DraftKings shares are relatively flat Friday afternoon, after the gaming company released mixed third quarter earnings. One of the more interesting aspects of the results involves the oddities of the 2021 NFL season.
DraftKings reported $213 million in revenue for the third quarter, in line with its guidance but about $20 million shy of average analyst estimates. Executives said the company faced a $25 million revenue headwind related to the unexpected success of gamblers at its sportsbook, largely driven by primetime NFL games.
Those are the most-watched (and most bet) regular season sporting events in the U.S., and the public usually backs the favorites and the over. In September, according to CFO Jason Park, 67% of primetime favorites won outright and 89% of primetime games hit the over. There was also not a single upset by an underdog of more than a touchdown in any NFL game.
The DraftKings third quarter is uniquely exposed to variance for sports betting because it holds just the first few weeks of the all-important NFL season, explained CEO Jason Robins.
“I definitely think that Q3 is the most vulnerable quarter, both in terms of that downside, and potentially upside if there’s a good run to start the season,” Robins said in an interview. “But in Q1 and Q2 we did have positive variance in hold percentage, which shows it can happen in any quarter.”
In October, the first month of the company’s fourth quarter, the NFL trend continued. DraftKings saw a $50 million revenue shortfall in the first three weeks of the month, Robins said, partially offset by a strong fourth week, when the New York Jets became the first heavy underdog to win a game this season. That last week produced $25 million more revenue than forecasted, Robins said. It’s all been factored into the company’s full-year guidance, Robins said, which was narrowed Friday toward the upper limit of what was stated after Q2.
DraftKings also saw a $15 million revenue headwind related to promotions in new states that launched earlier or faster than expected, Robins said. Losses per share were better than expected, and user growth was strong. The stock (Nasdaq: DKNG) fell as much as 10% in pre-market trading, but is down about 1% in full trading as of mid-day Friday.
In an interview after the earnings report, Robins highlighted the company’s success in Arizona, where the company launched its sportsbook in September. DraftKings achieved 100,000 users in 17 days, more than 100 days faster than it reached that level in New Jersey or Pennsylvania, despite not having a huge fantasy database already in place.
The company, which has net losses of $1.19 billion so far this year, believes that most states will turn profitable on a 2-3 year horizon. (New Jersey was faster, hitting that point in its second full year).
It’s difficult to make yearly or quarterly comparisons for DraftKings, whose business is gradually growing as more states legalize sports betting and iGaming. The sports calendar, usually very consistent, was also thrown out of whack in the last 12 months, pushing big betting events into new months. It will likely be a while before revenue and expense comps become an easy way to assess the company’s health.
That said, one metric is closely watched by investors—the size of the company’s active customer base. Average monthly unique players in the quarter was 1.34 million, up from 1.12 million in the second quarter, and up from 1.02 million in the third quarter last year. Average revenue per user, was $47, down from $80 last quarter and up from $34 in the Q3 of 2020.
Another important metric—DraftKings’s marketing spend. Every new state means a new group of potential users, and customer acquisition can be expensive. The company’s “sales and marketing” jumped to $303 million in the third quarter (it was $170 million in Q2).
This quarter spans the three months ended Sept. 30, during which DraftKings expanded its relationship with MLB, launched in a few more states, debuted a new NFT marketplace, and reached an agreement to buy the Golden Nugget’s online gaming business in an all-stock deal valued at $1.56 billion. More recently, the company dropped its $22.6 billion pursuit of European gaming giant Entain, a deal that would have given it new tech capabilities and an instant international presence.
Robins said that there were a variety of factors that led to the company walking away, including the economics and, to a lesser degree, deal complexity. An acquisition would likely have involved an agreement with direct competitor MGM Resorts, which was a 50-50 partner with Entain in BetMGM.
“One of our pillars for long-term growth will be long-term expansion,” Robins said in the company’s earnings call. “That could happen soon. It could happen years from now. We don’t have a set timetable…. This is one that we thought potentially could have been a good route for global expansion. ”
The DraftKings earnings come one day after Penn National (Nasdaq: PENN) tumbled nearly 20%. That selloff was a mixture of bad quarterly earnings and a damning story about Barstool Sports founder Dave Portnoy (Penn National owns 36% of Barstool and uses its name on its mobile sportsbook). Unlike Penn, DraftKings does not operate brick-and-mortar casinos, which have been affected by COVID-19 and the Delta variant.
(The story and headline been updated to reflect movement after the markets opened and comments from Robins.)