Earnings Call Transcript - DKNG Q4 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Fourth Quarter 2022 DraftKings Earnings 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. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Stanton Dodge, Chief Legal Officer. Please go ahead.

Stanton Dodge, Chief Legal Officer

Good morning, everyone, and thanks for joining us today. Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties and other factors, as discussed further in 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 filings 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. I will now turn the call over to Jason Robins.

Jason Robins, CEO

Good morning and thank you all for joining. First off, I am very excited about 2023. We are more focused than ever on expense management. Since our previous earnings call in November, we have made surgical decisions backed by strong analysis about our expenses and have actioned items that totaled an expected $100 million of adjusted EBITDA relative to our prior guidance. Including the impact of the increase in our 2023 revenue guidance, we have improved our adjusted EBITDA guide from a range of negative $475 million to negative $575 million to a range of negative $350 million to negative $450 million, and notably expect to generate more than $100 million of adjusted EBITDA in the fourth quarter of 2022. As you can see, we are in a great spot and are seeing an acceleration in our contribution profit and adjusted EBITDA. And we will continue to explore ways to drive efficiencies, both in our compensation and non-compensation expense categories. To be clear, the top line is performing very well, and we have strong momentum heading into 2023. We grew revenue 81% year-over-year in the fourth quarter and had an adjusted gross margin rate of 49%. Jason Park will speak more about what drove our strong fourth quarter results. Turning to our product offerings. DraftKings' mobile sportsbook was the number one most downloaded sportsbook app in the United States since Super Bowl Sunday. For sportsbook, one of our key product highlights was the launch of our own in-house live same-game parlay product, making us the first operator to deliver this capacity end to end for the NBA. This continues our focus on enhancing our parlay offering, which drives increased hold rate. And for iGaming, we launched DraftKings Jackpot, a unique type of progressive jackpot that is shared across more than 100 slots in table games. We also received approval for our first live casino game developed entirely in-house, which we expect to launch in the coming months in New Jersey. 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. While our work here is not done, we feel great about our trajectory and the ability the team has shown in driving strong revenue growth while also managing our expenses better than ever before. I also noted that it is critical for top management to not take their eye off the ball in this area. And I am personally very focused on ensuring that goals, compensation and accountability are all aligned toward this very important objective. With that, I will turn it over to Jason Park.

Jason Park, CFO

Thank you, Jason. Yes, let me hit on some of the highlights, including our Q4 performance, our new and improved 2023 guidance and some information on our underlying state vintages. Please note that all income statement measures, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, we have great momentum coming out of Q4. In Q4, we posted $855 million of revenue, which represents 81% growth versus Q4 2021. This brought our full year revenue growth to 73%. Adjusted EBITDA was positive in October and was positive for the entire quarter after adjusting for the roughly $75 million investment we made in our recent launches in Maryland and Ohio. Our revenue was better than our prior guidance, primarily because of structural improvement in our sportsbook hold and fundamentally better customer trends than we expected. Customers are engaging more with our products and are less reliant on promotions. We also managed out approximately $25 million of expenses in Q4. 2023 is off to a great start. This will be a year of continued revenue growth and expense management; strong customer trends, including customer retention, handle per player, hold rate and better promotion reinvestment are enabling us to increase the midpoint of our revenue guidance from $2.9 billion to $2.95 billion. And our expense management programs have already identified $100 million of cost savings for 2023, roughly $50 million from scale marketing efficiencies and another $50 million from people-related costs. These two factors, along with our higher revenue outlook, allow us to confidently increase our adjusted EBITDA guidance range from negative $475 million to negative $575 million to negative $350 million to negative $450 million. I also wanted to spend a bit of time on foundational state economics. At any given point in time, our company results are a reflection of a combination of mature states, newer states and brand new states. Our states are performing very well, and we are seeing faster paths to positive contribution profit than we expected. For example, when we look at our 2018 to 2019 vintage states, which represent roughly 10% of the U.S. population, we are seeing great results. In 2022, those states grew net revenue by 50% versus 2021. This continued growth is due to several factors. We are seeing great customer retention, handle for retained player is growing, promotional reinvestment is coming down and hold percentage is going up. And because much of the net revenue growth is coming from less promotions and higher hold, our adjusted gross margin rate in that vintage was up more than 400 basis points in 2022 versus 2021. Finally, our absolute marketing dollars in those states decreased by more than 15%. These are important statistics and they are the foundational drivers of continued contribution profit expansion and acceleration across our states. This increase in total contribution profit, combined with much slower growth in fixed costs, results in an acceleration of our adjusted EBITDA profitability and clear progress towards achieving our long-term adjusted EBITDA goals. That concludes our prepared remarks, and we will now open the line for questions.

Operator, Operator

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

Shaun Kelley, Analyst

Jason or Jason, I was wondering if we could just drill down a little bit on some of what you're seeing on the kind of structural hold improvement. That seems to be a really big story and one that you called out, yes, mix shift. Can you just give us a sense about two things? What's the underlying assumption for kind of 2023 as you think about what you saw results wise in the fourth quarter? And then secondarily, what's some of the kind of product road map? How do you think you can kind of continue to migrate customers into those types of products in the medium and long term?

Jason Robins, CEO

Great question. So, really, I think it made a ton of progress in this area, which I think has been enabled by having migrated towards the beginning of last NFL season to our own platform, and really, I think NFL 2022, with the culmination of a year's worth of work, which has continued through. We just launched live SGP for NBA, which I think was the first stop. We were the first operator to do so, and that was an entirely in-house built and traded product. So really, I think we should expect to continue to see more and more effort towards driving a better parlay product offering, and I think that will continue to drive more mix shift. Also, we are making other changes. Certainly, mix shift is the largest driver of what we're referring to as structural hold increase. But we are also making other adjustments to our models, rolling out new and improved models, improving our data environment and doing a lot of other things that are helping us improve our trading performance. So, I do think there's some additional upside. We continue to be able to execute against those things on the product road map.

Jason Park, CFO

Yes. And I would add, Shaun, in terms of your question for guidance. As we saw the empirical structural hold flow-through in Q3, late Q3 and Q4, we've embedded that into our 2023 revenue guidance, which is a big part of the increase in our revenue guidance that we provided today.

Operator, Operator

Thank you. One moment for our next question. That question comes from David Katz with Jefferies. Your line is open.

David Katz, Analyst

Congratulations on the quarter. Regarding the updated operating platform, if we were to see iGaming launch in New York, could you explain how that might affect the guidance in terms of losses and cash flow?

Jason Robins, CEO

Certainly. There are many factors to consider, such as the size of the market and the tax rate structure, along with promotional deductions. Generally, we have previously estimated that around 7% to 8% of the U.S. population is impacted by new sports betting markets each year, with about 3% to 4% for iGaming. New York would likely fall on the higher side of that range. These assumptions are incorporated into our guidance for 2024. Even if New York were to pass the bill this year, it’s unlikely that the market would go live this year. It’s important to note that there was typically a year gap between passing the bill and going live, as seen in previous cases. While some states have expedited the process, most tend to launch in the following calendar year. Therefore, we're anticipating 2024, and we've adjusted our assumptions accordingly, indicating that this iGaming market could be larger than we initially projected.

David Katz, Analyst

And just to follow that up, if I may. Is it a fair assumption that the negative impact, both to earnings and cash flow from an iGaming state of size would be less than it would be from a sports betting or is that not a correct assumption?

Jason Robins, CEO

No, I think that is correct particularly if it is a state that already has sports betting or we’ve already had a lot of customer acquisition investment like New York. So we've acquired hundreds and hundreds of thousands of players in New York already. I think the cross-sell opportunity there would be enormous. We know that some of these players are going to Connecticut, to New Jersey, to Pennsylvania to do iGaming now. So, I do think there is some incremental customer acquisition spend, but it's not the same as a fresh market where we haven't had hundreds of thousands of customers that we've acquired already. So it's an accurate assessment, I think.

Operator, Operator

Thank you. One moment. We have a question from Jason Bazinet with Citi. Your line is open.

Jason Bazinet, Analyst

I have a broad question. You are clearly making significant progress in improving operations, and all metrics appear to be trending positively. At a high level, when you reflect on how these improvements align with the long-term targets you've set at previous Investor Days, does this suggest that the objectives remain unchanged but you might reach them sooner? Or, if performance continues on this trajectory, is there a possibility for those goals to be adjusted upwards?

Jason Robins, CEO

That's a great question. We will, later this year, be providing an updated long-term outlook at an Investor Day. So stay tuned for that. But speaking to it conceptually, I do think there's some upside there. We certainly have some upside on the hold rate front. I think promotions will probably end up somewhere in line with where we think they'll be long term. And then on the cost side, I think there's always effort that needs to be going. That's something, I think, that really has resonated with the team is, yes, obviously, we're all cognizant of the market environment we're in. But we also understand that to build the most profitable long-term company, we need to be as efficient as we possibly can. And that's a message that everyone on leadership has really taken to. The Board conducted a thorough review of management incentives towards the end of 2021 and starting in '22, it's continued to '23, completely realigned management incentives. So, there was an equivalent focus on EBITDA and profitability to what we previously had on revenue. So I think that when we look at the long term, and like I said, we'll provide more specific updates later this year, I do think there's some upside if we can continue to find the efficiencies that we've been finding over the past 12 months.

Operator, Operator

Thank you. And our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Carlo Santarelli, Analyst

Jason, Jason, whoever wants to take this one, as you guys think about kind of the structural hold improvements that you're making and you think about kind of the new parlay product, relative to retention and acknowledging, it's early with a lot of this stuff, but you obviously had some growth over the course of 2022 with your addressable TAM, with new states that have come online. I believe your monthly unique payers was up high 20s this year. I'm not sure if that is in line with kind of the addressable TAM that you brought up, but it seems similar, at least. As you think about like kind of that retention effort, as holds are rising, how could you kind of comment around the balance between how to retain and kind of how to improve efficiency on a per customer basis?

Jason Robins, CEO

I think that's an extremely important question. And really, in the end, it's all about the customer. We start there. What's nice about the parlay product is customers love it. It's something that I think helps with retention if the product offering keeps getting stronger. So we don't view it as a trade-off at all. We look at it and start with the customer, find the products that the customers want and then ideally construct those products in a way that is both really exciting and benefits the customer and also create attractive economics for the Company. And I think parlay is a great example of that. We've had DFS for years. And while certainly, DFS is a skill game, while certainly people do win, it's not as common. But when they win, they have an opportunity in these big tournaments to win very large prizes. And I think the parlay product functions the same way. If somebody does a very large parlay with lots of legs, they have an opportunity to turn a very small bet into a large payday. And I think that's really the value prop that's unique about the parlay product relative to the singles bets.

Carlo Santarelli, Analyst

Great. Just one follow-up. Regarding adjusted sales and marketing, I believe the external marketing in 2022 was slightly over $800 million, and you disclosed that the total was a little over $1.1 billion. Should we expect that this expense will decrease in 2023, or will it remain relatively flat this year with some leverage from revenue growth? Will we see a reduction in sales and marketing expenses in future years?

Jason Robins, CEO

I believe that's accurate. I think we will remain relatively flat this year. Some of this will obviously depend on how state launches unfold. However, based on a baseline expectation, I anticipate we will be fairly flat this year. As you mentioned, as more states and the overall market develop, we might see a slight decline. But for this year, I expect to be essentially flat compared to last year.

Operator, Operator

Thank you. One moment. Our next question comes from Ed Young with Morgan Stanley. Your line is open.

Ed Young, Analyst

And first of all, just to say thank you for some of the extra disclosure in the presentation. It's really very useful and appreciated. I want to ask about the statement you've reiterated really, which is around producing your first adjusted EBITDA positive quarter in the fourth quarter of this year and then how that set up '24. Given as you mentioned that you were there this Q4, except for the new state investment, can you just help us sort of think about that statement? Is that due to the cadence of the cost savings that you mentioned? Is that due to conservatism around the new state launches and not having perfect line of sight to that? Or is there anything else? Is there a reason particularly why that couldn't come earlier, you just maybe just want to commit yourself to that?

Jason Robins, CEO

Yes, that's a great question. There is certainly seasonality in the business, with deeper marketing investments typically in Q1 and Q3. Currently, with the new opportunities in Ohio, Maryland, and the upcoming launch in Massachusetts, we feel confident in our Q4 projections. The performances in Maryland and Ohio have been promising, potentially leading to stronger contributions earlier than expected, although I’m uncertain if Q2 will be too soon for that. We are focused on enhancing efficiency and working towards profitability sooner, which is our main goal. At the moment, we are comfortable committing to over $100 million in EBITDA for Q4, but we aim to increase that number and improve each quarter beyond our current expectations. We have several efficiency initiatives that could provide further upside.

Operator, Operator

Our next question comes from Jed Kelly with Oppenheimer. Your line is open.

Jed Kelly, Analyst

Great. Maybe following up on Carlo's question. Can you just talk about your churn rate this football season, I guess, with the higher holds, and you did have a better football outcome, too, versus last year? And what's kind of driving the underlying churn rate? And then just question just on 1Q. Can you talk about sort of some of the dynamics around the first quarter? I think last year, March Madness was a negative or lower than you thought. So can you talk about sort of some of the comps we should be thinking about for 1Q?

Jason Robins, CEO

We've observed strong retention rates, especially with the increase in hold. There are market comparisons that show even higher hold levels than ours, which have maintained decent retention, so we believe there is potential to raise hold without impacting churn negatively. So far, the trends in retention have been positive. Regarding March Madness, the last few years have been unusual, particularly with the cancellation in 2020. College basketball is really gaining popularity again, and we're seeing increased engagement during the regular season compared to previous years. We anticipate a successful March Madness and are eager for it. If Massachusetts goes live, it will mark the first time residents there can bet and stay, which represents a significant opportunity. Additionally, we aim to enhance our understanding and improve our betting options. However, college sports pose challenges for bet mix since many states restrict player props, and bettors are typically less familiar with the players, leading to more parlays across multiple teams. We'll continue to focus on this area while also working on the same game parlay product, but it seems multi-game parlays will be easier given the factors I've mentioned.

Jed Kelly, Analyst

Great. And then just one quick follow-up. Is there anything to call out from the World Cup in 4Q that won't be in there this year?

Jason Robins, CEO

World Cup was great, I mean, no doubt about it. That said, it was low single digits percentage of our revenue. And I think we don't believe that there's anything really that you should adjust accordingly from World Cup. I think that was a nice little boost, but didn't have a tremendously material impact on our financials last quarter.

Jason Park, CFO

I would just add that the World Cup was already factored into the Q4 guidance we provided in November. When we analyze the data on a customer-by-customer basis, it seemed more like a shift in engagement between sports that were popular in Q4 rather than true incremental growth.

Operator, Operator

Thank you. And our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Robert Fishman, Analyst

You called out how you're looking for more efficiencies around not renewing certain team league and media rights going forward. I'm just wondering if you can expand upon these different relationships and maybe how they've changed over the past year or two since you first signed the deals, now that some of the other OSB players have pulled back.

Jason Robins, CEO

Yes, I think what you're describing is one of the many efforts around the Company aimed at becoming more efficient. And obviously, marketing being a big expense category, team and league deals being a big expense category, we feel there's room there. We've had a number of partners that have been very constructive and have agreed to reductions that would make these deals efficient in a way that we need them to be. And there's others that we will be discontinuing when the deals come up and have discontinued as they've come up over the past year. So it's really been a mix. There's been a lot of really great partners, though. They recognized that the market's changed, have said, 'Look, we want long term to be in business with DraftKings. And we realize that this is not an efficient part of the portfolio right now, and we need to rework it.' And there have been others that we've had to unfortunately discontinue the deals with. So, it will be a mix of things, but it's really part of an overall effort that we have to be more efficient as a company. And I think there is an opportunity in this category to get even better.

Robert Fishman, Analyst

If I could just ask one quick follow-up. Any update you'd care to make about the future partnership with Disney? And whether the relationship has changed at all since the early days since Bob Iger is back?

Jason Robins, CEO

No. I mean we've continued to have a great relationship with Disney. ESPN, Jimmy Pitaro and his team have been great partners. So, we've really enjoyed that relationship, gotten a lot out of the partnership. And we always talk to our partners about ways that we can improve and extend and grow the relationship. And Disney and ESPN have been a great partner thus far.

Operator, Operator

Our next question comes from Clark Lampen with BTIG. Your line is open.

Clark Lampen, Analyst

I've got just one for Jason Park. Jason, if we assume you guys are finishing '23 with, I guess, let's just say, it's a wide range, $600 million to $800 million of cash, and you're going to be at that point, a lot closer to breakeven on a cash flow basis, does it make sense to be a little bit more aggressive with cash usage or explore debt financing options in a market where so many of your competitors are now leaning out, at least on the sports betting side and you're past the point of having to illustrate to the market that you won't need to raise capital just to remain a going concern?

Jason Park, CFO

Yes, I appreciate the question, Clark. Yes, just to clarify, I would not say that we're like $600 million to $800 million. I would say, greater than $700 million ending 2023. So maybe $700 million plus is probably a better way to think about it. Yes, and look, I think the most important thing is we're in a great place where we can just focus on operating the business, finding efficiencies, not having to worry about any type of financing needs. And in terms of broader questions around debt's role at DraftKings, we'll continue to evaluate the entire capital structure, obviously, the macro environment on potential instruments like that. And we'll come back to you if anything comes to fruition.

Jason Robins, CEO

I believe that due to our cash position, we have the ability to be aggressive if opportunities arise without needing capital through equity or debt financing. If a strategic opportunity presents itself, we may consider it, but we don't require it for organic growth. Therefore, it is unlikely that we will take on any debt or equity capital for this purpose. Furthermore, when it comes to optimizing our operations, we aim to be precise, addressing inefficiencies where needed while also investing in areas where we have strong data and conviction. However, sometimes we have to remind our team to not cut everything, as we recognize the importance of balancing cost management with smart investment. Overall, our analytically driven culture and wealth of data give us confidence in identifying both reductions and areas for growth.

Operator, Operator

Thank you. Our next question comes from Ben Chaiken with Credit Suisse. Your line is open.

Ben Chaiken, Analyst

On the SG&A side, the guidance for 2023 indicates an increase of around 10% to 12% compared to the previous year. I'm trying to consolidate everything between contribution profit and EBITDA. Will this growth rate continue, especially given that there was a 40% growth rate between 2022 and 2021? Will we see this growth rate continue to slow down even as we expand into new states?

Jason Robins, CEO

The growth rate of fixed costs?

Ben Chaiken, Analyst

Just the whole SG&A bucket, so everything between contribution profit and EBITDA that's growing in 10% 12% range.

Jason Robins, CEO

No. Yes, I think there's really very little fixed cost impact of launching new states. There's some customer service sometimes, but we're also working hard to find ways to be more efficient there. So hopefully, we're able to offset any need to grow there with other efficiencies that we find. So really, it's mostly variable cost COGS that we see with new revenue coming in from new states. There's obviously marketing expense, but not really fixed cost. I think most of our functions are at scale, are pretty close. So that's why you're seeing moderate fixed cost growth this year, a significant reduction in fixed cost growth year-over-year. And I also think that the team is working hard to be more efficient. I think that there's been a real lightbulb that's gone off here that we can do more and actually grow revenue faster if we become more efficient. And there's a connection between being better focused on expense management and efficiency with revenue growth, with doing better for the customer. And I think making that connection and realizing that actually these things feed off of each other, that the better we do to manage our expenses and be more efficient as an organization, the more that we're going to be able to deliver value for the customer. And that will actually lead to market share gains and revenue growth. I think that's been a real rallying cry for the team over the past year, and it continues to be in 2023.

Operator, Operator

Thank you. Our next question comes from Michael Graham with Canaccord Genuity. Your line is open.

Michael Graham, Analyst

I wanted to ask about the disclosures related to the growth in your mature states, specifically the 2018 to 2019 cohort. You mentioned a 50% year-over-year growth and provided some solid reasoning for that growth based on retention and increased hold. I'm curious about what you're observing in terms of customer and player growth in those mature states. Do you believe you are nearing terminal penetration, and what insights have you gained about how the model operates as you explore these mature states further?

Jason Park, CFO

Yes, that's a great question. Thanks for highlighting that part of the letter. If we examine the 50% revenue growth we saw in the 2018 and 2019 cohort, approximately 70% came from existing customers, while about 20% to 30% was generated from new customers. The key point is that even though those states were in their third or fourth full year, we were still bringing in new customers. We haven't encountered a ceiling yet in terms of total population penetration, even in those more established states.

Jason Robins, CEO

And I think also, if you look at comps around the world, other markets, I mean growth typically occurs decades. And so obviously, growth rates go down. It's not going to continue growing at 50% forever, but I don't expect we've hit any sort of ceiling there. I know different dynamics, but the iGaming market in New Jersey, which is now coming up on almost a decade, still growing. So, I think lots of comps around really not just the world, but if you look at the U.S. lottery market and other sorts of comparisons, it's just very much a market that I think always has new customers coming into it. And I think there's an expectation that we should have that there will be a pretty steady growth for at least another decade or so.

Jason Park, CFO

And it’s very important, Mike, to understand that the source of growth is much more than just acquiring new customers. It includes growth from existing customers, improvements in handling, and ongoing reductions in promotions that contribute to net revenue growth.

Jason Robins, CEO

And we're still in the phase of the market where we're finding big wins on the product front. We're finding ways that we can be more smart operationally, that we can reach customers in a more effective way. So, I think there's still many years of just innovation that will drive growth in our consumer wallet share. And when we think about wallet share, we don't just think about it within our own industry. We think about our customers' entertainment wallet share. And we believe that customers will be willing to spend more time with us and spend more with us if we create better products that they find more entertaining than other things they could be doing for fun.

Clark Lampen, Analyst

Thank you, guys. Congrats on all the progress.

Jason Robins, CEO

Thank you.

Operator, Operator

Thank you. And our next question comes from Bernie McTernan with Needham & Company. Your line is open.

Bernie McTernan, Analyst

Jason, I want to take your pulse on the M&A market. And just given everything you've talked about in the shareholder letter on profitability, does that impact your philosophy on using your stock as a currency?

Jason Robins, CEO

I believe they are somewhat independent. Clearly, the more momentum we can generate behind the stock, the more appealing it becomes as a currency. However, I don't think this is something we're focusing on right now. Our main emphasis is on our internal operations and improving efficiency. It’s difficult to predict the right time in the market, especially since we are in such a fast-paced phase of change. Eventually, there will be a moment when these aspects will make more sense, and we can shift our focus. Right now, our priority is ensuring that our company is on a clear path to profitability while operating in the most efficient and cost-effective manner possible.

Bernie McTernan, Analyst

Understood. And then just a follow-up on parlays. I think a big question, just given the success, is where could it go? Do you guys have a sense in terms of just what the U.S. penetration of parlays is relative to the rest of the world or more mature markets?

Jason Robins, CEO

I think that's a great question, and it's tough to compare to rest of world. I think the U.S. is a bit unique. My belief is that the U.S. consumer and the gaming market, a lot of the roots of it are in the lotteries where there have been lotteries across states for a lot longer than casinos and other sorts of gaming products. And that lottery mentality of big jackpots, I think, is carried over into other products. We even see it in DFS where our most attractive offerings are the large tournaments that you can enter for anywhere from $3 to $20 and win hundreds of thousands or million plus in prizes. So I think that's carrying over into the U.S. market. And I actually think for that reason, parlays have more upside than they would in other parts of the world, not to say that they're not popular in other parts of the world. They call them accumulators in Europe. And certainly, that's been a big growth area overseas. But I think the U.S. customer is uniquely oriented towards the kind of proposition of bet a little to win a lot. So I think there's a lot more upside. And we're still at the infancy stages of this product. I mean there's so much we can do to innovate and make it more exciting and more fun for the consumer.

Operator, Operator

And our next question will come from Ryan Sigdahl with Craig-Hallum. Your line is open.

Ryan Sigdahl, Analyst

Curious to get your thoughts on the current competitive dynamics. We've seen several operators pulling back more notably on online sports betting and iGaming. But then, you have fanatics with the most notable high profile. I guess, new incumbent coming or entrant coming. How do you think about promotional and marketing intensity from an industry standpoint in 2023, better or worse year-over-year?

Jason Robins, CEO

I believe things will improve. More established markets will emerge, and as these markets mature, we should continue to benefit from a natural reduction in promotions. There will always be new players entering and exiting the market. However, one observation is that the competitive landscape has become much more rational. We previously noted that during part of 2020 and into 2021, the market emphasized market share and revenue growth above all else, which led to some irrational behavior from competitors. As the market shifted its focus towards demands for accountability in efficiency and profitability, we witnessed a change in behavior. I don't foresee this shifting again. We are now in a new phase where competition is based on a more rational framework, and I expect this trend to continue for both current and incoming operators.

Operator, Operator

One moment. Our next question comes from Dan Politzer with Wells Fargo. Your line is open.

Dan Politzer, Analyst

Jason, I was hoping just to clarify on the 2023 revenue guidance. I think for the fourth quarter, you guys had $30 million uptick in revenue from the structural improvement in the hold. I just want to clarify, your 2023 guide that you issued at the same time that did include the hold benefit? And then just for my follow-up, just the pace of the fixed OpEx deceleration, if you could maybe parse that out in terms of the G&A, product and tech and other corporate marketing, and I guess, where you're seeing the most efficiencies.

Jason Park, CFO

Yes. So in terms of your first question on hold percentage, yes, that's all embedded within the guide and the H1, H2 revenue split that we provided. So any type of empirical pattern that we're seeing that we have confidence will continue, we'll embed into our guidance. And in terms of further breakdown of P&T, S&M, G&A, fixed cost growth, I think someone earlier mentioned 10% to 12% growth, I would say that, that's pretty similar across all three of those areas.

Operator, Operator

Thank you. One moment. Our next question comes from Brandt Montour with Barclays. Your line is open.

Brandt Montour, Analyst

I wanted to ask about iGaming. It seems you have achieved significant success in gaining market share with DraftKings in New Jersey in the fourth quarter, in Pennsylvania in the fourth quarter, and in Michigan in the third quarter. Could you provide insights into the factors contributing to that success, such as features like progressive jackpots or the cross-selling efforts that took place during this NFL season? Additionally, are there any lessons or strategies from GNOG that you're applying? Any details you could share would be appreciated.

Jason Robins, CEO

Thank you. I appreciate it. We are really pleased that in January, we achieved the number one market share in iGaming in New Jersey for the first time since our launch in December 2018. This is a great culmination of over four years of effort from the team in building products, optimizing our analytics, and onboarding a new brand in GNOG. The most exciting aspect is that we believe the biggest upside is still ahead when we migrate GNOG to the DraftKings platform and product suite, which we hope will happen later this year. This transition will provide us with an additional boost and ongoing cost savings by reducing our revenue share payments to third parties. We are already seeing positive results from the product side. Additionally, we've become more effective at cross-selling, particularly as we gather more data. The more data we have, the more effective and efficient we can become. We have not only improved our ability to increase cross-sell but have also done so more efficiently. I am very proud of the progress the team has made.

Brandt Montour, Analyst

And if I may just quickly follow up on that. Is it fair to assume that 2023 guidance assumes that you're able to hold the share gains that you just recently enjoyed?

Jason Robins, CEO

Well, there's always seasonality in the business. So naturally, we're going to do best during heavy sports periods on the cross-sell fronts, more activity in the platform. So, we've embedded that in. But yes, I think as far as like when you adjust for that and look at where we are today, I would say, yes, although the January report is brand new. So I can't say that we necessarily like looked at the implications of that. But more so, what we do is we look at the underlying cohort data, and we bake in adjustments for seasonality as well as any other initiatives or efforts or actions that we plan on taking.

Operator, Operator

Thank you. Our next question comes from Joe Stauff with SIG. Your line is open.

Joe Stauff, Analyst

I wanted to follow up and ask about user growth. Jason, you mentioned that states are ramping up much faster. What is the right way to consider how long it takes to reach that golden cohort now compared to about a year or year and a half ago? I have one follow-up question, please.

Jason Robins, CEO

That's an interesting question, Joe. It's a bit complex because there are seasonal differences when we look at different states. For example, Arizona caught on quickly in September, while states like Ohio or Maryland, which launched later in the year, present a different scenario. Massachusetts is set to launch in March. There aren’t many data points available given all these variables, making it hard to draw precise conclusions. However, generally speaking, we have observed that there seems to be a need for deeper initial investments. We're pleased to note that throughout 2022, we managed to offset these costs by achieving efficiencies in other areas of the business. Essentially, we financed all the state launches in 2022 by saving costs elsewhere. Additionally, this process allows for a quicker transition to positive contribution profit and greater operating leverage, leading to earlier potential revenue and profitability gains. How this will pan out over the year will require more data, but at a broader level, that's my perspective. Regardless of seasonal factors or others, it's clear that states are ramping up much faster than they did three or four years ago.

Joe Stauff, Analyst

That makes sense. And then maybe just a follow-up on structural hold in general. You certainly mentioned that the new in-house NBA same-game parlay sort of capabilities that you had launched, and I was wondering I know at least for part of your NFL product, you do outsource same-game parlay. I'm wondering if your '23 guide includes bringing that in-house.

Jason Robins, CEO

The team is currently working on bringing that in-house. For our 2023 guidance, we anticipate that this will happen at some point in the year, and it is accounted for in the guidance, but it will not impact the entire year. As I mentioned earlier, we have begun to implement some of our own in-house same-game parlay offerings, most notably the live same-game parlay MBA product, which was the first of its kind in the industry. This indicates that we are entering a phase where, after more than 1.5 years of experience, we have accumulated enough data to develop new models. We now believe we can produce models that are equal to or superior to those available from third-party providers.

Operator, Operator

Our next question comes from Chad Beynon with Macquarie.

Chad Beynon, Analyst

First, just wanted to ask about opportunities or aspirations in non-North American markets. Given your data science and kind of all the learnings that you've had in the past couple of years, it seems like you're in a pretty good position to make it then in some of those markets, obviously, a lot to do still here in North America, but wondering if anything has changed in other markets.

Jason Robins, CEO

I do think you're right that the technology we've built is going to be very portable to the global gaming market. And we believe that when we do decide to expand overseas, we'll have advantages over incumbent competition when it comes to product, when it comes to hold rate, things like that. That said, we are laser-focused on the U.S. and on Ontario right now. I think that the opportunity here remains very significant and growing. We have a lot of work to do to become more efficient as an organization that we need to focus on. There will be a time and a place to focus on international expansion, but it's not going to be right now. Doesn't mean that we won't look at it and start to do some exploratory work this year behind the scenes. I think we have to always be thinking about what future things we want to do and start laying some of the research and groundwork for that. But on the whole, the team is very focused on how do we continue to make progress and do better for the customer in the U.S. and how do we continue to become more efficient and cost-effective as an organization.

Chad Beynon, Analyst

And then a follow-up to that, just on the iGaming, iCasino legislation, I know you and your competitors on the mobile side are doing a lot of work communicating the story, but it also seems like a lot of the land-based operators are as well, as they've seen probably lower cannibalization than they may have feared. So do you think there will be more momentum? Do you think that's more based on kind of what happens in the economy? What's really going to start kind of the rolling stone for more iCasino discussions?

Jason Robins, CEO

Yes, that's a great question. There is certainly an opportunity for tax revenue, and if states find themselves in greater need of that, it could have an impact. Additionally, as an industry, we must improve how we communicate our message. Significant efforts have been made by organizations like the EGA to present data highlighting the considerable scale of the illegal sports betting market, which has influenced policymakers to take action. However, the illegal iGaming market has not received as much attention, despite its existence. Many mobile sportsbooks and online casinos operating illegally overseas also feature an online casino, but this aspect isn't discussed as much. This could be due to iGaming being a less social product that people engage in less frequently. Moreover, our industry hasn't concentrated enough on clearly presenting this information. Therefore, it's a mix of states recognizing the tax opportunity and understanding that there is already an illicit market, akin to sports betting, that can be regulated to protect consumers and generate revenue for the state.

Operator, Operator

Thank you. And our next question comes from Robin Farley with UBS. Your line is open.

Robin Farley, Analyst

Could you provide some details on your guidance for states that are contributing positively? Last year, 11 states generated $105 million. For this year’s target of $500 million, how many states are expected to contribute to that total? Also, at one point, you mentioned a three-year payback period for a new state legalizing until it becomes profitable. Is that period shorter now, especially considering the progress in Arizona? What do you estimate that timeline to be? Lastly, for clarification, you mentioned that your long-term guidance anticipates 7% to 9% of new online sports betting each year. It’s correct to say that your guidance for 2023 and 2024 doesn’t depend on any states that have not yet legalized, right? So no new legislation is required to achieve those targets?

Jason Robins, CEO

That last point is correct. The only state we assumed in our guidance that is not yet operational is Massachusetts, as it is quite far along in the process. We thought it would be beneficial for investors to include Massachusetts in our outlook. However, we have not included any other state launches from new legalization that occurs this year. Regarding the states that are contribution profit positive for 2023, we have not disclosed that information yet. We plan to provide more details at our Investor Day later this year, along with additional disclosure and data. We had to keep some information for that event to encourage attendance. And now, what was your second question? Oh, speed and inflection.

Robin Farley, Analyst

Oh just the speed.

Jason Robins, CEO

Yes, yes. So I think you're absolutely correct. One of the implications of faster ramping with new states, that the inflection to profitability and the degree of operating leverage that you get earlier is greater than what we had seen in some of the earlier states that launched in more of the 2018, '19, '20 time frame. So, there is that implication, and I think that could potentially have an effect not just with the states we're seeing launch in recent months as well as Massachusetts, but with future states that launched that again, something I think we'll address at the Investor Day. But in a nutshell, to answer your question directly, I do think it brings in the timeline to path to profitability for a new state. And we'll be providing a more specific update on that later this year.

Jason Park, CFO

I just want to be clear, Robin, that 2024 EBITDA does include an assumption of more states legalized.

Jason Robins, CEO

Yes. Sorry. So, '23 does not. '24, we have assumed 7% to 9% or 7% to 8%, I forget, if the population launches for sports betting and 3% to 4% for iGaming.

Robin Farley, Analyst

Okay. So, that would be some new states in this legislative session, right, would have to...

Jason Robins, CEO

That would be, yes. And the implication, if that comes in high or low or if it's less so, while it may mean less TAM, it actually means we're probably going to have faster profitability ramp. So, I think either way, it's a good story for the Company. But obviously, we're pushing hard to get more legislation passed.

Operator, Operator

Thank you. And our next question comes from Joe Greff with JPMorgan. Your line is open.

Joe Greff, Analyst

Just regarding the incremental benefit in 2023 compared to the guidance we provided three months ago, how widespread is the improvement from more efficient promotional activity and reinvestment? How concentrated is that in specific markets? Additionally, how much is the market in New York contributing to this improvement?

Jason Robins, CEO

The majority of our EBITDA guidance increase came from direct management. About $50 million of it was attributed to compensation expenses, and another $50 million to marketing. This demonstrates a significant impact, with some revenue growth stemming from hold rate and promotion optimization, along with improved handle and retention metrics within our cohorts. On a state-by-state basis, there are no notable differences; states are evolving as anticipated, and the hold rate increases are consistent across the board. In the newer states we have launched, we are observing quicker adoption of parlays and same-game parlays, likely due to the advancements in our product offerings compared to a couple of years ago. Besides that, the enhancements we are implementing to the hold rate and other factors driving retention and monetization are consistent across various state vintages.

Operator, Operator

Thank you. And that's all the time we have for questions. I'd like to turn the call back to Jason Robbins for closing remarks.

Jason Robins, CEO

Thank you all for joining us on today's call. We had a really great finish to 2022 and are excited about 2023 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.