you. And if I may just follow-up quickly with respect to Jack Pockets, it seems like a nice business that generates a little bit of return, but more as a customer acquisition vehicle. As we think about these cash allocation decisions going forward, are there more things like this that are contemplated or is it more a function of capital structure and returns? And that's it for me. Thank you.

Speaker 2

Yes. I think it's more the latter. There's all sorts of different options that we're looking at for, how to

Speaker 4

maximize shareholder return with the capital we'll be

Speaker 2

accumulating on our balance sheet. And shareholder return with the capital we'll be accumulating on our balance sheet. I think what you will see though is we're going to stay very squarely on strategy. We talked about how Priority A is winning in the U. S.

Speaker 2

And I think Jackpocket is absolutely in line with that. Lottery is the oldest form of gaming in the U. S. It's been around forever. The audience is massive.

Speaker 2

And as you noted, it's a very efficient way to acquire customers in mass at extraordinarily lower tax than what we see in the other forms of online gaming. And we know from overlap analysis that we did that those customers will cross sell very effectively too. And from the overlap analysis we did, we saw that the customers that overlapped were about 50% higher spend on DraftKings OSB and iGaming products than customers who didn't. So lots of reason to believe that not only is there cheap acquisition, but there's also high LTV customers that we can crossover. And I think that's a really core thing that DFS provided for us as an advantage too.

Speaker 2

So if you look at kind of the playbook that's worked for us, entering new states, having a built up database, having an active base of customers that we can cross sell, I think this is doubling down on that.

Speaker 4

Thank you.

Operator

Thank you. Our next question comes from Shaun Kelley with Bank of America. Your line is open.

Speaker 5

Hi, good morning, everyone. Jason or Jason, I was hoping you'd comment a little bit on just how the Q4 played out from a promotional activity perspective. So overall, we didn't see quite the sequential improvement in promotions that we saw a year ago between the Q3 and the Q4. So kind of what are we seeing as the business levels off there? And just if you could characterize a little bit given plenty of nail biting out there strategically about new customers, launches, sport mix changes obviously between NFL and NBA.

Speaker 5

Just help us kind of characterize the landscape as you saw it and we move through 4Q and into January?

Speaker 2

Yes. So I mean there's a couple of things at play here. First, for a fixed amount of promotions, obviously, lower hold due to sport outcomes. And I mean, we had the worst 2 week stretch of sport outcomes from a dollar cost basis that we've ever had as a public company. So that's going to just naturally make up.

Speaker 2

But if you look at sort of the adjusted for outcomes numbers, it was down 200 basis points to 300 basis points year over year. I think also we had a blowout quarter from a customer acquisition perspective. So you're going to have a little bit higher rate when that happens. And if you isolate to the retention side to existing customer promotion, those were down even more significantly year over year. So we're actually seeing really good trends on that front, playing out pretty much exactly as we expected.

Speaker 2

And I think where you're seeing some noise is just from some of the outcomes and also a blowout quarter from customer acquisition. But even despite all that, when you adjust just for the outcomes and leave the acquisition numbers in there, it was still 200 to 300 bps lower year over year.

Speaker 5

Very helpful. And just for my follow-up, if we could talk about Jackpocket, the business today, our belief is probably losing a little bit. Just trying to kind of get a sense of contribution as we move out and you actually consolidate this business probably more in 2025. What's your sort of risk tolerance around what you'd be willing to invest or commit to this business again from a capital or loss perspective for those couple of years while you want to ramp it? Because it seems like at least in the forecast that you've given, there's a heck of a lot of organic growth that you can also attribute to this business.

Speaker 5

So help us balance those 2 and maybe losses or potential investment in 2025.

Speaker 2

Yes. First of all, regardless of when this closes, if it closes in 2024, it will not have a material impact. It will not cause us to change our guide. So let me be clear on that. We're talking low single digit losses this year.

Speaker 2

And I think next year will be a positive year. I think the real question is how much depending on timing of close synergy can we realize next year and how much upside is there. But I don't expect this to be any sort of drag. If anything, it'll be I think some pleasant upside, but we're just hesitant to kind of commit to timing of synergies given that we don't have a definitive date of close yet. So really I think that's the question for 2025 is, is it going to be slightly positive or are we going to be able to capture real meaningful synergies and start to accelerate some of the expected synergies that we have pegged for 2026 currently.

Speaker 2

And that's currently not something that we really can peg given we're not certain of the closing timing. But just to be completely clear, this will not change our guide regardless of when we close in 2024 and there should be, if anything, a positive, certainly not a drag on EBITDA in 2025.

Speaker 5

Thank you very much.

Operator

Thank you. Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open. Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Operator

Our next question comes from Joe Greff with Morgan Stanley.

Speaker 6

This is Joe Greff from JPMorgan.

Speaker 2

Depending on how you want

Speaker 6

to answer this, what was the parlay mix in the Q4, if you want to look at it by handle or GGR or number of bets? What's the assumption for parlay mix growth for 2024? And then maybe another way to answer the question too. If we look at Illinois, the only state that really details, parlay activity, you no matter how you cut it, you had a huge spike in what was reported for parley bet mix or parley handle mix in December versus November. Specifically, what's going on there?

Speaker 6

And is that representative of other states with respect to, Parley activity?

Speaker 2

Yes. So for the Q4 we were around 30%. We think there may have been an error in the Illinois report for December that overstated it. So that's something we're still digging into. But it was around 30% for the Q4.

Speaker 2

And we expect continued increase this year. We haven't put any exact numbers out for what we are forecasting parlay mix to be. I think some of this somebody mentioned in game betting earlier, there's so many moving parts and people have to remember as different levers for monetization are increasingly being adopted by consumers, you're going to see lots of things moving. In game betting of course is going to have less parlay mix just because of the rapid nature of it and therefore may have lower hold, but it's still a very good thing for monetization. So there's something we have to always keep in mind.

Speaker 2

Obviously hold and parlay mix are big levers, but it's not the only lever. Those are not the only levers that we have increase monetization. But to answer your question for Q4 is 30%, and we're going to dig in and figure out what's going on with the Illinois data, but that looks a little off to me. Okay.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from Robin Farley with UBS. Your line is open.

Speaker 7

Great. Thanks. I wanted to go back to the Jack Packing acquisition for a moment just to kind of understand the opportunity. It sounds like there's already pretty significant overlap between the 2 customer bases. So is the idea that is the opportunity to penetrate even more than that significant amount or is it more in new states where jackpots operating and you're not there yet, although that would seem like a relatively small number of states.

Speaker 7

So just wondering if you could help us think about since there's already so much overlap where the incremental comes from? Thanks.

Speaker 2

Yes, it's a great question. I mean first, the fact that there's overlap shows us that the customers are very similar type of customer. And we looked at a number of different data points to verify that from demographic data to other behavioral and psychographical stuff. I think the idea is that overlap was with 0 CRM or actual effort put towards cross sell. And it's nowhere near the cross sell that we've been able to achieve from OSB to iGaming.

Speaker 2

So we think there's a ton of upside there with real meaningful effort put towards that and that's something we do best. We feel like we have the best in the industry cross sell rates. And I think whether it's DFS to OSB and iGaming or OSB to iGaming or any of the above, we've been able to achieve much higher cross sell rates through our efforts. So I have to imagine there's a ton of upside there. And the other thing is if we're seeing natural overlap with our audience, probably many of those are still using competitor products and not us.

Speaker 2

So I think there's also an opportunity to market more effectively in our database that may still be playing OSB and iGaming, but with competitors, maybe in the jack pocket database, I should say. So I think that's number 1. And then number 2 is, you're right, absolutely every new state that opens, this is just like DFS has been for us. We have this built in customer base. We know that there's tons of people around the nation who play live.

Speaker 2

One of the great things about this too is unlike OSB and iGaming, you don't need legislative in most states in order to get lottery, courier lottery, digital courier lottery launch. You need to get usually some kind of approval through the lottery and the executive branch, but you don't need legislative action, which makes it a much lower hurdle to get up and running in new states. And this is something of course that every state lottery we think would want. It will grow the lottery market, bring new customers in. So I think it's a great opportunity to get a product potentially in the vast majority of U.

Speaker 2

S. States. And you're absolutely right. I think as time goes on, if you like us believe that more and more states will

Speaker 7

in terms of your acquisition philosophy overall. Are you more likely to do things related to technology for your product? Or are you looking more for things like this that have to do with customer acquisition? Thanks.

Speaker 2

I think we feel pretty good about our technology stack. I think that there may be small bolt ons here and there that we think are helpful to enhance. But, I really think it's more about these kind of strategic moves that are going to help us win in U. S. Online gaming.

Speaker 2

And I think we're going to be super disciplined on M and A. I don't think you'll see us go in this rash of buying companies left and right. This is when we did a ton of diligence on. We underwrote it very carefully with very conservative, I think, assumptions. And, we feel like it has high potential to be a real home run.

Speaker 2

So, I think you're going to see us pursuing things like that that really make a lot of sense when you think about it. And I think you're going to see us continue to be super disciplined and you're going to see us look at all sorts of different ways to take the capital that we're accumulating and create shareholder value. This is M and A is not the only way to do it. There are many others. So, I think that's the best way to describe it.

Speaker 2

And I think it fits with how we're disciplined in general as a company. If you look at the deals we do on the business development partnership side, it's the same thing. We use a lot of discretion. We're very careful and we underwrite with a very strong analytic process and that's exactly how we approach this M and A deal.

Speaker 7

Great. Thanks very much. Thanks.

Operator

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

Speaker 8

Hey, good morning, everyone, and thanks for taking my questions. First one, just wanted to touch on structural hold. I think you guided to 10% to 10.5% for 2024. And I think that's about 50 basis points up year over year versus over 200 basis points in 2023. Now I get you're coming off a higher base, but I guess to what extent does this reflect some degree of conservatism?

Speaker 8

And are you seeing more casual betters come into your system, just as another competitor has launched and recently talked about growing the market there?

Speaker 2

I think first, I'm glad that you feel that there's some upside there. I do too. I noted this earlier. I think one of the reasons that we're a little cautious with hold is that there are other things you can do to improve monetization like pushing live betting more that might actually not increase hold, but still be very good from an LTV standpoint. So we want to make sure that we leave some flexibility for all sorts of different levers.

Speaker 2

And at the same time, I do think you're right. There's probably some upside there. Really for us, we've always had a nice mix of customers across the spectrum. And I do think in the last few months there's been more casual customers coming in, but there's been more customers of all sorts of spend and sort of across the spectrum of spend. So really not seeing anything tremendously different other than just really strong customer acquisition across the board, but I can't look at it and say it's skewing more casual or anything like that.

Speaker 2

It just seems like overall customer acquisition is just really strong right now.

Speaker 3

I would just add, Dan, our philosophy on guiding to hold rate has been that we should commit to something that we have empirically realized. So as you saw, structural hold in Q4 was better than we thought and that gave us conviction to increase the embedded hold rate in our 2024 guide. But to Jason's point, we've got a lot of work going on to improve that, but our philosophy has been only to commit to what we've empirically actualized.

Speaker 8

Got it. That's helpful. And then just for my follow-up, you alluded to some comments in the prepared remarks on optimizing capital structure. I mean, how should we interpret that? Are you kind of referring to maybe incurring some debt and maybe long term as you think about the company and maturing and becoming cash flow positive, how do you think about a healthy leverage ratio, what that might look like?

Speaker 2

Yes. I mean that is something that we're actively looking at right now. So we're still doing our work, but we'll have more to say on that in the coming months.

Speaker 3

Yes. I would just add, I mean, if you look at our cash balance that we forecasted $1,600,000,000 at the end of this year, before including the 400 $1,000,000 roughly for the acquisition of Jackpocket. And then our multiyear plan that we outlined in November, we're obviously going to be accumulating cash very quickly. So it's a great position to be in, and we're exploring all those options, Dan.

Speaker 8

Appreciate all the detail. Thanks.

Operator

Thank you. Our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Speaker 9

Good morning. I'm curious, can you talk about the recent hiring of Marie Donahue as Chief Business and Growth Officer? I'm wondering how does her prior experience at Amazon Sports potentially impact DraftKings appetite to explore sports rights down the road?

Speaker 2

Yes. We're really excited to have Marie on board. I mean, she not only was at Amazon, she's at ESPN for many years and has an incredible reputation and really strong relationships throughout our ecosystem and industry. So very excited to bring her on. I wouldn't say this is any way a signal that we're looking at live sports rights.

Speaker 2

That's not something that right now is on our mind. But, I think she brings a number of different experiences and skill sets that will help us understand all parts of the ecosystem. And we do a lot of business with folks who own live sports rights. So, having that understanding from the other side of the table, I think will be very helpful in future opportunities that we explore negotiations. So very excited to bring her on and I think she's going to bring a lot of real depth of experience as well as a unique perspective to the team.

Speaker 9

Okay, cool. And maybe just switching gears, can you discuss any more detail around the growth that you mentioned in increased bet frequency versus the bet size averages in 2023 and how you're prioritizing one over the other to drive the 2024 results? Thank you.

Speaker 2

We really look at both. I mean for us it's about how do we first engage the customer. If we have the customer engaged that's table stakes. You can't do anything if you don't have that. So we start there.

Speaker 2

And then we really try to meet them where they're at. If they're looking for new types of bets and that makes it more interesting than great. If they're looking to try new sports then we try to provide that to them. And really I think for us it's about taking that customer and personalizing the experience. So they're sticky and they feel like it's easy and comfortable to use the app.

Speaker 2

So if you're always betting on basketball, we're going to show you basketball, but we might also show you other interesting basketball bets that we think you might find intriguing. So it's really something that I think starts with the customer and there's all sorts of different levers that you can pull and important thing is not force anything to try to just get the right products in front of the right customers. And I think we've done a good job doing that.

Speaker 9

Great. Thank you, guys.

Operator

Thank you. Our next question comes from Joe Stauff with SIG. Your line is open.

Speaker 10

Thanks. Good morning. Jason, I was wondering if you could, I don't know, size or discuss North Carolina opportunity. Do you see that similar to maybe in Ohio or Massachusetts? Or do you see it maybe like one of the maybe smaller new state launches?

Speaker 10

And then the second question I had was, I'm wondering if you could discuss just the differences in parlay penetration, right, between the new and, say, older states. And especially with that parlay penetration being lower in the older states, is how easy is that to ratchet that higher? And is it reasonable that it can get to those same levels that you see in the newer states? Hopefully that makes sense.

Speaker 2

Yes. So on the first question, I mean, I think you're right. North Carolina will be similar. It's a little smaller population wise than Ohio, but it's a top 10 state and we expect it to be a great launch and contribute in a meaningful way. And it will be pretty standard.

Speaker 2

I mean at this point our playbook is honed. So we're not going to approach North Carolina any differently and other than a few optimizations that we always make around the edges. But I think you're going to see North Carolina be a very similar state launch to the ones that you mentioned that we did last year. And as far as parlay mix, yes, you're absolutely right. Newer states, I think it's always easier when you have a product that you're introducing customers to for the first time to get them to try new things and harder to get them if they've been using the product in a certain way for years to change behavior.

Speaker 2

So it's more of a grind, but the trends are absolutely continuing every single year in the oldest states that we have from a parlay mix perspective. The trends are continuing to move in the right direction. So I think that's another one that will just be a continuous tailwind for us over time. And eventually, they'll converge with what we're seeing in the new states. It will just take a little longer.

Speaker 10

Thanks a lot. Thank

Operator

you. Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Speaker 9

Hey there. Can you hear me?

Speaker 2

We can hear you.

Speaker 9

Excellent. Thank you. Apologies for that. So on Jackpot, I guess one question, just is that going to stay a single app or be folded into the DraftKings app or both? And does the ramp to $60,000,000 to $100,000,000 in 20 6 assuming new states get approved?

Speaker 2

So for us, a lot of the questions around branding and product, we're still in the early stages, but the current plan is to keep it as its own brand and app. I think they've built a strong audience and a good brand and I think that we want to keep it. But obviously, we're going explore opportunities to integrate ecosystems, have all products available across all brands just like we do with GNOG. And I think Jackpocket has a casino that they so there's a lot to do there I think with their brand and we'll see how that all evolves over time, but that's the current plan. And then I'm sorry, what was the second question?

Speaker 9

The targets, if you look at the 2026 on China, not including the states?

Speaker 2

Yes. So no new OSB and iGaming states are included in our synergy or any other assumption. So we're just assuming current footprint. So a lot of upside if there's more OSB and iGaming states and cross selling more customers. We do assume that some more lottery states launch.

Speaker 2

As I noted earlier, it's a lot more seamless to launch a lottery state. You don't need to go through the legislative process. It's really more of going and working out a deal directly with the state. So I think that that's something that we feel a lot of confidence in. And if you look at their ramp over the last few years, they've launched a number of different states.

Speaker 2

And I think the hardest part really is because there's no legislative process, the hardest part is one they've already solved, which is building a technology solution that will scale and will be able to service multiple states and lots of customers at the same time. And of course remember there's already states that they're in that are big states. I mean Texas is a huge revenue state for them. And as we know Texas came very close last year to passing OSB and we're very hopeful they will this year. New York is a huge state for them.

Speaker 2

I think New York could do iGaming in the next year or so. So, that's another big opportunity. So really I think the best is yet to come. And as I said earlier, this is an asset that we believe will just continue to increase in value because if you're a believer, which I hope we all are that there will be more and more OSB and iGaming states. None of that is baked into any of our synergy assumptions.

Speaker 2

That's just all upside.

Speaker 9

That's super helpful. And maybe looping in Jason Park here on free cash flow. As we look further out, how do you generally anticipate free cash flow conversion evolving?

Speaker 3

Yes. So we outlined that for 2024, the free cash flow the delta between adjusted EBITDA and free cash flow net impact of CapEx, Cap Software plus some cumulative good guides across working capital and interest income is about $100,000,000 So that's a free cash flow yield on the adjusted EBITDA. I think about the components between adjusted EBITDA and free cash flow as being more steady over time. So as adjusted EBITDA grows, the free cash flow conversion percentage is going to go up, Stephen.

Speaker 9

Perfect. Thanks so much for getting me back in.

Operator

You got it. Thank you. Our next question comes from Bernie MacTernan with Needham and Company. Your line is open.

Speaker 11

Great. Thank you for taking the questions. Just to start, Jason, in the letter you said 87% customer retention over a 5 year period on average. I think that was better than what was quoted in the Investor Day a couple of years ago. Is that true that retention is improving that much or the number is not apples to apples?

Speaker 2

Yes. I think that is true. I mean, I'm not sure if it's exactly apples to apples. I have to go back and check. But absolutely, retention is improving.

Speaker 11

Okay. Any drivers to call out specifically? Yes.

Speaker 2

I mean, I think it's largely products. That's the biggest one. I also think that you're just seeing more and more natural organic growth as customers adopt more sports and things like that which just keeps them more sticky and active on the product. But it's really just the product advancement more than anything else. We also are constantly optimizing our CRM, so that's a big lever too.

Speaker 2

I should mention we're testing all the time, and finding wins. So I think between the product improving, greatly over the last couple of years and our marketing and, team continuing to test and learn. That's probably the biggest drivers. But there's a lot of things, right? I think our customer service has improved.

Speaker 2

We're I think there's just so many different dimensions across the product and across the entire customer experience that have helped us improve our retention.

Speaker 11

Great. And I know it's early days, but just wanted to get your thoughts on Barstools and what that could be as a customer acquisition and retention vehicle for you guys?

Speaker 2

Yes. We're very excited about that. We've worked with Barstool many times over the years and really thrilled to be working with them again. It's a partner that we know very well and have ton of data on. So we felt really good.

Speaker 2

I mean, this is about as good as it gets in terms of us having historical data and being able to underwrite this deal. So it's really exciting and we believe it will be a strong performer for

Speaker 11

us. Great. Thanks, Jason.

Operator

Thank you. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Speaker 12

Good morning. Thanks for taking my question. With respect to the gross margin guidance improvement for 2024, should we think about the 250 basis point to 450 basis point improvement more of just kind of a factor of the scale and the growth that you're going to have? Or are some of the, I guess, variable fees coming down and we should expect for that to continue, just given some of your partnerships and what you're able to do with payment processing and the like? Thanks.

Speaker 2

Yes. I mean, I think it's a number of different things that come with scale. Certainly, there are discounts that come with volume and scale on things like payment processing. Also, promotional mix continues to trend down as we increase the ratio of existing to new customers. And those things, I think, are the largest drivers.

Speaker 3

Yes, I agree. I think it's all of the above, Chad, where the improving promotional reinvestment rate due to our mix of existing versus new customers, our improving hold rate and then just ongoing optimization of our COGS vendors are all driving that improvement in gross margin rate.

Speaker 12

Okay, great. Thanks. And then we'll probably see the public release at least from New York, I believe later today, with respect to the Super Bowl outcome and kind of the hold rates there. But could you maybe give us a little preview in terms of how that fit into the Q1 guidance, how you guys did in the Super Bowl from a hold standpoint?

Speaker 2

Yes. So I think this speaks to the power of our work that we've done over the last few years to build out the same game parlay product and improve player props and really diversify the bets that despite the fact that the game outcome did not go our way at all, with the Chiefs winning, we ended up actually holding right in line with what we thought we would from a hold rate perspective. So, that was really I think a testament to the great work the team has done over the last few years to drive more diversified bets and more parlays.

Speaker 12

Impressive. Thank you very much. Appreciate it.

Operator

Thank you. Our next question comes from Barry Jonas with Truist Securities. Your line is open.

Speaker 8

Thanks. Can you talk about hold trends in iGaming? Do you think there's maybe a path to higher structural holds over time there?

Speaker 2

I think iGaming is a little bit different because it's so high frequency that it's really whole rate matters of course if you look at the math. But if you think about kind of a customer and how they behave, most people sit and they play for some period of time, and they have a budget. And I think that hold rate generally doesn't move more than 100 or 200 bps up or down in any given day. It's much more stable than sports hold rate because it's not outcome dependent at all. So it's always something to look at, but I think it's just a fundamentally different product.

Speaker 2

And it's same thing with like live betting and game. If somebody is betting on every play of a game, taking a super high margin doesn't necessarily make that person stick for as long as you can. So it's very different than I think somebody who's making 1 or 2 bets pre game or maybe they're making a lot of bets pre game, but they're betting sort of on a much longer cycle and the money isn't churning as quickly. That makes sense. Then just

Speaker 8

a follow-up on Jackpocket. I guess I'm trying to understand the risks to Jackpocket and the broader courier model. How do you see the potential for more states to legalize ILottery over time which would effectively remove the need for service fees?

Speaker 2

Well, I think that the real question is what can Jackpot contribute to the overall lottery ecosystem. And regardless of how it evolves, I think that their products, their customers are going to have a role to play. And this is something that any lottery would want, right? I mean, it would certainly make any I would think I shouldn't say any. I'm sure there's some around the country that for whatever reason don't.

Speaker 2

But it increases the lottery market and increases sales. So, it should be a no brainer I would think for the vast majority of state lotteries. And, I think Jackpot is very well positioned for however it evolves in I Lottery and other things. I mean they have an incredible customer base, a brand. This is I think something that actually could be a real tailwind for them depending on how it evolves.

Speaker 2

But whether it continues to be the current model or whether it changes, I think that Jack Pockey is extremely well positioned and is a very unique asset. Thanks so much. Yes. One other thing worth noting too is iLottery requires legislative action unlike what jack pocket does. So I think while it could happen, it's going to be a much slower burn.

Speaker 2

And I think the ability to get the digital lottery products that Jackpocket offers up and running in a number of states quickly is just much more seamless.

Operator

Thank you. Our next question comes from Jordan Bender with Citizens JMP. Your line is open.

Speaker 9

Great. Thanks for taking my question. So the Barstow partnership kind of highlights a theme of past years of using your marketing budget higher costs legacy partnerships that are going to roll off this year versus some of the opportunity for incremental marketing agreements like a bar stool maybe into 2024 and to 2025 and the positive ROI you might see off of those? Thank you.

Speaker 2

Sure. I mean, as you know, our relationship with ESPN ended late last year. So that is certainly one. But I wouldn't say there's like any one thing. We're constantly optimizing in and out.

Speaker 2

And actually most of our spend is not committed. Most of our spend is done through buying that we can pull in and out of it at any various points of time. So there's a ton of different levers that we can pull as we think about funding different agreements. And right now, I think given sort of the pace and cadence of what we expect state launches to be in 2024, barring some big surprise, I don't think you're going to see an increase in marketing this year. It's going to be much more of a focus on deploying our dollars much more effectively and I think Barstool is a great example of that.

Speaker 9

Great. And then on the follow-up on Jackpocket with CACs going down and LTVs going up, does the acquisition help your margin targets long term just for the core business? I think it's around 30% still. Like should we expect any incremental lift through this acquisition?

Speaker 2

It's a great question. At this point, we haven't dug in as much on that, but I think it's certainly something that you could see. I think that what we get with Jackpocket is the ability to acquire a lot of customers at a fraction. It's about 10% to 15% of our current customer acquisition costs. And that's something that obviously will provide a lot of levers for being able to optimize margin over the long run assuming that we can continue to do that which I have no reason to believe we can't.

Speaker 2

And I think on the other side of it being able to cross sell, it will provide some revenue lift. We don't view this necessarily. It's more like DFS, right? DFS is a nice little product makes money for us, but it's not something that is going to drive the massive top line growth. That's really the OSB and I gaming and it's more of a vehicle to be able to continue to acquire customers and engage customers in states that don't have that yet.

Speaker 2

And I think Jack pocket much like DFS will do the same thing. And also I think in states that do have OSB and iGaming it will provide us another vehicle to acquire cheaply. And one of the cool things I think is if you look at sort of where a lot of customer acquisition happens now, it's during these big moments, whether that's the Super Bowl or March Madness coming up or any of those things, it's those big tentpole moments. And what Jackpocket does is it creates more of those, big mass cheap customer acquisition opportunities during the year. And it could be any time, right?

Speaker 2

Like it could be the middle of August when there's suddenly a $1,000,000,000 jackpot and we're the only ones who are able to actually acquire en masse right before the NFL season starts. So it's those types of advantages I think that you're going to see really pay off over time. Great. Thanks, Jason.

Operator

Thank you. Our next question comes from Jed Kelly with Oppenheimer and Company. Your line is open.

Speaker 12

Hey, great, great. Thanks for taking my question. Has your structural holds improved, theoretically, you're going to be able to promote at a higher incremental gross dollar. So can you talk about what that does for retention? And then my follow-up is, we're seeing these new streaming services start to pop up.

Speaker 12

Can you talk about where the category leading gaming companies are going to be in terms of in this new streaming wave and sort of helping around the distribution? Thanks.

Speaker 2

Great question. So I think on the first one, it gives you the ability to do that. It doesn't mean we will. I think for us right now, we feel there's a lot of room to just continue to drive engagement through product and customer service and other things. But certainly having a little bit more cushion to be able to find other new sorts of promotions that works is another advantage.

Speaker 2

And, doesn't necessarily mean that that's going to be something we're looking to do. But, I do think it provides an ability to do so, which is certainly an advantage over time. And then on the streaming side, I think early to say. There's a lot of moving parts right now. And at the same time, we know obviously that there's a lot of disruption going on in sports media.

Speaker 2

Obviously, we've seen a ton of disruption and have seen kind of how the evolution of non sports media. And sports is still very much right in the thick of the evolution that's occurring. And it'll be interesting to see how it plays out. And no doubt there'll be opportunities created. And we're always looking for new partners and interesting ways that we can take advantage of any disruption happening in an adjacent market to us.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from Brandt Montour with Barclays. Your line is open.

Speaker 11

Hey, good morning everybody. Thanks for taking my question. So the first one, another one on Jackpocket. Just thinking about the non overlap portion of the database. I mean,

Speaker 13

I think we think about lottery and think of sort of a very

Speaker 11

wide diversified range of demographic and income levels. And I'm just curious if you've done any work on the non overlapping piece, give us a sense on who those folks are? Is it older people? Is it men or women? And is that a richer cross sell opportunity for Igaming or OSB in your mind?

Speaker 11

And how do you compare that?

Speaker 2

Yes, great questions. I mean, so we did a ton of work on the overall customer base, and also on the general lottery market. And what we find is that the people that are buying lottery tickets on Jackpocket, they're using mobile devices to do so. They're younger. They're a tech more tech savvy customer.

Speaker 2

It's a different demographic I think than the average lottery customer and that's part of why it's growing the market which is great. So similar to kind of the online better versus the retail better, it's just it's different person willing and also that has an iPhone and that sort of thing. And I think really that's kind of what the appeal is, is that this is a disruptive new thing in a market that really the customer wants this, right? I mean, people don't buy lottery tickets today, sometimes I think due to convenience. And just like being able to make a bet on your phone, shooting I mean, if you look at anywhere, right now that's legalized betting, online betting makes up a much larger portion of the handles than retail betting.

Speaker 2

It just makes sense when you give people a digital and mobile option that you're going to grow the market and also reach a new demographic of person. So that's really what we found when we dug in there. And I'm sorry, what was the second part of the question? IGamingRO. Oh, iGamingRO OSB.

Speaker 2

So actually another interesting thing we saw, I had gone in thinking this was going to be much more propensity to cross sell to iGaming this type of customer. But when we did the overlap analysis, it was actually quite similar, the overlap between OSB customers and iGaming customers. So that gave us great confidence that which makes sense in some ways, right, because the overlap between iGaming and OSB and the cross sell rates are so high. So it kind of makes sense when you think about it, but I would have gone in probably thinking it would skew a little more iGaming and it was actually very similar.

Speaker 11

That's really interesting. Thanks for that. And then maybe more on the sort of maybe competitive landscape. This is a disruptive technology service that is growing based on penetration. And I think this is the number one player in the space, but you guys mentioned that regulatory regulatory structure wasn't exactly a problem.

Speaker 11

And so maybe we wonder about barrier to entry and if that's sort of low. And so are there sort of second, third, 4th sort of apps out there snipping at the heels of this one? And what's competitive landscape look like?

Speaker 2

Well, no doubt I think there will be more. And I think what you really have to think about is you're right from a regulatory perspective there are other it's not as hard. But I think that what really is hard is the technology side. It's a very complicated fulfillment process and every state is a little bit different. So you have to build a solution that can be flexible and it's actually quite similar to what we've built in terms of our multistate regulatory structure in OSB and iGaming.

Speaker 2

But I think the added piece for them is the fulfillment and that's very complicated. To do that at scale in a cost effective manner and have a technology system, they have patents as well on various pieces that they've created. To have a technology system that can support rapid launch of states is not something that you can build right overnight. So, no doubt there'll be more competition over time, but I think these guys have a big head start. And while the barriers to entry may not be super high, I think that head start is real.

Speaker 13

Helpful. Thanks, Jason.

Operator

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

Speaker 14

Thanks. Good morning, guys. Just staying on Jackpocket, curious, I get all the cross synergies you've mentioned, but are there any features that Jackpocket has that could potentially be useful whether it be OSB or iGaming thinking pool play where they split winnings, there's an autoplay feature so on?

Speaker 2

Yes. I haven't really thought as much about that. They do have a lot of interesting things they've worked. I know they have a bingo product that were that they recently launched. So there could be some leverageable things there for sure.

Speaker 2

Definitely thought about it more as they're building out a great lottery experience and by plugging in the iGaming experience that we've been able to build out and the OSB experience that we've been able to build out to the lottery experience they've been able to build out, I think that's where the real power is. But there also might be, you're right, some good nuggets there in terms of features and other things that are repurposeable across other products. That's something that we'll have to look into a little bit more.

Speaker 14

Great. And just as a follow-up on DFS, any early metrics and thoughts on the PIK-six product? And then how should we think about that take rate gross margins etcetera relative to your traditional DFS business?

Speaker 2

Well, that's a product we're very excited about. We haven't talked as much about it because just launched, but it's something that we think could really reinvigorate DFS growth in a real meaningful way. Right now, we're seeing really good early signal, very strong retention numbers, good monetization. The fees that we take, their guaranteed prize pools are actually higher than the average DFS fee, so that's good too. So a lot of things to like about that product and I think it's something that we could really see be a meaningful contributor in the future.

Speaker 14

Thanks, Jason. Good luck, guys.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from John DeCree with CBRE. Your line is open.

Speaker 13

Good morning, everyone. Thanks for taking my questions. I've covered a lot of ground, but maybe a high level question on iGaming. So a lot of success for you over the past year. Can you talk a little bit about if we talk sports and Jackpocket, but about some of the stuff you have planned for iGaming.

Speaker 13

I think your proprietary content has been a big driver of some of your success. But as we think about 2024 and where you're going in iGaming, high level what should we think about?

Speaker 2

Yes. I mean, first, we are just in the process of completing the migration on GNOG. So, that's going to be a real exciting one and, really just at the very early stages of deploying our multi brand strategy. And I think that's going to be a real tailwind for us. We also have a number of product features and new games that we're working on as well as things that we're working to increase and build out like our jackpots offering, which I think is a real differentiator for us.

Speaker 2

So, there's a lot going on in that space. We're working on a lot of new gamification stuff. There's just a lot. And I think really front and center is that GNOG migration and having those products become on the same platform, I think will allow us to really get even more leverage out of each additional feature and game that we launch.

Speaker 13

Got it. Thanks. You touched on a little earlier, iGaming, your view on New York perhaps getting close and we probably feel the same way. There's quite a few bills circulating out there for gaming this session, but curious if you have a view or if your team has a view on at least directionally over the last couple of months or quarters, if you've seen greater progress at the state legislative level or if there's maybe anything out there that people aren't thinking about that's not major headlines like New York that might be interesting over the next kind of 1 or 2 years on the iGaming regulatory front?

Speaker 8

Yes. There's a few states that

Speaker 2

I think are getting momentum on iGaming now. And it'll be hard to say, but I think we're going to get at least 1 or 2 this year, if I had to guess. Some of the states I'm hearing some momentum in include Maryland, Wyoming is 1. So I think there's a few states that could consider it. I think a dark horse is Illinois.

Speaker 2

Really what I think you saw and there's kind of 2 things that I think are playing out here. One is a number of different states wanted to do OSB first and see how that went and that's still ramping for them. And so the draw for that reason of new tax revenues from online gaming isn't as strong if you just launched online sports betting and you're waiting to see how it's ramping and you're still getting more and more accustomed to and comfortable with it. The second thing is that, we talked a few years ago about post COVID and how that was going to be a real catalyst given states would need tax revenue. What we ended up seeing was that so much federal money was pumped into the state's coffers that that really dragged over the next few years it kind of extended that timeline a bit.

Speaker 2

But now that's I think coming to an end in many states. You're starting to see budgets that really look a lot like the budgets 4 or 5 years ago in many states and the surpluses in some of these states are no longer there. And so I think that's going to also just sort of change the dynamic in the coming years between people getting comfortable that the regulatory and responsible gaming pieces that we can put in place are robust and really do a great job protecting people understanding there actually isn't a legal online casino market, iGaming market and that much like with sports betting, disrupting that illegal market that has no consumer protections, paying no tax revenue, actually is a real priority that states should have. And then of course the amount of programs whether it be educational or otherwise that the revenues can fund I think are also going to be real catalyst behind. And it's kind of as we expected, maybe not exactly as we expected, but we thought there'd be a lot of momentum initially on OSB I was actually pleasantly surprised as many states as they did ended up doing iGaming at the same time.

Speaker 2

And I think as OSB legislation continues to move through the states, I think you're going to see a wave of iGaming legislation start to materialize over the course of the next year or 2.

Speaker 13

Thanks, Jason. We agree. That's all helpful commentary and congratulations to you and the team on a great 2023.

Speaker 2

Thank you so much. Really appreciate it.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Jason Robbins for any closing remarks.

Speaker 2

Well, first, thank you all for joining us on today's call. Really, 2023 was an excellent year for DraftKings and we're so excited about the opportunities in 2024 and beyond. I think 2024 is going to be even a bigger year for us. I hope everyone stays safe and well and look forward to chatting with you in the future. Thank you.

Operator

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.

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NRG Energy Q4 2023
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