Earnings Call Transcript - DKNG Q1 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the DraftKings Q1 2023 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Stanton Dodge, you may begin.

Stanton Dodge, Executive

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 results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will also discuss certain non-GAAP financial measures that we believe may be useful in evaluating DraftKings' operating performance. These measures should not be considered in isolation or as a substitute for DraftKings' financial results prepared in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings 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 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.

Jason Robins, CEO

Good morning, and thank you all for joining. I'm excited to be with you today and share that DraftKings is off to an excellent start in 2023. Revenue growth has been outstanding, supported by strong customer retention, acquisition and engagement as well as better structural hold percentage than anticipated. First quarter revenue increased 84% year-over-year, and we are increasing our full year revenue guidance to a range of $3.135 billion to $3.235 billion, implying growth of 42% year-over-year at the midpoint, which is pretty remarkable off a revenue base of $2.2 billion in full year 2022. At the same time, achieving efficiency remains a relentless focus. Our mantra of revenue growth and cost efficiency is gaining even more momentum throughout the organization. Due to both our strong revenue growth and our ongoing effort to capture efficiencies, primarily within external marketing and our fixed costs, we are on the cusp of achieving profitability on an adjusted EBITDA basis. We expect to be approximately breakeven on an adjusted EBITDA basis in the second quarter, and we expect to achieve nearly $150 million of positive adjusted EBITDA in the fourth quarter. For the full year, we are improving our adjusted EBITDA guidance to a range of negative $290 million to negative $340 million, or an increase of 21% at the midpoint versus our February full year guidance. Turning to our product offerings. DraftKings has continued to introduce unique sports wagering opportunities by most recently launching live Same Game Parlays for MLB, supported by our in-house trading platform. We continue to invest in our in-house trading capabilities and technology in advance of the NFL season this fall. In iGaming, we estimate that we achieved #1 GGR share in the U.S. at 26% in the first quarter. Our homegrown games continue to function as a key differentiator. For example, our exclusive DraftKings jackpot product is now live in three states across more than 100 slots and table games. We also launched DK Horse, our stand-alone horse racing app, at the end of March, which offers wagering on races from hundreds of domestic and international tracks, including all three Triple Crown races beginning with this weekend's Kentucky Derby. I am proud of the team and culture we have in place. In particular, I am proud of our team for their relentless focus on efficiency and expense management over the past 12 months. Our work on achieving ends is not done, and we feel great about the trajectory of our business.

Jason Park, CFO

Thank you, Jason. I'll hit on the highlights, including our Q1 performance and our new and improved 2023 guidance. Please note that all income statement measures discussed, except for revenue, are on non-GAAP adjusted EBITDA basis. As Jason mentioned, the organization is executing very well, and that is showing up in our results. We achieved $770 million of revenue in the quarter, which is 84% higher than our first quarter 2022 revenue and our adjusted EBITDA of negative $222 million in Q1 significantly outperformed our expectations. Structural hold percentage was better than anticipated, with parlay handle mix up 400 basis points year-over-year, while promotional intensity declined, together supporting a more than 600 basis point improvement in our adjusted gross margin rate. We were particularly pleased with the results in our older state vintages. In each of our 2018, 2019 and 2020, 2021 state vintages, first quarter 2023 handle grew more than 25% compared to the same period in 2022. GAAP revenue grew at least 80% year-over-year. Adjusted gross margin rate increased at least 1,200 basis points year-over-year, and external marketing spend declined at least 10% year-over-year. These strong results and our visibility into continued improvement have enabled us to raise our full year 2023 revenue guidance range to $3.135 billion to $3.235 billion from $2.85 billion to $3.05 billion. We are also improving our full year 2023 adjusted EBITDA guidance range to negative $290 million to $340 million from negative $350 million to $450 million, or by $85 million at the midpoint. The bridge from our February full year 2023 guidance to our May full year 2023 guidance includes increases due to stronger customer retention, acquisition and engagement, structural sportsbook hold improvement and favorable sport outcomes in the first quarter, which were partially offset by the timing of our recognition of a loyalty program expense. Customer retention, acquisition and engagement are exceeding expectations and account for approximately $195 million of the revenue improvement and approximately $80 million of the adjusted EBITDA improvement. Our structural sportsbook hold percentage forecast is also higher, supported by our introduction of in-house Same Game Parlay capabilities. This trend accounts for approximately $20 million of the revenue improvement and approximately $15 million of the adjusted EBITDA improvement. Favorable sport outcomes in the first quarter contributed approximately $20 million to the revenue improvement and approximately $15 million to the adjusted EBITDA increase. Last, expense recognition timing is a $25 million headwind to our improved full year adjusted EBITDA guidance. As a result of greater visibility into our new loyalty program, costs that were originally expected to be expensed in the first quarter of 2024 are now expected to be expensed throughout 2023. This additional expense accrual in 2023 will not result in additional cash outflow. In terms of our full year 2023 adjusted gross margin percentage, we continue to expect to land in the range of 42% to 45%. With regard to our balance sheet, we ended the first quarter with $1.1 billion of cash and now plan to end the year with more than $800 million of cash before our expected inflection to generating positive adjusted EBITDA for the full year 2024 under any reasonable new state launch scenario. In sum, we had a strong first quarter, and underlying drivers are improving our outlook for 2023 and beyond.

Operator, Operator

And our first question will come from Shaun Kelley of Bank of America.

Shaun Kelley, Analyst

I wanted to discuss the revenue performance, which was excellent this quarter. Could you provide your thoughts on whether improved customer retention and engagement are driving this? What products or changes in your offerings are contributing to this trend? Additionally, how do you see this evolving through the first quarter? From what we've heard, March was particularly strong for DraftKings. Could you elaborate on the cadence and your product mix that might be sustaining engagement outside of the typical NFL season?

Jason Robins, CEO

Thank you, Shaun. I appreciate it. I think you're right. The theme on the revenue side has been customer retention and monetization. Also, we've had tremendous acquisition results. We acquired 57% more first-time players year-over-year on a 27% lower cost of acquisition. So really pleased on that front, too. It's been our OSB and iGaming products that have been carrying the load for us. We've been seeing really the big trend difference year-over-year is last year, we saw a bigger drop off after the NFL season ended after the Super Bowl. And this year, I think, due to some CRM optimizations and product enhancements on the sports betting side, as well as some similar things that we've been doing on the iGaming side, we've just seen much stronger retention flowing into late February and March. And it seems to be continuing into Q2 as well.

Shaun Kelley, Analyst

Great. As a quick follow-up regarding the revenue outlook and the increase this quarter, are faster paybacks factored into that as well? Considering what you're observing at the individual state level, especially with the launches in Ohio and Massachusetts, is that included in the revenue outlook increase, or is it seen as an opportunity for the future?

Jason Robins, CEO

No, absolutely. The strong acquisition trends we have observed in our new state launches continue, and our penetration into the mid- to high single digits of the adult population suggests a faster payback period. What previously took 2 to 3 years to become profitable is now happening more quickly. We also anticipate that these states will contribute more revenue in the near future. Therefore, this is definitely a factor driving our increased revenue forecast.

Jason Park, CFO

I would add, Shaun. As we indicated, the increase in our Q4 EBITDA, I think that a big part of that improvement is exactly what you're referring to.

Operator, Operator

And our next question will come from Bernie McTernan of Needham & Company.

Bernard McTernan, Analyst

Maybe to start, just the reiteration of the 42% to 45% gross margin guide for the year. Just given the strong performance of 1Q, just any puts and takes we should be thinking about for the remainder of the year here?

Jason Robins, CEO

The main highlight is the rise in customer acquisition. As we've mentioned before, new users are increasingly aware that a significant amount of promotional funds are being utilized, which subsequently increases the spending on promotions. That being said, we are maintaining our guidance of 42% to 45%. We do not anticipate any changes to that range for the year, although there will be some variations from quarter to quarter that could affect the flow-through rate. This is likely the most significant factor to consider. Overall, we expect gross margin percentage to remain within that range this year.

Bernard McTernan, Analyst

Understood. And now wanting to step on the toes of any maybe future potential Investor Day. But now that you've posted back-to-back quarters of really strong results on profitability, any changes to thoughts on long-term profitability or maybe getting to those long-term targets sooner?

Jason Robins, CEO

Well, you're right. We are planning on covering that at the Investor Day. So I'll hold off on comment on that until then, but we will certainly have more to say about that later this year.

Operator, Operator

And our next question will come from Ed Young of Morgan Stanley.

Edward Young, Analyst

My question relates to Slide 6, about the increasing pace of customer acquisition. The 6% you've achieved in Massachusetts in the first, I guess, 50 to 60 days, suggest that the pace is continuing to improve even further of the '23 cohort. Can you just talk to the drivers of this? How much of that is related to your playbook? How much is that sort of stage you're at in terms of the market? And particularly, I wonder if you could comment on to what extent any of that's reflective of the competitive situation and the actions of others that were informing those faster paybacks?

Jason Robins, CEO

I mean I do think it's all of the above. I think all of the factors you just mentioned, all three factors, are contributing in our tailwinds right now. So one, I think we've very much optimized our go-to-market. We now are close to 2 dozen states at this point. So I think we've had a lot of time to really optimize that and feel very good about our new state playbook. Secondly, you're seeing the effects of national advertising. And that really, I think, especially in the case of Ohio, Massachusetts and Maryland, which came shortly following in the case of Massachusetts, the NFL season, a lot of that probably a quick ramp was at least in part the result of a switch to national advertising, which made it so these states have seen more advertising than in the past. I think also there's a lot of momentum in the industry. People travel to different states. They have friends playing. So I think that's helped with faster ramp. And I do think that competitively, you're right, that there's been a lot more consolidation in the last few state launches to the top two players in the sportsbook market. And I think that's also driving it as well.

Edward Young, Analyst

Great. Just a quick follow-up on iGaming. You talked about some of the internal improvements in terms of retention through the end of the NFL season into March. But I wonder if you could just again broaden the competitive environment question there on iGaming. Are you seeing anything particularly different in that environment? Is that informing the market share as well? Or do you think it's sort of primarily internal actions that bring that share increase?

Jason Robins, CEO

I think it's again a mix of both. I think that you're certainly seeing both. I also think that because the cross-sell is so strong between sports betting and iGaming that as we gain share in sports betting, we're naturally going to gain some share in iGaming as well if we continue to do a good job with the cross-sell, which we have been doing. So I think that's a big factor to consider also.

Operator, Operator

And our next question will come from Carlo Santarelli of Deutsche Bank.

Carlo Santarelli, Analyst

Jason, you mentioned that the parlay handle increased by approximately 400 basis points year-over-year. Could you provide some context regarding a) the impact that had on hold on a stabilized basis, not specifically for the quarter, but perhaps some sensitivity around it? And b) could you give us an estimate of what that number looks like in absolute terms?

Jason Robins, CEO

The hold rate, specifically the parlay mix, has not been disclosed. Currently, for Q1, we are observing a hold rate in the mid-8s, which represents roughly a 250-basis-point increase compared to last year. This increase is attributed to a combination of outcomes that were unfavorable last year, some favorable outcomes this year, and the increased parlay mix contributing to the rise.

Carlo Santarelli, Analyst

Great. Okay. And then as a follow-up, I believe last year, your marketing was a little bit over $800 million. In steady state, how do you guys think about that number relative to revenue as a percentage of revenue? Probably post-launch, et cetera?

Jason Robins, CEO

Yes, I think you're right; it does depend on state launches in the short term. However, long term, during our Investor Day, we mentioned around 7% to 8% of revenue, possibly a bit more, about 10%. For now, as I mentioned earlier, we'll be updating some of those metrics later this year at our new Investor Day, but for the moment, we feel confident that this is the right number. Also, as revenue grows, marketing may not need to increase proportionately from this point. Based on the snapshot we provided during our last Investor Day, that scale seems appropriate, and I believe that as revenue continues to grow, marketing doesn't have to increase linearly either.

Jason Park, CFO

Yes, Carlo, I believe that marketing as a percentage of sales is a valid external measure. Internally, we will continue to assess the Lifetime Value to Customer Acquisition Cost as the situation matures in the fifth to seventh year and adjust the total marketing expenses accordingly to account for the adults yet to be acquired. As we've shared data on our more mature markets, you can observe that the actual marketing expenditures are decreasing in those areas.

Operator, Operator

And our next question will come from Barry Jonas of Truist Securities.

Barry Jonas, Analyst

Great. We've seen some deals across the space recently. Curious how you're thinking about M&A here?

Jason Robins, CEO

No. Right now, it's not really a focus of ours. We feel like we had really strong organic growth. We're executing very well competitively. We're seeing natural consolidation of market share happen in the U.S. So I think right now, that's our focus. And it doesn't mean that down the road, M&A couldn't become more interesting. But at the moment, we're very focused on execution.

Barry Jonas, Analyst

Great. And just as a follow-up, curious where you think, from a state legalization perspective, what are the biggest opportunities for OSB? And maybe iGaming expansion exist today?

Jason Robins, CEO

Yes, it's a great question. I think right now, the states that we are seeing active bills that have a shot of moving Texas, which we'll see. It's different by the day, what I hear there. North Carolina, Minnesota, and I think Vermont are the ones that have the best shots of moving. Kentucky, of course, already passed this year. We don't have any update yet on the timing of launch, but we expect by our August call, we'll have a little bit more clarity there and can factor that into any future guidance, to the extent that it's relevant to this year. And then on the iGaming side, I think there's a lot of bills right now. I don't know that most of them have a good shot of moving this year, but the state that I think probably has the best chance on the iGaming front this year would be Illinois.

Operator, Operator

And our next question will come from Daniel Politzer of Wells Fargo.

Daniel Politzer, Analyst

I just wanted to dive a little bit more into gross margin. Obviously, it came in nicely above. I was wondering if you could maybe unpack this a bit and talk to the puts and takes here in terms of gaming taxes, the platform cost, processing cost and the rev share. I mean which of these pieces are tied to GGR versus handle? And what kind of moves around quarter-over-quarter? Because this obviously was a big source of the upside, and we've already talked about that a little bit, but any more color there would be great.

Jason Park, CFO

Yes. Good question. I mean, I think gross margin rate was obviously higher on a year-over-year basis, by 600 basis points. Underneath of that is a bunch of state complexion, Dan. So you've got investment through promo dollars, which is a headwind to gross margin rate in Ohio and Massachusetts. At the same time, we're lapping a heavy promotional Q1 with the New York and Louisiana launches in Q1 of 2022. That's probably one of the largest factors that impact gross margin rate in any given period. Bigger picture, the other elements, taxes, those are fairly well known from a statutory tax rates. Platform cost, we continue to be very thoughtful about vendors that sit within our platform cost, and you hear us talking about bringing in-house more of our game offerings both on OSB and iGaming side. And then in terms of market access, as a scale operator, we believe we get fantastic rates in the states that do require market access fees. So I think those are the biggest levers and elements of our gross margin rate.

Daniel Politzer, Analyst

Got it. Just one quick follow-up, if I may. For the third quarter, I don't think expectations have changed much. Is there an anticipation that for Massachusetts, Ohio, and possibly Maryland, we might see an increase in promotions with the first football season? Or is there something else I should be aware of?

Jason Robins, CEO

Yes. I think you're right in the sense that we expect that, given some of the early acquisition trends we've seen in those states and knowing that Massachusetts hasn't even had any football yet, it was March Madness, but there's still probably a significant audience out there. We are baking in an increased acquisition assumption, which results in Q3, even though there might be sort of similar to what Jason was saying on the gross margin side. There's a lot of puts and takes there too, and it will probably net out slightly better than we thought. But I think that's really going to depend on how strong the customer acquisition is. And overall, H2 should definitely be better. So it's really just a question of depending on acquisition trends, which are a little hard to predict in these states at that early stage of the NFL season, how much falls in Q4 versus how much falls in Q3.

Operator, Operator

And our next question will come from Benjamin Chaiken of Credit Suisse.

Benjamin Chaiken, Analyst

I recall that in your comments last quarter, you projected a fixed cost increase of 10% to 15% year-over-year for 2023. Jason mentioned in the prepared remarks about a low single-digit trend in the second quarter. What is your current outlook on the full-year fixed cost guidance? Is it still in the 10% to 15% range, or has that changed?

Jason Park, CFO

Yes, absolutely, maintaining the 10% to 15% on a full year basis. And we called out single digit for Q2, as you could see that the fixed costs in Q1 were higher than that. So yes, maintaining the 10% to 15% full year fixed cost growth.

Benjamin Chaiken, Analyst

Okay. I'm thinking on the fly, but that suggests a flat to low single-digit decline in external marketing year-over-year in response to Carlo's question. You have some new state launches in there, which indicates that the legacy states are seeing a significant drop in external marketing. Is this due to national advertising, improved products, or something else? How do you perceive the situation? Are you pleasantly surprised, or is this all part of the plan?

Jason Robins, CEO

No, I believe this is going as planned. The speed at which we're observing these developments is a nice surprise. However, the trends are in line with our expectations. I anticipate that we will end the year roughly flat, with some possible variations depending on the results. As Jason Park mentioned earlier, we are monitoring this situation closely and analyzing real-time data. We're quite certain about our position for Q2, while Q3 may have some flexibility depending on the outcomes. Overall, we expect to remain in a flat range year-over-year. If we increase our spending slightly, it could lead to additional revenue expectations in Q4, but I don’t foresee any changes in our adjusted EBITDA outlook.

Operator, Operator

And our next question will come from Jed Kelly of Oppenheimer & Company.

Jed Kelly, Analyst

Great. Two, if I may, one longer term. Jason, how do you think about the right approach in terms of managing the optimal hold percentage you want to generate with the maximum number of users? And then my follow-up is, you saw very strong growth in the vintage state. I think you said 10% unique user growth. Where are those unique users coming from? Is that more consumers being of legal age? Or are you actually getting new users? And does that include Golden Nugget? Or is that all organic?

Jason Robins, CEO

On the first question, I think we don't have a clear answer yet. Globally, there are markets with much higher hold rates than what is currently being targeted in the U.S., influenced by various legal frameworks. There are numerous data points to consider, and I understand there are many factors at play if one tries to piece it all together. We will approach this process iteratively. The main focus for us is achieving product-market fit. We are not currently considering increasing hold rates by making odds less favorable for players. Instead, we aim to create products that people enjoy, continue to use, and find appealing. Our priority is increasing adoption and ensuring customer satisfaction with our products, which will naturally lead to higher hold rates. We have many ideas and strategies to pursue, including enhancing our parlay offerings and exploring other products like cash out options where there is potential for growth. Internally, our focus is not solely on boosting hold rates but on maximizing user adoption and satisfaction, which should result in improved hold rates over time. We will remain data-driven and monitor the situation closely. Now, what was the second question?

Jed Kelly, Analyst

Where is the 10% unique user growth coming from in vintage states?

Jason Robins, CEO

There are always new individuals entering the market, and we believe we have not yet reached the ultimate total addressable market. In the oldest states, we are still under five years into this industry. While iGaming in New Jersey has been established longer, outside of that state, iGaming has not existed for more than four or five years at most. It is still early in the development of this sector. Typically, in the early stages of any market, we expect to see ongoing user growth and increased market penetration. There are always new people reaching legal age and others moving in and out of states, creating dynamic conditions. However, much of this is a gradual process. As with any product, full adoption doesn't occur immediately; rather, you initially attract the most enthusiastic users. This is a consideration when setting customer acquisition cost targets, as we know more casual customers will come over time. There remains a significant market potential available. Additionally, much of this growth will be driven by our products. The more we develop offerings that resonate with the general public and that are easier and less intimidating for average customers, the more user growth we can anticipate.

Operator, Operator

And our next question will come from Robert Fishman of MoffetNathanson.

Robert Fishman, Analyst

Given the current weak ad market backdrop, can you just discuss how that's helping with your additional ad buying efficiencies, both on the national and local basis? Maybe I don't know if possible to compare how much you're paying for an ad spot in the playoff this year compared to last year?

Jason Robins, CEO

There has certainly been a decrease in the market rate for advertising, which varies by channel. However, looking at it from a broader perspective, this trend is evident across the industry. Certain channels experience some offsets due to inventory restrictions in our categories. For example, the NFL has imposed limits, likely around five spots per game, which affects the dynamics. This doesn't have the same impact in other media forms, where auto and insurance sectors are competing and influencing the market differently. Overall, it is clear that there has been a reduction in ad rates. Coupled with optimization efforts, this has led to a significant increase in customers while managing to achieve a decrease in customer acquisition cost, which is unusual. Typically, a 50 percent increase in customers would lead to a rise in CAC, but we actually observed a 27 percent year-over-year decline in Q1.

Robert Fishman, Analyst

That makes a lot of sense. And just maybe a big picture. With the current competitive landscape, it seems clear to us at least that you cemented DraftKings as a winner for this long-term opportunity. So can you just talk about plans to keep growing your market share from here and maybe even potentially close the gap with FanDuel?

Jason Robins, CEO

Yes. I mean, first, we don't take anything for granted. So we assume that there's always going to be a very competitive market. And that we don't assume we won anything or that we have anything that we can bank on yet. And I think that keeps a lot of the edge in the competitive drive for the company. No doubt having a big competitor in FanDuel also is helpful. It gives us somebody on the OSB side to feel like we can chase down. And I think similarly, on the iGaming side, we've been chasing down BetMGM. And for the first time in Q1, we're able to pass them for #1 market share in iGaming, which we're very proud of. So definitely, I think, having that competitive landscape is helpful in keeping our employees focused on who we need to be. And at the same time, we also understand that new competitors can enter the market at any time, and we can't take anything for granted and have to assume that we always have to be serving the customer and innovating and creating new products and new features. And over time, we believe that that's the key to driving loyalty. It's just the best product and the best customer experience.

Jason Park, CFO

I would add that when you compare our market shares to FanDuel on a year-over-year basis, both of our handle shares are quite similar. This highlights that the hold rate remains a significant focus for DraftKings, and we are committed to improving hold rates through product mix and offering customers additional products they enjoy. As we progress with hold rates, it will positively impact our relative market share compared to FanDuel.

Operator, Operator

And our next question will come from Joseph Stauff of FIG.

Joseph Stauff, Analyst

Asking about just frame how much wider, say, your product depth is this year versus last, especially in the second quarter? So I don't know how you can frame for us. Like how much wider NBA product is? Or especially second quarter versus last? Especially as I see it kind of going into May, 5 states still in play. Obviously, Knicks and Celtics, which have huge fan bases and probably betting handle?

Jason Robins, CEO

No, I think first, you're right that the product has significantly improved year-over-year. Specifically regarding the sportsbook product, while we have also made progress in iGaming, we began from a standpoint where last Q2 we were about 6 to 7 months post-migration. Now, we have a full extra year of experience. We've introduced micro markets for NBA, baseball, and several other sports that are unique to us. We are currently the only company with live Same Game Parlay. We didn't have Same Game Parlay 1.5 years ago, but now we offer the only live NBA Same Game Parlay and the only live MLB Same Game Parlay available. We are continuously innovating with numerous features. We added parlay insurance and many other markets that didn't exist last year. So you're absolutely right. The depth not only in terms of market offerings but also in features and capabilities has been transformative for our ability to compete for market share and attract customers.

Joseph Stauff, Analyst

And then can you just remind us on your efforts and your initiatives to GNOG in particular? And just remind us of maybe be fully, say, implemented in the market?

Jason Robins, CEO

Yes. We are still focused on the migration of GNOG and believe that we are on track. GNOG has been a valuable addition to our efforts in achieving the number one market share. I believe the best is yet to come because we haven't fully realized the synergies from the deal until it is on our platform. We are very excited about the migration. The synergies include not just cost savings but also improved product quality, better revenue generation and monetization from players, a smoother customer experience, enhanced usability, superior merchandising, and increased cross-selling between games. Our customer acquisition process is also showing promise, as our PAM is converting new users at a better rate than the GNOG conversion rate. There are many positive developments ahead, but we have yet to see them realized. We are hopeful to witness some of these achievements in the latter half of the year.

Operator, Operator

And our next question will come from Clark Lampen of BTIG.

William Lampen, Analyst

Jason, given a lot of the positive things that are happening now with the U.S. business that we've covered already on the call so far, I'm curious whether we're at a point where either near or medium term you'd feel more comfortable entertaining opportunities to expand the business maybe a little bit more broadly in overseas markets?

Jason Robins, CEO

For us right now, the opportunity in the U.S. is so significant, and we are so well positioned here that, that has to be the focus. At some point down the road, international will become of interest, but right now, we're very focused on the U.S. And at the same time, obviously, we understand that the capabilities that we're building on the product side, the technology side. These will be things that will give us high leverage and create really strong EBITDA margins where we'd expand into international markets because a lot of the same tech and product is usable without having to add a ton of incremental cost. So it's something down the road we consider. But right now, we think the U.S. is still in the very infancy stages we are so strongly positioned. We're growing our market share. We're growing at a faster clip. The investments we're making are working, and we want to continue to fuel that as much as possible.

William Lampen, Analyst

Understood. And then maybe coming back to product. We've seen some of your peers of late looking to bolster their first-party offerings. I'm curious understanding that the priority is really building in-house there is sort of bigger picture a widening gap between you, FanDuel, and the rest of the sports betting market, would you consider additional acquisitions as a means of sort of both improving the offering and magnifying that trend? Or is there one market, whether it's OSB or iGaming, where that makes more sense?

Jason Robins, CEO

At this point, I don't think that's really a focus. We're seeing market share consolidate organically, and I believe that eventually we will hit a ceiling. At that time, we will evaluate the situation. But for now, I think we feel that our current strategy is effective. Companies often make mistakes by getting distracted from what is working instead of maintaining focus. We believe it's crucial to keep our team centered on our goals right now.

Operator, Operator

And our next question will come from Chad Beynon of Macquarie.

Chad Beynon, Analyst

As we think about the revenue guidance, Q1 was 24% of that, which I believe is slightly higher than normal. And you called out all the items that led to that strong performance. But as we think about normal seasonality, understanding that it's a moving target with these structural hold changes, is there anything that you're comfortable with providing to us just in terms of how that could look? What's really hinged on that fourth quarter or what the middle of the year could look like?

Jason Robins, CEO

Yes, it's a great question. When comparing to last year, we had unusually low hold in Q1 due to unfavorable sports outcomes. In any quarter, that can swing things, which is why we focus more on annual guidance and provide some context on how we expect performance to differ in various halves or quarters. However, it does vary based on those factors, but over the year, it tends to balance out. You will see fluctuations in revenue distribution, and changes based on the timing of state launches and other elements. The difference this time is due to last year's low hold, which was driven by outcomes, and there have also been structural hold changes that have improved. We experienced poor sports outcomes in Q1 last year compared to this year, which has contributed significantly to the difference. Regarding future quarters, much of what we improved last year began to take effect in the latter half of the year. We have additional initiatives that we believe could enhance performance this year. However, a lot of the factors we've accounted for in our forecast were already felt in the back half of last year, leading to a more significant impact in Q1 and potentially in early Q2, while as we approach the second half of the year, some of that is year-over-year.

Chad Beynon, Analyst

Okay. Helpful. And then with respect to just media tie-ins, you've done some of these exclusive live broadcasting partnerships. It appears that there will be more opportunities if you want to kind of expand with other partners in the media space. Just wondering what you've seen, from a success or failure, with some of these exclusive deals that you've had, if the engagement is higher? And maybe it's worth exploring some of those opportunities that could come up in the next 12 to 24 months?

Jason Robins, CEO

Yes, optimizing our marketing is a significant focus for us, and it's done on a case-by-case basis. We have accumulated substantial data over more than a decade of daily fantasy sports and nearly five years of sports betting regarding which types of media yield the best results. This data has been crucial for our year-on-year optimization. Additionally, the market conditions have improved, as mentioned earlier. There is a lot to appreciate in the media landscape. When it comes to deals, we assess each one individually. The key question is whether we could achieve similar results by spending the same amount in the open market. If we believe we can, then it makes no sense to commit those funds. We look for deals where we have a strategic advantage, whether through efficient spending at a larger scale that wouldn't be possible elsewhere or through favorable pricing that justifies tying up funds instead of maintaining flexibility.

Operator, Operator

And our next question will come from Robin Farley of UBS.

Robin Farley, Analyst

I have two questions. First, I would like to follow up on how much the GNOG acquisition contributed to the 10% increase in unique users. Second, regarding your guidance, it typically improves each year by 7% to 9% of the population. Achieving that would require several of the smaller states you mentioned to legalize this year to increase access for 2024. If multiple legalizations do not happen, particularly referring to states other than Texas, is there enough organic growth from your existing states to sustain your guidance for 2024?

Jason Robins, CEO

Thank you, Robin. Regarding the first question, it's a like-for-like comparison. We didn't just add GNOG to our numbers and keep it in the base; in fact, GNOG is slightly dragging down that 10% figure. The DraftKings brand would have shown a higher percentage on its own. On the second question about timing, it will fluctuate from year to year. Currently, if you consider the live bills, it's possible we could end up above our forecast, below it, or right on target. If Texas is approved, along with Kentucky, we would exceed the target. However, if Texas doesn't pass, we could still meet our expectations if North Carolina, Minnesota, and Vermont pass alongside Kentucky. So those scenarios could lead us to meet or exceed expectations. It’s still too early to predict the implications of these legislative outcomes. We are seeing nearly double revenue growth year-over-year in our established states in Q1, and it's important to remember that even the oldest states are still under five years into legalization, leaving room for organic growth. Long-term, we need more state legalization, but I wouldn't read too much into whether we're over or under our projections in any particular year. Specifically for 2024 numbers, if legalization proceeds slowly this year, I don't expect a significant impact on 2024 revenue because any new states legalizing would launch throughout the year, facilitating new user acquisition. While there might be some minor revenue effects, the real impact would be felt on EBITDA; less state legalization could lead to increased EBITDA in 2024. So that perspective is quite interesting as well.

Operator, Operator

And our next question will come from Jordan Bender of JMP Securities.

Jordan Bender, Analyst

If we think about your legacy customers, does the promotional intensity of those players, maybe it consistent with more international markets? Or do you think there is still more room to save on promotions coming from those cohorts?

Jason Robins, CEO

I think definitely, there's more room. And similar to how we look at hold, it can't be something where we create a worse customer value proposition, a worse experience, and you don't need to. There's plenty of levers just by making sure we get the right things targeted to the right people so that they're actually generating incremental GGR alongside the promotional dollars and having the effect that we want. There's optimization of bonus hunters still out there, which we've been very focused on. There's all sorts of levers that you can pull. And then there's still just the natural decline that you're going to see over time as the market matures. And I think you can look across Europe and see that trend in a number of different markets. So no doubt, there's still room there, and that's still a focus area for the team. And at the same time, we feel like there's no real absolute target. It's certainly about maximizing long-term NPV and player value. So we're also leaving the flexibility to say that if you could find wins where you can really drive increased revenue and retention through promotions that pay back quickly, then we want you to pursue that as well.

Jordan Bender, Analyst

Great. And then for my follow-up, on DK Horse, should we be thinking about that as a revenue driver for you guys? Or is that more of kind of a cross-sell opportunity into other areas of the business?

Jason Robins, CEO

I mean it will have a revenue impact, but it will be fairly de minimis on the year. We're still rolling it out. It's in, I think, 15 states now. So still in the process of doing that. I think we'll have more to say probably, more information on that once we get through the Triple Crown, particularly the Kentucky Derby, which I think will give us a sense of what kind of customer acquisition we can expect. And I think really, it's still new enough that I wouldn't necessarily ascribe a whole lot of revenue this year to it. But as we get smarter about how to utilize that product and cross-sell between it in sportsbook and iGaming, I think you'll continue to see a bigger and bigger impact. And it is something that we felt was important to add to our product portfolio, and we'll also work to better integrate long term.

Operator, Operator

And our next question will come from Ryan Sigdahl of Craig-Hallum Capital Group.

Ryan Sigdahl, Analyst

Nice job. Curious on Massachusetts, so you guys defended your home turf very nicely there. Took #1 handle share by a commanding lead. How important was that psychologically to win the early battleground? And I guess, did you change your spend and your strategy versus running the normal playbook that you say applied in Maryland or Ohio?

Jason Robins, CEO

I think, really, the only thing that we changed in terms of strategy was just making it clear that we're a hometown company. And obviously, that's unique to hear. So other than that, it was pretty much the same playbook. I think New England, in particular, we tend to love our own here. So we feel like that was a really good angle for this market, and it worked. It was very effective from a market share perspective and a new customer acquisition perspective. So we'll continue to do that. But otherwise, it's the same state playbook that we've been optimizing over the last 20-plus states. And I think that was the biggest reason that we've had success in penetrating because you saw a similar adult penetration, maybe not quite as much market share, but similar acquisition and adult penetration in Ohio and Maryland as well.

Ryan Sigdahl, Analyst

And then just for my follow-up, with the live Same Game Parlay products for the NBA, Major League Baseball, has that accelerated in-game betting in total? Or is it just a shift in what people are betting on live and being margin accretive rather than incremental?

Jason Robins, CEO

No, it's definitely incremental. I mean I think that right now, we're seeing both parlay. I know we talk about parlay a lot, but we're also seeing in-game grow. So there's a lot of upside there. I think the biggest upside in in-game is just figuring out how to get the video feeds, lower latency for people who want to do that play-by-play type of betting. But no doubt, live Same Game Parlay has driven an increase in engagement in-game.

Operator, Operator

And our next question will come from John DeCree of CBRE.

John DeCree, Analyst

Maybe the first one, which is probably a little bit of summary from a couple of components that we've talked about this morning already. But with structural hold rate going up, and then particularly in vintage cohorts that promotional intensity is moderate here coming down, but yes, your customer retention seems to be increasing nicely, which is a really nice tailwind. I was wondering if you could kind of talk about what you think is kind of driving that success? So presumably, customer value is going up or if they're spending more, but also coming back more frequently.

Jason Robins, CEO

I believe it begins with our product, which is designed to create more loyal customers. Customer experience has been a major focus for us, and we've seen significant improvements in our customer experience year-over-year, including the introduction of chat and other enhancements that have made a big difference. Our customer relationship management has been refined over the past few years, leading to notable improvements, particularly in post-Super Bowl retention and cross-selling into iGaming. The CRM team has performed exceptionally well. Overall, it has been about effective execution throughout the business, with many dedicated individuals contributing to our success.

John DeCree, Analyst

That's helpful. And maybe an easy one for Jason Park. I think cash at the end of the year is expected to be around $800 million. In the past, I think you've been comfortable with capitalization, but is it fair to assume with that cash balance and profitability trajectory improving that you're still comfortable with your capitalization at this point?

Jason Park, CFO

Very comfortable with our capitalization. No need for additional capital.

Operator, Operator

And I would now like to turn the conference back to Jason for closing remarks.

Jason Robins, CEO

Thank you all for joining us on today's call. We're off to a strong start in 2023 and are excited about the rest of the year and beyond. I look forward to speaking with you over the next few weeks and hope you all stay safe and well. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.