What To Watch In DraftKings Earnings Report

DraftKings (DKNG) is scheduled to report results of its third fiscal quarter before the market open on Friday, November 13, with a conference call scheduled for 8:30 am ET. What to watch for:

1. OUTLOOK: As part of the company's secondary offering prospectus last month, DraftKings said it expects third quarter revenue in the $131M-$133M range. The company stated, "As of the date of this preliminary prospectus, we expect to report unaudited revenue for the three months ended September 30, 2020 of between $131 million and $133 million on a GAAP basis, an increase of approximately 97% as compared with the three months ended September 30, 2019, and approximately 41% as compared with the three months ended September 30, 2019, after giving pro forma effect to the Business Combination as if it had occurred on January 1, 2019. Atypical hold rates from NFL wagering during the three months ended September 30, 2020 resulted in an estimated negative impact on revenue of approximately $15 million based on our historic average hold rate for online sports betting of approximately 6.5%.

As a result of strong customer engagement, we expect our sales and marketing expense, inclusive of stock-based compensation, depreciation and other non-cash expenses, for the three months ended September 30, 2020 to be between $200 million and $210 million on a GAAP basis. Increased time spent at home due to COVID-19 has resulted in increased response rates to our advertising spending and, even with our scaled-up spending on customer acquisition, recent customer acquisition costs have been better than our expectations. We expect our B2C monthly unique payers for the three months ended September 30, 2020, to be approximately 1,020,000, representing growth of approximately 64% compared to the same period last year."

During the company's last earnings conference call, DraftKings had also introduced fiscal year 2020 pro forma revenue guidance of $500M-$540M, which equates to year-over-year pro forma revenue growth of 22% to 37% in the second half of 2020. DraftKings at the time did not anticipate an impact to its long-term plans due to COVID-19.

In a research note ahead of quarterly results, Benchmark analyst Mike Hickey said he does not expect DraftKings will raise its fiscal year 2020 revenue guidance considering elevated uncertainties related to virus influence on professional play. The analyst also highlighted that DraftKings launched iGaming apps in Pennsylvania and West Virginia in July and launched a retail and online sports betting app in Illinois in August. He kept a Buy rating and a $60 price target on the shares.

2. 2021 GUIDANCE, LOCK-UPS AMONG KEY TOPICS: With DraftKings already disclosing third quarter revenue, users and marketing spend, Morgan Stanley analyst Thomas Allen sees four quarter/2021 guidance, win margins, lock-ups, and EBITDA losses as key topics for debate into earnings. The analyst expects DraftKings can still achieve $540M of 2020 revenue, which implies about 70% quarter-over-quarter growth in the fourth quarter.

On Allen's math, DraftKings will exit 2020 providing online sports betting to 18% of U.S. adults, or 21% including the imminent launch of MI. MI will also add 3% to the iGaming population, while stay-at-home acquired customers will also benefit iGaming, the analyst added. On this basis, he would assume the company would increase its 2021 guidance to about $730M. Additionally, Allen forecasts DraftKings's fourth quarter monthly unique payers to increase 40% year-over-year to 1.5M, a slowdown from the third quarter.

The analyst expects management to address the regulatory outlook as it provides the building blocks to the sizeable market opportunity. Ohio and Massachusetts could still legalize sports wagering this year, but he has heard Ohio is now a "coin flip" as 3 of its 4 bill sponsors are leaving office, so may get pushed to 2021. Massachusetts may also delay to next year due to stimulus uncertainty, he added. Allen also pointed out that DraftKings' secondary offering and 120M shares coming off lock-up on October 20 have heavily weighed on its share price. He believes another 60M shares come off lock-up on November 20 and 65M on January 4.

3. ESPN AGREEMENT: Back in September, DraftKings announced it had entered into a multi-year agreement with Disney's (DIS) ESPN to become a co-exclusive sportsbook link-out provider and exclusive daily fantasy sports provider of the "media giant." Links across ESPN digital platforms will connect fans to DraftKings' products and services. Under the agreement, DraftKings will now be able to integrate its products and offerings across ESPN's digital platforms. DraftKings will also power existing and future ESPN studio shows with dedicated segments for promotion, beginning with daily fantasy sports.