DraftKings Credits Atypically High Hold Percentage For 2020 Q4 Revenue Beat

Citing a stronger than anticipated hold percentage for its online sports betting segment over the final three months of 2020, DraftKings surpassed fourth-quarter revenue expectations by a considerable margin, the company reported during a 2020 fourth-quarter earnings call Friday morning.

For the quarter, DraftKings’ generated revenue of $322.2 million, beating Wall Street forecasts by nearly $100 million. While the Boston-based company credited a litany of external conditions for the guidance beat, CEO Jason Robins described the strong hold percentage as a primary factor.

DraftKings brought in about $30 million in unexpected revenue from the atypical hold rates, particularly from the outcomes of NFL and college football games over the quarter. A sportsbook’s hold is largely interpreted as the revenue a company retains after all winning bets have been paid. DraftKings did not disclose the exact hold percentages on Friday.

Strong hold percentages across the industry

Robins cautioned that DraftKings’ hold rates may not be as high in future quarters, while noting that the rates were elevated across the board at other books across the industry, as well. During the third quarter of 2020, DraftKings barely beat hold forecasts, Robins indicated, after customers won at a relatively high rate at the start of the NFL season. The company was not alone, as bettors opened the NFL regular season with a hot start at numerous books nationwide.

DraftKings also pointed to a favorable sports calendar, particularly for college sports and the NBA, an extension of mobile registration in Illinois, and strong customer acquisition results for the revenue beat. Despite some concerns that the NFL regular season could be pushed into mid-to-late January due to COVID-19, the league did not cancel a single game. At the same time, all five power conferences in college football held a conference championship game in December even as the Big Ten and Pac-12 delayed the openings of their respective seasons because of the once-in-a-century pandemic. Several states, most notably New Jersey and Nevada, have reported record sports betting activity among digital offerings over the last two months, as the vast majority of bettors remain home during the pandemic.

“There were just a lot of things that broke our way,” Robins said Friday during call.

Robins emphasized that the company’s share of the customer’s leisure and entertainment wallet could dip in the coming months if customers increase spending on travel and events such as concerts.

Increased forward guidance

In total, DraftKings generated revenue of $644 million in 2020, nearly doubling overall revenue from the previous year. Bolstered by the pent-up demand for online betting in the third quarter, after the global sports freeze ended, DraftKings raised its forward guidance to a range of $540 million to $560 million in November. Before the COVID-19 pandemic spread to the U.S., DraftKings projected 2020 revenue of $540 million, before revising the lower end of guidance to a range of $500-$540 million near the middle of last year. Sportsbook revenues across the industry fell sharply in the first half of 2020 after the spread of COVID-19 led to the cancellation of March Madness and lengthy postponements of several professional sports.

Given the company’s strong finish to 2020, along with encouraging customer acquisition and retention metrics, DraftKings increased guidance to a range of between $900 million and $1 billion in revenue for 2021, DraftKings Chief Financial Officer Jason Park said on Friday’s call. When DraftKings previously projected 2021 revenues of $750- $850 million in November, the company did not factor its financial performance from Virginia or Michigan into the forecasts. DraftKings launched online sports betting operations in both states last month. The guidance is based on the assumption that all professional and college sports calendars that have been announced come to fruition, Park added.

As of its fourth quarter, DraftKings had 1.5 million monthly unique paying customers, in line with Wall Street estimates.

While DraftKings is not offering guidance for 2021 Adjusted EBITDA (Earnings before interest, taxes, depreciation, and amortization), Park indicated that sales and marketing spending will be a key metric to watch moving forward. In 2020, DraftKings reported Adjusted EBITDA of negative $844.3 million, as net losses continue to escalate. A year earlier, the company reported Adjusted EBITDA of negative $142.7 million.

DraftKings reported a loss per share of 24 cents, compared with FactSet consensus estimates of per share losses of 43 cents.

Long road to profitability?

In terms of guidance, Robins indicated that it is difficult to predict the timing for when additional states will go live in 2021. In addition, he noted that DraftKings is flexible in how it allocates spending for customer acquisition expenses depending on financial results throughout the year. The results make it challenging for DraftKings to pinpoint earnings forecasts for the upcoming year.

“It’s really tough for us to guide to that at this point, and for that reason we are choosing not to,” Robins said.

On a long-term basis, Wall Street consensus estimates do not anticipate that DraftKings will turn a full-year profit through 2023. Ahead of its public debut in April, DraftKings’ warned investors of possible near-term uncertainties. According to an SEC registration statement filed last January, DraftKings’ cautioned that it may “incur significant losses,” in future periods, but did not specify the frequency or duration of the potential losses.

DraftKings’ shares Friday initially rose as much as 8.1% on news of the forward guidance and revenue beat. Shares in DraftKings hit an intraday high of $62.47, before see-sawing in morning trade. As of 12:15 ET, DraftKings traded around $62 a share, up 7% on the session.

After dipping below $35 in October to fall to a six-month low, DraftKings is approaching its all-time high of $64 a share.

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