Investors Look Past DraftKings’ Weak March Madness

Key Concepts:

• Revenue forecast downgrade
• Sports outcome variance (March Madness)
• Jackpocket impact (Texas ban, integration)
• Structural hold rate
• Promotional efficiency
• Monthly active users (MAUs)
• Cross-selling
• iGaming cannibalization of land-based casinos
• Regulatory environment

1. Revenue Forecast Downgrade and March Madness Impact

• The revenue forecast was lowered by approximately $200 million.
• The impact of sports outcomes, particularly March Madness, was a significant factor. The actual loss from March Madness was slightly less than $200 million, but close.
• $170 million of the downgrade was attributed to unfavorable sports outcomes.
• An additional $30 million was due to Jackpocket ceasing operations in Texas.

2. Underlying Business Fundamentals

• Despite the revenue downgrade, the fundamental aspects of the business remain strong.
• The structural hold rate has increased.
• Promotional efficiency has improved.
• These positive factors partially offset the negative impact of sports outcomes and the Jackpocket situation in Texas.

3. Sports Outcome Variance

• The speaker emphasizes the inherent variability in sports outcomes.
• Customers can experience winning streaks, which is a normal part of the product.
• The occurrence of all four number one seeds reaching the Final Four, coupled with specific seedings in the Elite Eight, was described as an anomaly.
• The speaker anticipates that future sports outcomes will likely swing in the opposite direction, citing NBA playoff upsets as an example.

4. Jackpocket Integration and Growth Potential

• Jackpocket is still in the early stages of growth and has significant upside potential.
• Full integration of Jackpocket into the DraftKings app is expected to improve conversion metrics, cross-selling capabilities, and marketing effectiveness.
• Cross-selling performance is already exceeding expectations.
• While Jackpocket's overall impact on the business is currently small, it is projected to increase as it continues to grow.

5. iGaming Cannibalization of Land-Based Casinos

• The perception that online gambling cannibalizes demand for land-based casinos is a challenge.
• The speaker acknowledges mixed evidence on this issue.
• Some markets have experienced declines after the introduction of online gaming, but these declines may have been pre-existing.
• New Jersey is cited as an example where online gaming reversed a declining trend for years.
• The impact varies from property to property.
• The speaker understands why companies without an iGaming presence might view online gambling as a threat.
• The speaker argues that the extent of cannibalization has been exaggerated.
• DraftKings aims to better educate stakeholders on the true impact of iGaming on land-based casinos.

6. Notable Quotes

• "So really the fundamentals of the business are about as healthy as can be."
• "...the amount of cannibalization and the downside has been greatly exaggerated."

7. Synthesis/Conclusion

Despite a revenue forecast downgrade primarily driven by unfavorable sports outcomes and the Jackpocket situation in Texas, the underlying fundamentals of DraftKings' business remain strong. The company is optimistic about the growth potential of Jackpocket and believes that concerns about iGaming cannibalizing land-based casinos are overblown. DraftKings aims to address these concerns through education and continued demonstration of the positive impact of iGaming in various markets.