Welcome to the DraftKings Q1 2022 Earnings Conference Call. My name is John. I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Stanton Dodge, Chief Legal Officer.

Good morning, everyone, and thanks 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 risks or from our forecast. We assume no responsibility to update forward-looking statements, other than as required by law. During this call, management will 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. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings presentation, which can be found on our website and in our quarterly report on Form 10-Q filed with the SEC. Hosting the call today, we have Jason Robins, Co-Founder, Chief Executive Officer and Chairman 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 up the line to questions. I will now turn the call over to Jason Robins.

Good morning, everyone. On today's call, I will cover the following topics. First, we are very excited to welcome the Golden Nugget Online Gaming team to DraftKings. Since the announcement of the proposed acquisition in August 2021, our excitement around bringing these companies together has only increased. The acquisition closed yesterday, and we are well prepared to integrate our respective businesses, begin executing on our multi-brand strategy and capture adjusted EBITDA synergies, which we expect to reach approximately $300 million long-term. Second, we'll discuss our first quarter financial achievements. Revenue for the first quarter exceeded the midpoint of our guidance by $7 million, and adjusted EBITDA significantly outperformed our expectations, finishing more than 12% better than the midpoint of our guidance. Third, we see a stronger top and bottom line outlook for the year and are raising both our 2022 revenue and adjusted EBITDA guidance. Despite broader concerns around the macroeconomic environment and inflation, our cohort level data has remained very healthy and our path to profitability has become more clear. Legislative momentum has remained robust as well. Looking forward, we see strong top line growth continuing through the remainder of the year and beyond, coupled with continued optimization of our margin profile and overall cost structure. Finally, I will touch on recent product developments in adjacent growth verticals. We are continuing to innovate and improve the customer experience by consistently adding new games and features, which we believe will ultimately support customer acquisition, retention and by extension player lifetime value. Additionally, we continue to make progress in media and marketplace, and we are very excited about the future prospects for both. Let's start with our acquisition of Golden Nugget Online Gaming. We are very excited to welcome the Golden Nugget Online Gaming team to DraftKings and have a well-designed integration plan that is already being implemented. The acquisition will allow DraftKings to leverage Golden Nugget's established brand to broaden our reach in new customer segments, particularly within iGaming. It will also enhance the combined company's iGaming product offerings through DraftKings' vertically integrated tech stack and Golden Nugget Online Gaming's unique live dealer capabilities. In addition, the transaction increases DraftKings customer database size through access to the more than 5.5 million members in the databases of the Golden Nugget 24k Club and Landry Select Club, on top of the current DraftKings' database of more than 20 million accounts. We continue to have confidence that the combination of our businesses will result in long-term adjusted EBITDA synergies of approximately $300 million. Now let's turn to our first quarter results. DraftKings generated $417 million of revenue in the first quarter, which exceeded the midpoint of our guidance by $7 million. Revenue growth was primarily driven by our B2C business, which increased 44% compared to the prior year period. Adjusted EBITDA of negative $290 million in the quarter also outperformed our expectations by $40 million compared to the midpoint of our guidance. Part of the reason why we are outperforming our own expectations is that markets such as New Jersey have turned highly profitable and continue to grow at an attractive rate. We have also identified efficiency opportunities and executed on them, which drove some of the outperformance in first quarter adjusted EBITDA. These efficiencies were up and down the income statement, including in our cost of goods sold, marketing and corporate fixed costs. The primary driver of these cost opportunities was faster growth in state expansion, which has allowed us to accelerate progress towards our plans for our long-term cost structure. Our Q1 adjusted EBITDA also benefited from corporate costs that shifted from Q1 to the remainder of the year. Consequently, some of the reduced costs in Q1 will continue to positively impact DraftKings going forward, while others are simply due to timing. Suffice it to say, we will continue to look for opportunities to accelerate the realization of cost efficiencies as DraftKings continues to grow at scale. Our key performance metrics, including user acquisition, retention and engagement, also continued to trend well. Q1 includes two marquee sporting events: the Super Bowl and March Madness. Basketball, both the NBA and college, also drew increased attention and interest throughout the quarter. The NBA has been strong, including when the NFL was still in play, while the Super Bowl saw tremendous customer engagement. For the Super Bowl, we set a single-day record for first-time online sports betting bettors, which increased 77% year-over-year. For the first weekend of March Madness, our first-time online sports betting bettors increased 42% year-over-year. March Madness this year featured various player-friendly results overall, especially the exciting run by Saint Peters to the Elite Eight. Bettors across the country backed the Peacocks during their surprise run. This run contributed to our lower-than-forecasted online sports betting hold. The whole variance due to game outcomes resulted in approximately $25 million of reduced revenue in the quarter. First quarter monthly unique players increased to approximately 2 million, up 29% versus Q1 2021. Average revenue per monthly unique player increased 11% year-over-year to $67. Notably, average revenue per monthly unique player would have grown approximately 26% if we adjusted both Q1 2022 and Q1 2021 for online sports betting hold. Cost of goods sold and marketing spend were both elevated in the first quarter, primarily due to our launch in New York on January 8. Gross margin percentage was also negatively impacted by sports betting hold during the quarter. With that, I will turn to our updated outlook for the business. We have several unique capabilities, including our growing daily fantasy sports database, which is a great source of online sports betting customer acquisition; a decade of marketing know-how to acquire sports fans; our sophisticated data science and analytics organizations; our vertically integrated tech stack; top-rated products across all categories in which we operate; and a single account and wallet. These capabilities are very difficult to replicate by other operators and are the reasons for a very attractive tax and strong share, which support our growth outlook for 2022 and beyond. We are raising the midpoint of our 2022 revenue guidance from $1.925 billion to $1.975 billion and improving our 2022 adjusted EBITDA guidance to a range of negative $760 million to negative $840 million. This increased guidance does not include the contribution of the Golden Nugget Online Gaming business nor does it include our contemplated launch in Ontario. Jason Park will touch on our preliminary expectations for GNOG in Ontario. I also want to spend a few minutes discussing the outlook beyond 2022. As a starting point, the pipeline for new states remains robust. Following our launches in New York and Louisiana, DraftKings is currently live with online sports betting in 17 states that collectively represent approximately 36% of the U.S. population. Additionally, DraftKings is live with iGaming in five states, representing approximately 11% of the U.S. population. We also expect to go live in Ontario in the near future, pending licensure and regulatory approval. Ontario represents about 40% of Canada's population, and Ontario will be the fifth largest U.S. state by population if it were in the U.S. However, due to the presence of gray market operators—many of which have been present in Ontario for several years—we do not believe that the timing of our launch will have any impact on the share we are able to achieve in that province. There are three U.S. jurisdictions that have legalized mobile sports betting in which we are preparing to launch upon licensure and approval from regulators: Maryland, Ohio, and Puerto Rico. These three jurisdictions represent approximately 7% of the U.S. population, and we'll bring the percentage of the population where DraftKings expects to offer legalized mobile sports betting to approximately 43%. In Kansas, which is about 1% of the U.S. population, a mobile and retail sports wagering bill has passed the legislature and is now pending executive action. We are also very excited by momentum in California. The approximately 1.6 million signatures submitted by Californians for solutions to homelessness and mental health support will likely allow us to qualify the ballot measure for the 2022 November ballot. This is a really important step. Once the signatures are verified, then the initiative will be placed on the ballot in November. If the initiative passes with a simple majority, then it becomes law. From there, regulators will implement the framework, and we are hopeful that we can be live sometime in 2023, pending licensure and regulatory approval. California, of course, represents a significant revenue and adjusted EBITDA opportunity, with approximately 12% of the United States population. In fact, if California were a country, it would be the fifth largest economy in the world ranked by GDP. In short, from a legalization perspective, there is a lot to look forward to. Finally, I will touch on recent product developments in adjacent growth verticals. Our sports betting app continues to score very well in third-party surveys. We continue to believe that product innovation and quality of customer experience will create strong customer acquisition, retention and lifetime values, giving DraftKings a sustainable competitive advantage over the long term. In the first quarter, we continued to deepen our content offer for online sports betting. We also added several player markets to our college basketball same-game parlay offering, including point score, assists, rebounds and three pointers made as well as combinations of these markets. In iGaming, our focus on cross-selling and in-house content development continued to pay dividends. In the first quarter, 43% of mobile sports betting users in our iGaming space also engaged with our iGaming product, and 54% of iGaming handle came from DraftKings' developed games. And in April, we launched our first DraftKings-developed slot scheme in New Jersey. With DraftKings Social, we have created an integrated and highly engaged community that allows fans to interact with each other within a peer-to-peer environment. In April, we launched betting groups, which are a seamless way to collaborate on a sports betting experience. Users can create a group and distribute the link for others to join. Once the group is created, all actions of the members who elected to share their bets will be dropped into the group in real-time, notifying group members with a link directly to that new bet. Our focus is on creating a community that engages users in a collaborative way during significant sporting events. For Daily Fantasy Sports, in March, we added international auto racing lead, Formula One, to our portfolio of sports offerings. This offering leverages the experience and success of our NASCAR Daily Fantasy product as well as the popular Netflix series. Turning to DraftKings Marketplace, we now offer options for NFTs in the marketplace in addition to regular drops. We introduced this additional mechanism for participants to access NFTs to broaden our appeal to a wider audience. We also now have a proprietary end-to-end in-house NFT factory, where we create our own content distributed on our marketplace through primary drops in auction. Users can buy, sell and collect NFTs on our secondary market to add to their collection sets and receive promotions and utility associated with certain NFTs. We will continue to look for opportunities to develop our own content and work with high-quality third-party content suppliers. We also continue to build out our media vertical through content agreements with prominent voices within the sports industry, such as former ESPN commentator Mike Golic Sr.; Meadowlark Media personality Jessica Smetana; and a championship-winning NFL executive Michael Lombardi. Most recently, popular baseball personality and content creator Jared Carrabis and former Notre Dame football player and television personality Mike Golic Jr. joined DraftKings. Each of these agreements brings exclusive content such as podcasts and in-depth commentary, which can only be found at DraftKings. I look forward to updating you on additional product development throughout the year. Before I conclude my remarks, I'd like to note that we recently marked our 10-year anniversary as a company. I want to thank my co-founders, Paul Liberman, and Matt Kalish; and all of our stakeholders, including our employees, both past and present; our customers; and our investors who help make all of our achievements possible. We also recently published our second ESG report. You can find the report on our Investor Relations website. The report focuses on our ongoing commitment to environmental, social and governance issues, including responsible gaming, the well-being and vitality of our employees and the communities in which they work and environmental sustainability. We believe our long-term success is sustained by our attentiveness to each and every one of our customers, employees, shareholders and communities, and we look forward to continuing to achieve meaningful ESG progress. I will now turn the call over to DraftKings' CFO, Jason Park, who will discuss our first quarter results and updated 2022 guidance.

Thank you, Jason, and good morning, everyone. We are really pleased to announce our Q1 results of $417 million of revenue and negative $290 million of adjusted EBITDA. Our B2C revenue grew 44% versus prior year as we saw a strong performance across our states. Our customers are very strong, with handle per active up in every single state versus prior year and no discernible sign of macroeconomic factors impacting our customers' engagement with our products. It's worth noting our revenue would have been roughly $25 million better if not for some customer-friendly sports outcomes. Monthly unique players increased by 29% to 2.0 million and average revenue per monthly unique player increased 11% to $67. MUPs were up in all states with mobile registration available in both Q1 2021 and Q1 2022 as we continue to retain and acquire new customers. I am pleased that we posted negative $290 million, which was $40 million better than the midpoint of our guidance range. Sales and marketing expenses were up 40% versus prior year, due primarily to the additional states in which we operated versus Q1 of 2021. New York accounted for more than half of our year-over-year decline in gross margin rate. Continued mix shift out of high-margin daily fantasy sports also impacted our year-over-year change in gross margin rate. I expect gross margin rate to settle at roughly 40% for the full year 2022 as promotional intensity declines in our more mature states, and we continue to reap the benefits from bringing our bet engine in-house. We are raising our revenue guidance to a range of $1.925 billion to $2.025 billion for 2022. The $50 million increase of the midpoint to $1.975 billion equates to year-over-year revenue growth of 52%, largely due to B2C revenue growth of approximately 60%. Our outlook for Marketplace in B2B is unchanged at approximately $70 million and $40 million, respectively. Regarding our 2022 quarterly revenue cadence, we expect Q2 revenue to be between $400 million and $420 million, which is slightly higher than the implied guidance we provided in February. We expect Q3 revenue to also be between $400 million and $420 million and Q4 to be $730 million to $750 million. You'll notice that cadence implies a relatively higher percentage of revenue being generated in the second half of this year compared to 2021. This is due to our expectation that New York and Louisiana will ramp up throughout the year and DraftKings Marketplace will hit its stride at the beginning of football season. Today, we are also meaningfully improving our adjusted EBITDA guidance from a range of negative $825 million to $925 million to a range of negative $760 million to $840 million, which represents a $75 million improvement in the midpoint. From a quarterly perspective for 2022, we expect our adjusted EBITDA in Q2 to be between negative $140 million and $160 million due to the timing shift of expenses, offset by efficiencies. We expect adjusted EBITDA in Q3, which is impacted by the start of the NFL season, to be about double Q2, and we expect our Q4 performance to be the best for the year as we benefit from higher seasonal revenue. It is very important to note that our revenue and adjusted EBITDA guidance for 2022 includes all states in which we were live as of May 6, including New York and Louisiana, but does not include the impact of our acquisition of GNOG or any other new jurisdiction launches such as Ontario. For the full year, we expect that the acquisition of GNOG, combined with our expected launch in Ontario in the second quarter, would contribute $130 million to $150 million in revenue and negative $50 million to $70 million in adjusted EBITDA. We are very pleased that underlying customer trends continue to be very positive and that we have identified and captured efficiency opportunities that, together, have allowed us to improve our 2022 adjusted EBITDA forecast. We feel terrific about our customer cohort gross profit paybacks as well as state profitability and thus, our trajectory for revenue and adjusted EBITDA in the short and long term. That concludes our remarks, and we will now open the line for questions.

Our first question is from Thomas Allen from Morgan Stanley.

So in the first quarter, revenue came a little bit ahead of expectations while marketing was much lower. Can you just talk about what's going on with marketing? Where you're finding efficiencies? Where you're seeing opportunities?

Thanks, Tom. It's a great question. I think we're starting to enter the phase where national advertising is going to be more and more of our mix and we are able to, through a series of tests that we've been conducting over the past few quarters, optimize out of some of the local television and other local marketing that we're doing. So, I think that's been a big source of efficiency there, and we expect it to increase, of course, as more states launch.

Our next question is from Jed Kelly from Oppenheimer.

Just circling back to GNOG and in some of their remarks, how should we think about what GNOG is going to do for monthly unique players and average revenue per monthly unique player? And then Jason, I appreciate the commentary on all the state legislation. You didn't mention Massachusetts. I know there's two competing bills. Could you give us an update on what you think about what's going on there as well?

Sure. So on GNOG, just to remind everybody, the rationale—strategic rationale behind the deal was really for us to be able to increase the audience that we'd be able to reach. What we found is that the DraftKings brand is very strong with a certain demographic of customers, particularly those that are sports fans. We've had some success getting casino-first customers on, and we feel really good about the state of the product and have really great lifetime values once we get those customers on. We think there might be a more efficient way to do it. As far as Massachusetts goes, we continue to be hopeful that there will be something done.

And just following up on Golden Nugget. The gross margin guidance you called out, that does not include any impacts from Golden Nugget.

No. We separately are guiding to the combined impact of Golden Nugget and Ontario. We want to provide more of an apples-to-apples view, so that we could highlight some of the cost efficiencies and also revenue outperformance we're seeing in the core business.

Our next question is from Shaun Kelley from Bank of America.

I just want to go back to some of the comments around gross margin. Obviously, some clear one-time impacts in this quarter due to New York, and it sounds like hold as well. But Jason, if I caught the comment correctly, I think you mentioned 40% for the full year. How's that number getting into the mid or even high 50s? Could you help us think about like the bridge and some of the pieces to see that step function or improve materially in the medium to long-term?

Sure. So I think the biggest factor will be the lowering of promotional intensity, which impacts both net revenue and margin. Having less contra revenue will bring up margin. We think between the internal initiatives that we have as well as just the natural change to gross margin, due to lower promotional intensity, you'll see us reach the long-term targets that we've set out.

Our next question is from Bernard McTernan from Needham & Company.

Jason, I was just wondering, are you seeing any change in the promotional or competitive intensity in the U.S.? And is that impacting your strategy at all?

I think that's a great question. I would separate that into two things. One would be new user offers and the second would be tentpole events, such as the start of NFL or Super Bowl. We'll always run promotions around those events. What we see is that a lot of the promotional dollars end up being put back into play, which increases the longevity of a customer, which is great.

Our next question is from Joe Stauff from Susquehanna.

Two questions, if I could. One is on Golden Nugget. And just wondering, it's always a well-managed company. As you suggested, it gives you access to a new consumer demographic and a high proportion of digital slots. They did rent all three pieces of their tech stack. And I'm wondering how quickly that software integration would take?

Can you repeat the second question, please?

Sure. I was just wondering for your online sports betting product offering, some of the newer products that you would have that could move the sports margin higher going forward.

Great. Thank you. So on your first question around Golden Nugget and the integration plan, we have a really strong integration plan. So everybody knows exactly what they need to do to perform that migration. By the time of our next earnings call in August, we will be able to do that and intend to do so.

Our next question is from Jason Bazinet from Citi.

I just had a quick question on the 10 states contributing or generating positive contribution margin this year. Would those just be the states that we would expect based on the launch date?

That's a great question. On the first topic, we specifically list the states out in our March Investor Day presentation. I must confess, I will probably lose track if I try to cite all 10 off memory here, but we list them out. On the second question, I think it's a great point. We are seeing faster ramp, which has resulted in more meaningful marketing and promotional investment upfront in some of our earlier states, but also appears to be leading to a faster path to profitability.

Our next question is from Carlo Santarelli from Deutsche Bank.

I just want to go back to Jason Park, something you talked about a little bit about the growth rates on products and technology and G&A expenses. Obviously, in the quarter, core G&A was down fairly nicely sequentially. I'm assuming that's where some of the timing stuff lies?

Yes. On a sequential basis, Q4 versus Q1, I think the G&A reduction is more about the accrual of annual bonuses for the employees. That's going to be the big driver. In terms of timing shift, that was probably a bit more than half of the Q1 beat.

Okay. Great. And then just as you talked about kind of moving into '23, the comment was we would see kind of meaningfully slower expense growth. At some point this year, do we anticipate perhaps some of those items start to level off and then you start to kind of straight line from there?

That's a great question, Carlo. Thank you. I think that we will see that start to happen a bit, but a lot of the growth that we're seeing year-over-year especially in compensation costs, comes from hires that were made throughout 21.

Our next question is from Michael Graham from Canaccord.

Jason, you mentioned the New Jersey profitability profile was improving. And I just wonder if you could give a little more depth around like is that more on the revenue side or the marketing side? Or just kind of what are some of the moving pieces there?

On your New Jersey question, it's really up and down the P&L. We're seeing strong revenue growth that's a bit better than our expectations, and we're also seeing some of the cost initiatives that we've put in place play out throughout all the states. So, it's really up and down the P&L.

Our next question is from Dan Politzer from Wells Fargo.

Just a couple of state-specific questions. I was wondering if you can maybe quantify the drag New York was in the quarter. What would EBITDA have been at New York?

You are right that those two things were EBITDA headwinds in the quarter. We think that both will lead to revenue outperformance down the road. So both are good things, but in the quarter certainly had negative EBITDA impact.

Our next question is from Chad Beynon from Macquarie.

Wondering if you could touch broadly on trends within daily fantasy sports, either growth or contribution. I believe it was still growing in the back half of the year. But wondering how that business has changed and how that contributes to your 2022 guidance.

It's a good question. What we sometimes see with daily fantasy sports is when state launches, there's so much excitement around sports betting that there's a bit of cannibalization. And we did see that in New York. Now in other states, we've seen that level off or even come back.

Our next question is from Stephen Glagola from Cowen.

Jason, following four NFL seasons, the industry remains concentrated around you, FanDuel and BetMGM. With the backdrop of depressed share prices, do you see further consolidation in the industry coming near term?

It is quite possible that there will be further consolidation. From our standpoint, we just made a very significant acquisition in Golden Nugget Online Gaming. I think that’s the template that fits the profile of what types of things we would look for, something that's strategically complementary.

Our next question is from Robert Fishman from MoffettNathanson.

Can you expand on how building out your media vertical with the new personalities and the exclusive content they bring helps drive incremental engagement to your platform? And maybe how you measure the return on this investment?

I think we've always thought there were strong synergies between media and what we traditionally do on the gaming side. Being able to drive some of that traffic organically is of great interest to us. We also have great content partnerships with several media outlets. We remain very flexible on that front.

Our next question is from Noah Naparst from Goldman Sachs.

As we look towards this summer and fall, are there any differences in the sports calendar? Any color on what those events could look like in terms of betting activity or hold?

The World Cup is the big one. I think there should be some decent betting on it. We've been growing in popularity in the U.S., and I think that the World Cup often spikes that interest.

Our next question is from Ryan Sigdahl from Craig-Hallum Capital Group.

Looking at guidance for Ontario and GNOG, it seems to imply minimal net revenue from Ontario. One, is that right? And then two, if you can deconstruct the two on revenue and loss expectations, that would be great.

I think at this point, we are not planning to deconstruct it too specifically. I will point out that even when you take the most conservative end of our guidance for those two, we are still better with our new guidance plus those impacts than we were last quarter.

Our next question is from Barry Jonas from Truist Securities.

Jason, how are you thinking about DraftKings entering Nevada retail and OSB now?

We've been very interested in Nevada. We're exploring opportunities there. It's a state that attracts a lot of attention because of its association with gaming. There's a decent-sized market there in terms of online sports betting.

Our next question is from Clark Lampen from BTIG.

I have one on Marketplace. Jason, you talked about Marketplace really hitting its stride around the NFL season. Could you give us a sense of whether that factors in; the way in which some of those utility-oriented NFTs could actually integrate with the gaming-focused businesses?

A few things. We just recently developed some in-house content creation capabilities and also built back-end infrastructure to tie benefits on sports betting and Daily Fantasy to ownership of NFT content we create. The way we're seeing the market move, it really is important to have utility.

And our last question is from Robin Farley from UBS.

I was wondering if there's a way to quantify how much of the lower hold was maybe kind of marketing like offering more favorable odds rather than just purely the sport outcomes?

What we've shared is that about $25 million of revenue hit came from purely sport outcomes. We typically don't share the breakdown of promotional and marketing tactics we've tested, as they are very competitively advantageous for us.

So, you're not breaking out anything withhold that's related to kind of marketing costs, anything like that?

No. We typically don't share those types of details.

And we have no further questions at this time. I'll now turn it back over to Jason Robins for final remarks.

Thank you all for joining us on today's call. We had an excellent first quarter. We continue to be very excited about 2022 and look forward to speaking with you all over the next few weeks. The Company continues to be focused on strong top-line growth and also on cost optimization, and we're really excited about a number of initiatives we have underway in both those categories and look forward to sharing more with you in the coming quarter.

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect.