Profitability timings will once again be the focus of attention as Q2 results come thick and fast, and FanDuel’s rivals hope they can hang on.
The height of the second quarter and half-year results season is fast approaching and the key questions of profitability and timing, or when operators will stop posting losses, will once again focus the minds of industry observers.
Analysts and investors will be looking for signs of progress on when they will reach profitability, but in truth, bar FanDuel (potentially), none of the online operators will be in EBITDA positive territory in the near future.
Most of them have earmarked late 2023 as to when they expect to be profitable, but even that self-imposed deadline might be pushed back for a number of them.
Temperature rising
This is not an unexpected state of affairs. But, much like the current summer temperatures, the financial pressures operators will face will continue to rise as the macroeconomic issues brought on by the pandemic, cost of living crisis and the war in Ukraine exert ever greater pressure.
In fact, the stresses that are likely to be exerted on operators from shareholders and investors could reach peak intensity over the course of the next six months as the pandemic-cost of living-Ukraine war trifecta peaks between now and the end of the year, making finance harder and more expensive to access, while consumers cut back or become much more cautious about their discretionary spend.
To these macro factors can also be added the fact that the major marketing costs required of online operators have not been recouped in the form of wagering volumes that drive them to profitability.
Making the call
For groups like DraftKings this means the prospect of having to go to investors to raise cash is real. This of course has long been denied by DraftKings and others, but the fact that it is mentioned as a possibility gives an insight into the pressures they are working under.
The group posted losses of $1.5bn in 2021, and in March it said it had cash reserves of around $2bn. In the first quarter of this year it posted better than expected adjusted EBITDA losses of $290m and increased full year 2022 revenues by $50m to $1.925bn-$2.025bn. For all this progress, however, the group will still be losing money when it publishes its Q2 results in early August.
In terms of marketing, CFO Jason Park said the Q1 improvement was due in part to the timing of expenses, but also to “true” expenditure such as national advertising was now taking up more of the market mix and lowering the marketing spend.
Lion’s share of the market
But despite this, the dynamics of online sports betting in the U.S. are such that without widespread marketing, promotions and free bets, market share will not follow.
And with DraftKings, BetMGM and Caesars all stating that they would reduce marketing spend post-Super Bowl – just as FanDuel said it would “lean in” to take advantage of that reduced marketing activity – the results have been clear.
Recent state revenue data from Illinois and New Jersey has shown how dominant FanDuel has become as a result of its main rivals reducing their advertising spend.
In April, FanDuel’s parlay GGR overtook that of all its main rivals for all bets, and in Illinois it recorded more GGR from parlays from March to May than its rivals did across all bet types.
At an individual level, the impact of DraftKings’ decision to cut back on marketing has also been clear.
As the team at Eilers & Krejcik revealed this week, DarftKings’ OSB market share in NJ in June was just 9%, the fourth month in a row in which it has declined.
In New York, meanwhile, DKNG’s share has also been on a downward trajectory; for example, in June, FanDuel generated 89% of the state’s GGR for the week ending June 19th.
The reasons for DraftKings’ slow progress are unclear. On the product side, for all the progress it says it is making on icasino and advances in NFTs or tokens, it is in its core sports betting product that it needs to make greater strides, which can only be achieved through a focus on its core OSB offering and improving margins.
Meanwhile, in terms of finances, its decision to jettison the $100m turnover and $10-15m EBITDA SBTech used to generate from its B2B clients seems short-sighted in light of how the market has developed since the groups merged more than two years ago.
It is also clear that players currently have little loyalty to OSB brands, as shown by FanDuel’s growth in market share as its main rivals reduce their marketing output. This will surely change when the NFL seasons restarts and they ramp up marketing.
However, the point about product remains and applies to other leading brands in the market such as PointsBet, whose recent deal with data and feeds provider IMG Arena fits in with its focus on developing market share through its product and live betting.
Early pressures
Pressure is also rising because the U.S. sector is still in its earliest stages. The team at Truist Securities alluded to this in a note following the SBC North America Summit last week.
“Though investor enthusiasm for sports betting has waned since 2021, operators continue to reiterate that it’s still early innings, with profitability around the corner as the new wave of interactive is on the way.”
And when it comes to product, Truist added: “The conference reinforced our view that sports betting is still in the proverbial early innings. While the promotional battle rages on, operators are pointing to a future where the best OSB product will prevail.”
Operators and investors must be thinking that time can’t come quick enough. The intervening period, meanwhile, will be fraught with tension and the likes of DraftKings and BetMGM, much like a cyclist trying to hold onto a leading rider’s wheel on a steep climb, will try to stay for as long as possible with the pace set by FanDuel.
