DraftKings now believes it can generate $1.7 billion in annual adjusted EBITDA given its updated expectations for US online gaming.
How big players from the offshore market factor into that remains an open question.
The forecast, given at a DraftKings investor presentation Tuesday, is up from $1.2 billion last year because of more bullish expectations on the US. The $1.7 billion forecast assumes a 31.5% margin on $5.4 billion annual revenue.
Of course, none of that will happen anytime soon. The market forecast assumes 65% of Americans have access to legal online sports betting and 30% to iGaming. Currently, just 27% have legal online sports betting and 11% have iGaming.
DraftKings Sportsbook is also still firmly in a cash-burning stage as it continues to acquire more customers while the market builds out. The company reported significant losses in 2020 for that very reason.
Considering the $1.7 billion adjusted EBITDA forecast is for five years after the US hits those legalization rates, that annual result could still be more than 10 years away.
DraftKings not converting many offshore bettors yet
DraftKings executives touched on a bunch of topics during the 90-minute presentation and Q&A session. Perhaps none were as interesting as CEO Jason Robins‘ take on offshore sports betting customers.
“We’ve seen a lot of data through the research that we’ve done that we actually haven’t converted a ton of people over from the illegal market yet, and those are arguably the most valuable players,” Robins said.
As for why those customers haven’t moved, Robins suggested it’s as simple as the offshores being there first and customers getting comfortable.
“I think it’s just stickiness; this comes back to the point we made earlier that early mover matters. People get comfortable with a particular product, a brand, a [user interface] and they just don’t want to change. And I think that that’s a good sign for the longevity of our customer,” Robins said.
New market calculations led to higher forecasts
The company now assumes annual revenue from the total addressable online sports betting and iGaming market (TAM) will hit more than $67 billion. That’s up 67.5% from last year’s estimate of $40 billion.
DraftKings used models based on population and GDP this year instead of just population last year. It then used the lowest forecast for both markets – $22 billion for online betting and $40 billion for iGaming – for its new projections. It also included $5 billion for Canada, which it did not anticipate legalizing at this point last year.
The base revenue from those projections, assuming 20% US online betting share, 15% iGaming share and 10% of Canadian online sports betting and iGaming share, is $5 billion. The rest of the $5.4 billion revenue forecast is from daily fantasy sports and other smaller sources.
That all leads to what Robins called a “very achievable and perhaps conservative” long-term annual EBITDA target of $1.7 billion. He made it clear there remains plenty of room for growth in that forecast as well:
“This also, as I remind you, does not include 70% of the US for iGaming, 35% of the US for online sports betting, 36% of Canada for online sports betting and iGaming, nor does it include any other international expansion or any expansion into new products.”
We get how marketing works
DraftKings took a convoluted approach to explain its path to profitability in individual markets but essentially said the company should be profitable in the second or third year of operations after launch.
The company then perhaps over-explained how marketing costs fall as individual markets mature because customers stick around. DraftKings also pointed out as more of the US population gets access to legal sports betting, the customer acquisition costs for national campaigns will decline.
DraftKings reported 82% customer retention in year one and 87% in year two, with 108% revenue retention in year two.
DFS growing, old players returning
DraftKings saw “incredible growth” in daily fantasy sports in 2020, Robins said. That’s partly from a 20% increase in paid users to 5 million, as well as former customers returning.
“In the initial days of New Jersey [sports betting] we saw meaningful cannibalization – we’ve actually seen that subside,” Robins said. “A lot of customers have come back and started playing more DFS even if they do continue to use sportsbook.”
DraftKings broke down the DFS cross-sell into sports betting for seven states. Colorado had the highest conversion with 69% of its active DFS users cross-sold. Pennsylvania was the lowest at 50%.
Other noteworthy nuggets from DraftKings
The Q&A session brought out additional interesting info not in the presentation:
- The online sports betting launch in Michigan showed a big disparity between the operators at the top of market share and those at the bottom. With DraftKings establishing itself as a top sportsbook, that should help it negotiate better market-access agreements, Robins said.
- DraftKings doesn’t take many advertisements and isn’t interested in expanding advertisements onto its paid products. It has had to turn advertisers down because of limited supply, Robins said.
- Illinois is DraftKings’ largest online sports betting state.
- Securing its own sportsbook platform in SBTech satisfied any needs DraftKings might in terms of M&A. There could be smaller acquisitions, though, that pertain to international expansion, media, or bolt-ons for current offerings.
- Wallet share in the US will be concentrated to a preferred brand, particularly on the sports betting side, Robins said.
- DraftKings’ iGaming business is still mostly by way of cross-selling sports bettors. It presents a big opportunity to expand into new demographics, though, Robins said.