Earnings Call Transcript - DKNG Q4 2021

Operator, Operator

Good day, and welcome to the DraftKings Fourth Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be 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. You may begin.

Stanton Dodge, Chief Legal Officer

Good morning, everyone, and thanks for joining us today. Statements we make during this call that are not statements of historical fact constitute forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. For more information, please refer to the risks, uncertainties and other factors discussed in our SEC filings. During the call, management will also discuss certain non-GAAP measures that we believe may be useful in evaluating DraftKings' operating performance. These measures should not be considered in isolation or as a substitute to DraftKings' financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our annual report on Form 10-K that was filed today with the SEC and our earnings presentation, both of which are available on our website at investors.draftkings.com. Hosting the call today are 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.

Jason Robins, CEO

Good morning, everyone. I hope you are all doing well. Before I share my thoughts on the fourth quarter, I want to thank everyone at DraftKings for their tremendous effort and contributions to our success. We had an incredible 2021, and our dedicated employees continued to deliver during an ongoing and challenging pandemic. I also want to thank our loyal customers for their continued support. At DraftKings, we are always striving to put our customers at the center of everything we do. On today's call, I will cover the following topics. First, I'll discuss our financial achievements. We outperformed our expectations for both revenue and adjusted EBITDA in the fourth quarter, capping off a year in which five of our states were contribution profit positive. We're off to a tremendous start in 2022 as well. Customer acquisition in new states has been accelerating while continuing to pay back on a gross profit basis in the two- to three-year time frame. As of today, 10 states are either already contribution profit positive or on track to achieve that milestone in 2022. Overall, we expect DraftKings to be contribution profit positive for FY '22. And if we were to have frozen new state launches at the end of 2021, we expect that DraftKings would have been able to achieve EBITDA profitability as an enterprise in Q4 of this year. Second, we continue to see rapid expansion of the OSB and iGaming TAM in the U.S. This is being driven by both new jurisdictions legalizing OSB and iGaming as well as continued healthy growth in existing states. Overall, in 2021, seven states enacted legislation for mobile sports betting, and we launched in five states last year with the other two states subsequently launching in 2022. In iGaming, one state enacted legislation in which we subsequently launched. We also saw two new states open up for Daily Fantasy Sports. Third, additional product features and functionality for our mobile sports betting and iGaming apps are driving increased customer retention and monetization, as well as improved margins. Many of these benefits are now possible as a result of the migration to our in-house sports betting platform, which gives us the ability to diversify our bet types, optimize our in-game betting features and expand the breadth and depth of our content offering. We also introduced our new Dynasty Rewards loyalty program and continue to expand our social functionality. And finally, adjacent verticals further increase our TAM with the added benefits of more efficient customer acquisition and higher customer LTV. Our new growth initiatives such as DraftKings Marketplace and media are seeing promising early results, and we're optimistic about the potential for future growth. DraftKings’ 47% year-over-year revenue growth to $473 million in Q4 exceeded our guidance by 8%. The strong fourth quarter brought our full-year revenue to nearly $1.3 billion, representing 101% year-over-year growth. Adjusted EBITDA in the fourth quarter also outperformed our expectations at minus $128 million. Fourth quarter Monthly Unique Payers increased to about 2 million, up 32% versus Q4 2020. Average revenue per Monthly Unique Payer increased 19% year-over-year to $77. I'm very pleased with the market share we achieved in Q4, which reflects the success of our technology migration and the strength of our overall business and brand. Our handle share for mobile sports betting across all active states was 32% in Q4. For iGaming, our gross revenue share was 20% in Q4, including Connecticut; and our market share in New Jersey set a record in each of October, November and December. We look forward to providing more color on a number of topics at our upcoming Investor Day, including our TAM, market share, product innovation, unit economics at both the player and state level, enterprise EBITDA, and new organic growth vectors. Our key performance metrics, including user acquisition, retention, and engagement continued to trend well in the fourth quarter and led to strong results across products. The fourth quarter was a record quarter for mobile sports betting handle on an absolute basis as we were live in more states compared to the fourth quarter of 2020 as well as on a same-state basis. In states where we were live for the entirety of Q4 2021 and Q4 2020, we saw a significant increase in engagement, with handle up to 65% due to paid actives growing by 37% and handle per paid active growing by 20%. Compared to the fourth quarter of 2020, iGaming gross revenue grew 153% year-over-year, including all state, and 61% year-over-year on a same-state basis. Looking at New Jersey, our most mature state where we launched mobile sports betting and iGaming in 2018, our MUPs continued to grow at a healthy rate. In the fourth quarter of 2021, Combined OSB and iGaming MUPs grew 18% year-over-year. MUPs in New Jersey were 78% higher relative to the fourth quarter of 2019. We had a very strong launch for mobile sports betting and iGaming in Connecticut, a state with only three mobile sports betting operators and only two iGaming operators. For mobile sports betting in Connecticut, our handle market share was 47%. Our gross gaming revenue share was 51% and our net gaming revenue share was 57% in the fourth quarter. For iGaming in Connecticut, our gross revenue share was 58%. Our business momentum has continued into Q1. On January 8, we launched mobile sports betting in New York. It took DraftKings less than 24 hours to acquire 100,000 first-time paid bettors in New York compared to 17 days for Arizona, 170 days for New Jersey, 312 days for Pennsylvania, and 344 days for Indiana. In our first 30 days, we acquired over 300,000 users in New York, which was 2.3x the average of our other states in their first 30 days on a population-adjusted basis. There is no question that customers are joining our platform faster than they did in states that we launched in previous years. As a result, our CACs are fantastic, but overall spending for the first few months is higher than it was for our more mature states, such as New Jersey. When the New York market launched, there was some aggressive promotional behavior by many operators, but DraftKings is committed to maintaining its disciplined approach to customer acquisition and is targeting a two- to three-year path to profitability for the state. We believe that product will be the key differentiator between operators over time. For example, our technology provides a seamless customer experience through a single integrated sign-in and wallet across product offerings and jurisdictions. We are already seeing this play out in the Northeast, where customers who travel between New York, Connecticut, New Hampshire, New Jersey, and Pennsylvania are able to play on the DraftKings app without having to open a new account. On January 12, we announced that DraftKings will become the official Sportsbook provider of the Oregon lottery. Pursuant to our exclusive agreement with the Oregon Lottery, DraftKings Sportsbook replaced the scoreboard app on January 18. The DraftKings Sportsbook app offers additional betting markets and an overall superior customer experience. We look forward to serving all sports bettors in Oregon. On January 28, we launched mobile sports betting for eligible customers in Louisiana's permitted parishes. With several professional franchises in addition to Division 1 collegiate athletics, there are ample hometown fan bases and opportunities in Louisiana to engage. And last Sunday, an exciting NFL playoff ended with another game that went down to the wire. It was also a great end to the season for DraftKings as on Super Bowl Sunday, our total actives across all products was nearly 1.7 million. In fact, this year's Super Bowl was our highest-ever day for actives and handle both in total and on a same-state basis. Looking ahead, we are raising our revenue guidance to incorporate the impact of New York and Louisiana as well as strong underlying performance in the states we were already live in last quarter. Jason Park will provide more detail. Turning to legalization trends, we have continued to see momentum. Following our launches in New York and Louisiana in January, DraftKings is 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 5 states, representing approximately 11% of the U.S. population. After the governor of Ohio signed into law a bill authorizing mobile and retail sports wagering, there are now 3 U.S. jurisdictions that have legalized where we are preparing to launch upon licensure and approval from regulators, Maryland, Puerto Rico, and Ohio. These jurisdictions represent approximately 7% of the U.S. population and will bring the percentage of the population where DraftKings expects to offer legalized mobile sports betting to approximately 43%. So far in 2022, 10 state legislatures have introduced legislation to legalize mobile sports betting, and 8 state legislatures have introduced legislation either to expand their existing sports betting frameworks, create referendums regarding sports betting legislation, or increase in-person sports betting opportunities. In addition, 3 states have introduced iGaming legislation and 3 other states have introduced online poker legislation. We also made 2 announcements that position us for mobile and retail sports betting in Kansas and the state of Washington pending changes in state law, licensure, and receiving necessary approval from state regulators. I also want to comment on California and Florida. In California, we continue to work with a number of leading online sports betting operators in support of a campaign to bring regulated safe and responsible online sports betting to the state. Legal online sports betting is projected to bring hundreds of millions in tax revenue annually to the state to address 2 of the state's most pressing issues, homelessness and mental health. We are confident that the California Solutions to Homelessness and Mental Health Support Act will create a competitive market with the best products and experience for consumers. In Florida, we were fortunate not to get the required number of signatures in time for inclusion on the ballot this November. This is due to a variety of factors, including COVID as well as the compressed time frame given when signature gathering started. We are very encouraged, however, by the over 1 million individuals who signed petitions in less than 8 months, which shows that Floridians do want the opportunity to vote on a competitive mobile sports betting market in the state. We are exploring all options to ensure that Floridians get that opportunity as soon as possible. And if we were to refile, we are very confident that, given the extended time frame, we will be able to qualify for the 2024 ballot. Ontario has announced that the province will launch the first competitive regulated and licensed online sports betting and iGaming market in Canada on April 4, 2022. We look forward to launching in Ontario and competing in that market, pending licensure and required approvals. For context, Ontario represents about 40% of Canada's population and would be the fifth-largest U.S. state by population. Moving on to product and technology. We continue to add breadth and depth to our mobile sports betting and iGaming products. As we have mentioned in the past, we believe that the long-term winners in this industry will provide the best product experience to customers. With the completion of the migration to our in-house bet engine, we are now capturing the acquisition synergies we anticipated in our mobile sports betting cost structure and have turned a variable cost into a fixed cost. For mobile sports betting, we launched parlay and same-game parlay insurance promotion capabilities in the fourth quarter. For those who are unfamiliar with this feature, parlay insurance allows bettors to win something even if they lose legs within their parlay bet. This new capability has had a great response from our users, and it has supported growth in our mix in mobile sports betting handle coming from parlays. For same-game parlays, we also expanded our sport coverage beyond the NFL, college football, and the NBA with the launch of College Basketball and the NHL in November. We invested in our in-play offering and in-play experience by introducing a new front-end user interface for Flash Bet that allows for a more engaging wagering experience. Flash Bet is an immersive live betting experience where users can follow what's going on in the game and get shown our flash markets, which refer to the next occurrence that will happen in the game. Markets supported by this functionality include Next Play Result, Drive Result, and Drive Yardage for the NFL and next team to score and type of score for the NBA. For iGaming, we continue to benefit from cross-selling in the games we have created in-house. In the fourth quarter, 49% of mobile sports betting users in our iGaming states also engaged with our iGaming product. When looking at DraftKings' developed games, 56% of iGaming handle in the fourth quarter came from DraftKings developed teams, which is important both for differentiation and from a gross margin rate perspective. As an example, DraftKings Rocket is now launched in Connecticut and in Michigan in addition to New Jersey. This game continues to be very popular with our users. In the first 14 days following launch, 40% of Michigan's iGaming paid actives and 41% of Connecticut's iGaming paid actives played Rocket. This compares to 33% of New Jersey iGaming paid actives in the first 14 days. We look forward to updating you on the DraftKings developed games we will launch in 2022 on future earnings calls. DraftKings Social is an industry-first innovation that creates an integrated social community allowing fans to interact with each other within a peer-to-peer environment. This functionality, which we began rolling out in Q2 of 2021, is now live across our Sports Betting and Daily Fantasy Sports products, and it is driving customer engagement through features such as bet-sharing. The average number of bets for users who have placed at least 1 bet through our social platform grew 67% from Q3 to Q4, which significantly outpaced quarter-over-quarter growth for users who have not placed a wager through our social platform. We will continue to add to our social functionality in 2022. For example, we're launching several additional social integration points across our Sportsbook and DFS products in the first part of the year. We're also building additional features, such as betting groups, which allow friends to bet in private groups where everyone gets to see each other's bets and chat, as well as chat features for both DFS and our live casino games. We will also be launching a feature that allows any user to go live with video and audio, which broadcasts bets they make in real time to viewers. In November, we launched Dynasty Rewards, our all-new cross-product loyalty program that rewards players for their play across all DraftKings consumer products in all jurisdictions. Dynasty Rewards is the most comprehensive DraftKings loyalty program ever, featuring a wide spectrum of rewards curated for every kind of customer, from free credits to exclusive experiences. With the ability to earn on everything DraftKings and to choose how you're rewarded, we believe it will take the customers' experience to the next level, help drive retention, and cement DraftKings as a top gaming and entertainment brand. We have tapped into our deep roster of deals and strategic partnerships to craft these once-in-a-lifetime exclusive experiences. At the launch of Dynasty Rewards, we partnered with the NFL for an exclusive DraftKings Super Bowl getaway and the NHL for the Winter Classic, with many more experiences to come. Engagement with the loyalty program has been phenomenal. Approximately 95% of customers in our highest 2 tiers have actively engaged with the Dynasty Rewards program since launch. And this is just the beginning. Over the months ahead, we will continue to enhance Dynasty Rewards with more ways to earn and redeem, deeper integrations and utility within our core products, new perks with partners and retail locations, and more. DraftKings Marketplace had another dynamic quarter as interest and demand continues to be strong. We sit at the intersection of Web3 and sports culture as the only company to offer digital collectibles, sports betting, daily fantasy, and iGaming products. As the NFT space evolves, the broader DraftKings ecosystem will create more opportunities for our marketplace around utility, gamification, and custom offers that only we can provide. The fourth quarter featured drops from Usain Bolt, Rob Gronkowski, Wayne Gretzky, Simone Biles, Tom Brady, and Tony Hawk, as well as SLAM Logo passes in the soft dome franchise. We also revealed plans with the NFL Players Association and One Team Partners, the group licensing partner of the NFLPA, to launch gamified NFT collections that we anticipate debuting on DraftKings Marketplace during the 2022-2023 NFL season. The agreement grants DraftKings licensing rights for active NFL players, including the authentic use of name, image, and likeness. Initial anticipated features of DraftKings gamified NFL player NFTs include the ability for customers to use these collectibles within games against each other on the platform, as well as separate buying and selling functionality. It is expected that there will be a variety of NFT additions in tiers that incorporate different aspects of utility and digital rarity. DraftKings previously announced a strategic agreement with Polygon to provide a scalable, eco-friendly blockchain solution that enables added throughput, lower transaction fees, and expanded capabilities. We continue to add functionality and features to Marketplace. We launched auctions in conjunction with the exclusive drop of Dale Earnhardt Jr. NFT, and also offer an experiential element, with one auction featuring NFT coupled with the chance to do a lap with Dale at Speedway. Our media vertical is seeing good momentum with month-over-month audience growth, driven in large part through our Dan Le Batard and VSiN assets. Our goal is to continue to grow our audience and content, which is uniquely positioned across three dynamic industries: Sports, entertainment, and technology. As part of that, we are excited to welcome Mike Golic Sr. to our roster of talent, and we have also been actively working closely with our partners at Meadowlark to greenlight several new shows that we expect will be announced in the coming months. And finally, last month, we announced the addition of two new senior leaders with extensive media experience to bolster our team and add velocity to our efforts. We will continue to invest in adjacent growth vectors like DraftKings Marketplace and media in 2022, with the approach that each of them will continue to drive the LTV-to-CAC flywheel that we are creating along with our existing core DFS, OSB, and iGaming offerings. I'd also like to provide an update on our acquisition of Golden Nugget Online Gaming. In Q4, we made significant progress towards closing the acquisition. And upon closing, we are prepared to integrate the business and capture the synergies we outlined when we announced the transaction in August. We're excited to deploy a multi-brand strategy while accessing the millions of loyal Golden Nugget Online Gaming and Fertitta Entertainment customers. We anticipate multiple channels for cost savings by, among other things, recognizing enhanced returns on advertising spend through marketing efficiencies and eliminating platform costs by migrating to DraftKings' in-house technology. I also want to provide some recent updates on responsible gaming. I am proud that DraftKings is playing the long game and refining the customer experience through a relentless focus on responsible gaming education and by supporting research in this area. In December, DraftKings announced a multiyear financial commitment to the Kindbridge Institute for a new research program to study the nexus of veterans and responsible gaming, with the ultimate goal of advancing evidence-based research in this area and improving the lives of veterans. And in January, we announced a multiyear financial commitment to assist the 35 state problem gaming councils across the country by providing critical funding, which will support the work of local non-profit organizations. As part of the new initiative, entitled the State Council Funding Program, DraftKings has offered each state council $15,000 per year for 3 years, a total commitment of $1.575 million over the span of the 3-year program. I will now turn the call over to DraftKings' CFO, Jason Park, who will discuss our fourth quarter results and 2022 guidance.

Jason Park, CFO

Thank you, Jason, and good morning, everyone. We are pleased to announce that we generated $473 million in revenue for the quarter, an increase of 47% versus Q4 2020. Our revenue performance was significantly better than the midpoint of our guidance for the quarter, which was $437 million. Our B2C business generated $458 million for the quarter, an increase of 58% versus Q4 2020. OSB hold was not a driver of overperformance versus our guidance. Our guidance on November 4 had included $25 million of core hold in October, and November and December combined were fairly typical. Given that hold was neutral relative to the guidance we shared in November, the $36 million organic outperformance versus our guidance was due to strength across customer acquisition, retention, and monetization. In our B2C business, we continued to drive strong growth through player acquisition and retention, as measured through MUPs, as well as player engagement and monetization as measured through ARPMUP. B2C Monthly Unique Payers in the quarter increased 32% year-over-year to approximately 2.0 million, which brings our full-year MUPs to 1.49 million, which is up 69% versus prior year. The increase reflects excellent player retention in states where we were live with our OSB and iGaming product offerings in Q4 2020, as well as the expansion of our OSB and iGaming product offerings into new states. Results reflected typical intra-quarter seasonality, with October and November higher from an MUPs perspective, followed by a modest decline in December. As a reminder, a MUP is a monthly unique player, and therefore, our number of annual active players is higher based on how many months per year a MUP plays. Average Revenue per Monthly Unique Payer, or ARPMUP, was $77 in Q4, representing a 19% increase versus $65 for the same period in 2020, which brings our full-year ARPMUP to $67, up 31% versus prior year. Our ARPMUP was positively impacted by a continued mix shift into our Sportsbook and iGaming product offerings and cross-selling our customers into more products. B2B generated $15 million, a decrease versus prior year due primarily to the termination of our Asian reseller agreement. We generated $251 million of gross profit dollars on an adjusted EBITDA basis for the entire business in the quarter, representing a 33% increase versus last year. Gross margin rate in the quarter on an adjusted EBITDA basis for the business was 53% versus 33% in Q3 and versus 59% last year. On a quarter-over-quarter basis, you can see how the promotional intensity for new customer acquisition impacted our gross margin rate in Q3 versus Q4, where we focus more on monetization. On a year-over-year basis, more than half of the share gross margin rate was due to the reduction in B2B revenues resulting from the termination of our Asia reseller agreement. The remaining portion of the change was primarily due to investments in new states launched after Q4 2020, including Michigan, Virginia, Wyoming, Arizona, and Connecticut. As Jason mentioned, the migration to our in-house bet engine has positively impacted our COGS as a percentage of revenue for OSB. Adjusted EBITDA for the quarter was negative $128 million, which also exceeded our expectations due to the strong underlying performance of our business. Our sales and marketing expenses were $263 million, which include our external marketing. External marketing was higher in Q4 2021 versus the fourth quarter of 2020 due to the 5 additional states that went live in 2021, offset by declines in more mature states. The 5 new states represent 9% of the U.S. population and were in their first NFL season. We are seeing more customers engage faster in new states versus states that launched in 2018 through 2020, which improves our per player acquisition costs while accelerating our total marketing investment in a new state. As a reminder, we invest to acquire a player based on 2- to 3-year gross profit paybacks, which we will discuss more at our upcoming Investor Day. Our general and administrative and product and technology costs on an adjusted EBITDA basis were $74 million and $42 million, respectively, as we continued to invest to achieve scale in our back office functions such as human resources, legal, finance and accounting, and customer service, as well as adding to our technology team principally for new product development. A majority of the combined $23 million of year-over-year growth in these two expense lines was due to the compensation of new employees. Our strong Q4 revenue brought our full year to $1.296 billion of revenue, $616 million of gross profit at a 48% gross margin rate and negative $676 million of EBITDA. Taking a step back, 2021 was a fantastic year of execution and continued learning. We will discuss more in our upcoming Investor Day, but it is clear that the business model is working. We are acquiring customers efficiently with clear 2- to 3-year gross profit payback periods, and states are turning positive 2 to 3 years after launching. Therefore, we have an increasingly clear line of sight into turning EBITDA positive. Moving on to our balance sheet and liquidity. We ended the quarter with $2.2 billion of cash on our balance sheet. As we look forward through our scenario-driven multiyear plan, we continue to feel that we are well capitalized for the legalization path and growth ahead of us. As a reminder, our primary use of capital is to fund state launches. And under almost all scenarios and state launch timing, we have sufficient capital to achieve positive free cash flow. Looking at 2022, on our November earnings call, we introduced annual revenue guidance of $1.7 billion to $1.9 billion. Given new state launches and underlying customer acquisition, retention, and monetization trends, today, we are increasing our 2022 revenue guidance to a range of $1.85 billion to $2.0 billion, a 7% increase at the midpoint to $1.925 billion. Our revised guidance equates to year-over-year revenue growth of 43% to 54% and B2C growth of 57%. We expect both MUPs and ARPMUP to grow in 2022, with MUPs increasing at a rate of about 50% higher than the expected rate of increase in ARPMUP. This guidance includes New York, Oregon, and Louisiana as well as the resumption of mobile registration in Illinois no later than March 5. It also includes approximately $70 million in DraftKings Marketplace revenue in 2022. It does not include additional state launches nor the impact of the Golden Nugget acquisition, which we anticipate will close this quarter. We will update our guidance following the closing of the transaction. For B2B, we expect revenues to be about $40 million with minimal growth going forward. Regarding our 2022 quarterly revenue cadence, we expect Q1 to be between $400 million and $420 million. Please remember that although New York and Louisiana launched in Q1, new states typically start generating positive GAAP revenue after 1 to 2 months. Looking at the rest of the year, we expect Q2 to be similar to Q1, Q3 to be modestly lower than Q1, and Q4 to represent the seasonally highest quarter for revenue. You'll notice this cadence implies a higher percentage of revenue in the second half of this year compared to 2021. This is partly due to New York and Louisiana as well as DraftKings Marketplace ramping throughout the year. Additionally, revenue distribution is affected by variations in hold. For example, in 2021, Q1 and Q2 had positive variances, whereas Q3 and Q4 had negative variance. For the purposes of our guidance, we are not assuming variances in hold will reflect last year's patterns as these are primarily driven by sport outcomes. Prior to today, we have not provided guidance for adjusted EBITDA. However, over the past few years, we have gained experience in multiple states, ran many tests to understand how to optimize our business, increased our clarity on organizational requirements, and gained scale in marketing, which supports providing EBITDA guidance at this time. We are focused on growth and on efficiency. We feel terrific about our customer cohort gross profit paybacks as well as state profitability, and thus, our trajectory for revenue and EBITDA. Three important points on profitability. First, we expect to be contribution profit positive this year, with contribution profit defined as gross profit minus external marketing. Number two, if we had not launched any additional states after December 31, 2021, we expect that DraftKings would have been able to achieve EBITDA profitability in Q4 of 2022. And most importantly, number three, based on all the states we are currently in, and if legalization trends remain consistent with prior years, which has been around 7% to 9% OSB legalization per year and 3% to 4% iGaming legalization per year, we would expect to be EBITDA positive in Q4 of 2023. For this year, including the 5 states representing approximately 11% of the population that we have launched since September and a return to mobile registration in Illinois, we expect our adjusted EBITDA to be between negative $825 million to $925 million. Our business model is based on acquiring customers with 2- to 3-year gross profit paybacks, states turning positive contribution profit after 2 to 3 years, and then positive contribution profit states offsetting negative contribution profit states. In 2022, the states we launched in 2018, 2019, and 2020 will generate significant positive contribution profit. This includes New Jersey, which exceeded the expectations we laid out at our last Investor Day on both the top and bottom line. The positive contribution profit from these more mature states is partially offset by the negative contribution profit from newer 2021 states, as well as large negative contribution profit from New York. Our guidance for adjusted EBITDA also includes continued near-term investments in non-external marketing expenses, given the high-growth stage of our industry. We will see the benefits of the investments we are making in 2023 as our P&T, G&A, and fixed marketing expenses will grow at a meaningfully lower annual rate compared to prior years. From a quarterly perspective for 2022, given our launch in New York on January 8 and in Louisiana on January 28, we expect our adjusted EBITDA loss in Q1 to be between $320 million and $340 million. We expect Q3, which is impacted by the start of the NFL season, to be slightly worse than Q1, with the second quarter representing a little less than half of our expected Q1 loss. We expect our fourth quarter loss to be the smallest as we benefit from higher seasonal revenue. As a reminder, as you think about the rest of 2022, please keep in mind that any states that launch have minimal to negative impact initially on the top line as we promote and a negative impact on adjusted EBITDA as we spend on external marketing to drive early customer engagement at CACs that are consistent with our 2- to 3-year gross profit payback period target. Our marketing spend is also highly flexible and can be reduced or paused altogether if attractive customer acquisition opportunities are not available or the sports calendar shifts. That concludes our remarks, and we will now open the line for questions.

Operator, Operator

Our first question comes from Michael Graham with Canaccord. Your line is open.

Michael Graham, Analyst

Hey, thanks very much, and thanks for all the detail. I just wanted to ask two. The first one is just any quick update on in New York, how you're sort of dealing with the high tax rate there and sort of passing that along to the players. And then for a more involved question, just on ARPMUP, the performance there was so strong. Maybe just a little more color on the mix of factors from engagement or product or cross-selling? Just a little bit more color on sort of what you're seeing under the hood that's driving such good performance there.

Jason Robins, CEO

Thanks, Michael. Two questions. So the first one on New York. There's been some chatter of New York considering in this upcoming legislative session adjusting the tax rate down. I think the approach we're taking is a wait-and-see on that. And I think if that happens, depending on where it lands, then we'll adjust accordingly. And if it doesn't happen, then we'll adjust accordingly. So I think we're kind of taking a wait-and-see approach to this legislative session. And in New York, customer acquisition has been so efficient and the early player cohort results have been so strong that we're hopeful that, with an appropriate tax rate, it can be a very profitable market for us. But if not, we'll make the necessary adjustments to ensure that it meets the two- to three-year payback and that it is a very profitable market for us in the long run. As far as ARPMUP goes, there are a few factors at play there. One, we continue to see a mix shift into OSB and iGaming from legacy DFS. That's been helpful. Second, we've improved our product dramatically over the last six months or so after migrating onto our own proprietary tech platform. We've seen an uptick in parlay mix. We've seen an uptick in live betting. So lots of good things there. And then lastly, I think that really, the ability for us to cross-sell and to engage and activate customers continues to get better as our CRM programs have more and more test data, and we optimize those.

Michael Graham, Analyst

All right. Thanks so much, Jason.

Jason Robins, CEO

Thank you.

Operator, Operator

Our next question comes from Joe Stauff with Susquehanna. Your line is open.

Joseph Stauff, Analyst

Thank you. Good morning, Jason. I wanted to ask about your EBITDA loss guidance for 2022. What kind of promotional and advertising environment are you considering for that guidance? Additionally, when you launch in a few states or provinces later this year, it seems reasonable to think that the midpoint of your EBITDA loss guidance, the $875 million, could be wider. Is that correct? Can you provide any specifics on that?

Jason Robins, CEO

So on the first question, the new states that we've launched recently, including, of course, New York and Louisiana this year and then a few last year, we'll continue to invest in those in customer acquisition. Typically, the first year, sometimes two years, of customer acquisition are the strongest cohorts that you acquire. And I think it's really important that we continue to invest there. As noted earlier, we're keeping an eye on the New York legislative session. And I think depending on what happens there with the tax rate, we may make some adjustments. But as of now, we are basing it on what we know. And then as far as new states, as you noted, we don't really get into the habit of saying, here's what we expect to happen because we don't know when new states are going to launch. Obviously, Ontario has some clarity around it. But most other states that have legalized, namely Ohio, Puerto Rico, and Maryland, have not yet set dates. So I think for now, we're going to wait and see on that. And I think there's a number of factors that could drive EBITDA better or worse than what we're guiding to right now. I think there's some upside, and there's, of course, the possibility of new states where we'd invest. So hard to say what the net impact will be, given all the moving parts.

Joseph Stauff, Analyst

Thank you.

Operator, Operator

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

Shaun Kelley, Analyst

Hi, good morning. Jason, I wanted to follow up on the comments about potentially reaching breakeven or profitability in the fourth quarter of 2023. My main question is, if we maintain the same assumptions and you're factoring in some growth, would you expect to be profitable for the entire year in 2024? Or is that unrealistic? Additionally, as a follow-up, will external marketing expenses likely start to decrease around the fourth quarter of 2023 or in 2024? Or will we just see these expenses decline as a percentage of sales without a decrease in the absolute dollar amount? Thank you.

Jason Robins, CEO

Yes, good question. So as we noted, we would expect, if we had frozen state launches at the end of last year, we'd be profitable by this year fourth quarter. And given, as you mentioned, normal 7% to 9% legalization of the population on OSB, 3% to 4% on iGaming, we'd expect to be profitable by the fourth quarter. As far as the entire year for '24, I think the expectation is we would either be profitable or close to it. Obviously, the further out we go, the more moving parts. But based on the assumptions we're making, it would be pretty much in that zone of either profitable or very close to profitable. And then as far as the question around marketing, we're not providing specific guidance around what marketing will be. But certainly, there will be a very strong impact from leverage. I think you can expect some slowdown in fixed costs as well. And obviously, the revenue growth we expect to continue to be strong. So I think that's really the primary driver there. But whether or not we make some optimizations to marketing, it will depend on how our testing goes.

Shaun Kelley, Analyst

Thank you very much.

Operator, Operator

Our next question comes from Thomas Allen with Morgan Stanley. Your line is open.

Thomas Allen, Analyst

Thanks. So two questions for me. First question, fourth quarter revenues were well ahead and EBITDA beat. One pushback we've heard is on where MUPs were a little bit lower at around 2 million, versus you guys had talked to on the third quarter call around 2.1 million. Can you discuss that a little bit? Second question, Jason Park, I think I heard you say that you have sufficient capital until you have positive free cash flow. So there's definitely a concern in the market that you may need to raise capital. So can you just address that?

Jason Robins, CEO

Thomas. First of all, very prescient report by you, almost nailing our EBITDA guidance, that was good. But I think as far as the MUPs go, we had said we had 2.1 million in September. Last quarter's average was actually lower. We haven't guided to MUPs, typically, so we didn't provide a guide. But I mean, it was pretty much on target with consensus, only like 3 or 4 analysts, I think, even predicting MUPs. And I think we were a couple of points short, but we were right where we wanted to be. But we haven't provided guidance there. And of course, it's an average of all 3 months. So as you get into certain months with different sport mixes and further into the NFL season, it can vary. But if you look at the quarter, last quarter, we actually went up in MUPs quarter-over-quarter, and we certainly went up year-over-year. And then I apologize, what was the other question? Oh, on capital and free cash flow. So we have said all along and continue to say that we expect that we have enough capital on the balance sheet to get to free cash flow positive. Nothing has changed there. Obviously, we would have to have a meaningful improvement in year-over-year losses starting in '23, which is what we expect, very similar to, I think, what you wrote in your report. But our plan, our multiyear plan that we have, does not require any additional capital raise.

Operator, Operator

Our next question comes from Stephen Grambling with Goldman Sachs.

Stephen Grambling, Analyst

Grambling, but close. Follow-up on MUPs. I think I heard you reference 1.7 million actives at the Super Bowl. How does this compare to last year? As optically, it does look like it's down sequentially from fourth quarter even as New York opened.

Jason Robins, CEO

Well, it was way up from last year. I mean, remember, that was 1 day. If you look at the quarterly MUPs, it's going to be higher than any 1 day would be, or at least the monthly would be. Obviously, there's some seasonality in there as football ended in February. But that was 1 day that was by far the most we've ever had in 1 day, and it's not even close. We haven't disclosed a specific number last year from Super Bowl, but that's something we can consider doing at our upcoming Investor Day, but I can tell you it was up extraordinarily higher year-over-year versus last Super Bowl.

Stephen Grambling, Analyst

And if I can sneak one other very quick one in. I guess on the guidance, EBITDA loss guidance, I guess, what is the underlying assumption on the broader promotional intensity?

Jason Robins, CEO

Our assumption is that we will continue using similar promotions for acquiring new customers as we have in the past, and that we will also run retention-based promotions during key events like the NFL season kickoff. There hasn't been a change in this approach. As we have mentioned before, as states develop, the percentage of promotions directed at new customers compared to repeat customers will likely lead to a natural decline. Additionally, the balance between new and more mature states will influence the overall performance. However, you can expect the situation to resemble past trends.

Operator, Operator

Our next question comes from Jed Kelly with Oppenheimer.

Jed Kelly, Analyst

Just with your guide to contribution profit neutral, it kind of implies you're spending a lot of money on technology, G&A. How much of these investments are going to revenue channels that we would consider outside of gaming or gambling? And then is there anything you could give us on what your total contribution profit was in '21?

Jason Robins, CEO

In response to the first question, we are seeing minimal impact from our DFS, OSB, and iGaming products. We anticipate that the new verticals will either break even or perform better. Therefore, we don't expect any significant negative effect on EBITDA from our current organic investments. If we take a broader view of the competitive landscape, we've consistently stated that success lies in product quality. Our top two competitors have thousands of engineers and well-established market positions in Europe built over many years. Our strategy has been to accelerate our product and technology hiring to catch up. Moving forward, we expect a notable reduction in fixed costs over the coming years. This approach was about achieving a higher level of scale even ahead of our revenue, which we believe will grow rapidly—we more than doubled our revenue year-over-year last year and expect to continue this growth within a year or two. This strategy highlights our belief that product and technology will be crucial for long-term success, necessitating a more competitive stance. What was the other question?

Jed Kelly, Analyst

Contribution profit for '21.

Jason Robins, CEO

We'll have more information on that at our upcoming Investor Day. What we said so far is that we will be positive contribution profit in 2022, but we'll have more information on what 2021 looked like in our upcoming Investor Day on March 3.

Operator, Operator

Our next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli, Analyst

So guys, you provided a lot of color. I was just hoping kind of to more or less understand the definition and see where kind of the contribution profit, if you could bridge the commentary around contribution profit for 2022 relative to the EBITDA guidance and just kind of address some of the major buckets there that maybe we're not appreciating entirely in that kind of definition or nomenclature that you guys use.

Jason Robins, CEO

Contribution profit is calculated by taking gross profit and subtracting the external marketing expenses related to customer acquisition. This includes all advertising efforts, whether local or national, as well as DFS advertising. We anticipate being positive in contribution profit in 2022 based on our current market presence. The logical assumption is that the remaining expenses are fixed costs. As I mentioned earlier, we recognized the need to enhance our competitiveness against our top rivals. To achieve that, we invested in our product and technology team, though we still have fewer engineers compared to our main competitors. Despite this, we have been able to innovate and advance our products more swiftly than anyone else, largely because our focus is on the U.S. market, which allows us to allocate our engineering resources efficiently without diversifying attention to international products. Moving forward, we believe we can manage the growth of fixed costs while leveraging revenue increases and contribution profit from our states to enhance profitability, likely starting later this year and continuing into 2023.

Carlo Santarelli, Analyst

Great. That's helpful. And just longer term, the external marketing as a percentage of net revenue, you guys are still targeting around 10%?

Jason Robins, CEO

Yes, that's about right. We'll have more information on that in our upcoming Investor Day, but that's about right.

Operator, Operator

Our next question comes from David Katz with Jefferies.

David Katz, Analyst

If you could just spend a minute on Canada specifically because if I'm correct, that's incremental to the numbers that you've laid out today. And I'm just wondering if the calculus there in terms of that market entry is it's not a regular state. If the calculus changes there in any way, one way or the other, and how we might work that into our models here.

Jason Robins, CEO

Definitely, it's different. There's been a gray market there for many years, which a lot of the operators will be competing with have already been operating in and have already had time to build customer bases. So as noted in last year's Investor Day, we are not projecting the same level of market share in Ontario or in Canada in general that we are projecting in the U.S., just because we don't have that early-mover advantage that we have in the U.S. I think the way we'll approach it is the same way we approach everything else that we do. It's going to be analytically based. We're going to target 2- to 3-year paybacks. And I think, depending on what we see in the data, we'll adjust accordingly. But it should be a good market; it has iGaming, it has sports betting, and we already have a decently sized user base of DFS customers there. So we're pretty excited about Ontario.

Operator, Operator

Our next question comes from Dan Politzer with Wells Fargo.

Daniel Politzer, Analyst

I would like to follow up on Ontario. How do you view the promotional environment there compared to a major market launch like New York? Are there any differences in terms of spending, considering the population and possibly varying regulations?

Jason Robins, CEO

Yes, we're still assessing the situation in Ontario. It has a large population, similar to the fifth largest state in the U.S., which makes it significant. Additionally, the presence of iGaming enhances the total addressable market for us. Similar to our approach with external marketing, we plan to conduct extensive testing and will make decisions based on the insights the data provides. And just a quick clarification on the fourth quarter EBITDA becoming positive. Does that assume a launch in Ontario and Maryland will be some of the other jurisdictions you haven't already launched in? No. To clarify, we mentioned that if we hadn't launched in any states after the end of 2021, we would have been EBITDA positive by Q4 of 2022. Our intention is not only based on the recent launches in New York and Louisiana. We've indicated that if we see a typical legalization growth of 7% to 9% in OSB and 3% to 4% in iGaming, we expect to be EBITDA positive by Q4 of 2023. This includes Ontario, but it will also depend on any additional states or jurisdictions that may open up. If the overall market opportunity increases, that's advantageous as it indicates a larger total addressable market, though achieving EBITDA positivity might take longer due to increased investment. Conversely, if the pace of legalization slows down, which might not be ideal since it suggests the market is not expanding as quickly, we would likely reach EBITDA profitability sooner.

Operator, Operator

Our next question comes from Joe Greff with JPMorgan.

Joseph Greff, Analyst

Question is this. Most of my questions on the business have been asked and answered. But why aren't insiders buying the stock? And will insiders buy the stock?

Jason Robins, CEO

Well, of course, we can't talk about what will happen, but we have had several insiders buy the stock. Many members of our Board... Well, I've been exercising options, as have several other members of our executive team, which is in effect, buying stock. So I think as long as there's options to be exercised, that would probably be the first stop for most executives. But I can't speak for everyone else. Also, as you know, there's wash rules. So based on 10b5 programs that have not been active the last few months but were active within the six-month time frame, it's not possible for executives to buy shares right now. But we can certainly exercise options and we have been.

Operator, Operator

Our next question comes from Robert Fishman with MoffettNathanson.

Robert Fishman, Analyst

I have a follow-up on advertising. We've seen how sports betting advertising is already one of the top local TV categories in the legalized markets. And now that New York is live and you continue to scale across the U.S., can you discuss your plans to ramp up on the national advertising piece? And how do you think about the balance of local versus national ad spend this year?

Jason Robins, CEO

It's a great question. We've mentioned before that we expect to become more efficient in our advertising efforts, as national advertising tends to be less expensive per impression in various channels, such as television, compared to local advertising. Since last NFL season, we have begun reallocating some of our spending towards national advertising, and we've already achieved about one-third of this with the launch in New York. You can expect this trend to continue. One advantage is that the national ads we run will reach populations in new states as they legalize, without the need for increased national advertising spend, since those ads are already targeting those audiences. Now that they can sign up for the app, we'll see continued momentum from further state legalization and a further shift towards national advertising. That said, we will still have to invest heavily in local advertising during state launches, particularly in certain channels, like outdoor digital. However, I anticipate that national advertising will keep increasing as a share of our overall spending, which should enhance our efficiency overall.

Operator, Operator

Our next question comes from Ben Chaiken with Credit Suisse.

Benjamin Chaiken, Analyst

Kind of on the lines of Carlo's question, the implied SG&A bucket, as you're bridging from contribution profit to EBITDA, which you can infer from the '22 guide, or ballpark. Is that fixed? Or does that growth inflation? How should we think about that?

Jason Robins, CEO

We have already implemented several market adjustments. Clearly, the labor market is challenging. While I cannot predict the future, based on what we know now, I do not anticipate any further impact on labor costs due to inflation. As I mentioned earlier, we had to ramp up hiring quickly to remain competitive with some larger European competitors that significantly increased their product and engineering teams over the past two years. We believe we are now well-positioned to compete effectively, particularly in terms of product and technology. Aside from areas like customer service, which will grow as we expand into new states, we expect to see more moderate growth in fixed costs starting in 2023.

Benjamin Chaiken, Analyst

Got you. Okay. That's helpful. And then one more. You may have kind of implicitly answered it, but you guided overall 4Q '23 EBITDA to be positive, but that included some incremental states even after New York. I guess just for illustrative purposes, how should we think about that timeline if things remained static?

Jason Robins, CEO

Well, you mean if no more states legalize?

Benjamin Chaiken, Analyst

Yes.

Jason Robins, CEO

Yes, I think it would be faster. So really, as we've talked about in the past, with a 2- to 3-year path to profitability in states, that first year and sometimes part at least of the second year, are meaningful investments for us as we ramp up our customer bases in those states. So were there to be more states in rapid succession, I think it would push out profitability a little. And were there to be less in the example you gave, I think it would accelerate profitability.

Operator, Operator

And our last question comes from Bernie McTernan with Needham and Company.

Bernard McTernan, Analyst

It seems that as markets continue to develop, they are progressing further along the Total Addressable Market curve, with New York being the most recent example and Ontario already having a well-established gray market. How far along this curve do you believe it could advance in relation to the $5 billion market opportunity you mentioned earlier, assuming full regulation?

Jason Robins, CEO

It’s difficult to determine. We have no prior experience in Canada. However, I absolutely believe the effect you mentioned to be true. There is already a substantial existing market. This is somewhat true in the U.S. as well, where legal operators and local bookmakers have been established for many years. What we're observing is that increased awareness and the overall impact of advertising, despite the competition, have actually benefited us. DraftKings tends to excel at converting new users. The quicker acquisition of 100,000 users in recent states like Arizona and New York can be attributed to competitive advertising, ironically. Thus, much of this is actually enhancing our ability to launch and grow rapidly, potentially paving a quicker road to profitability in various states. We will have to see how it unfolds.

Operator, Operator

That's all the time we have for questions. I'd like to turn the call back over to Jason Robins for closing remarks.

Jason Robins, CEO

Thank you all for joining us on today's call. We are very excited about 2022, and we look forward to speaking with you at our virtual Investor Day on March 3. I hope all of you stay safe and well. Thank you.

Operator, Operator

This concludes the program. You may now disconnect. Everyone, have a great day.