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The Maryland Lottery and Gaming Control Commission approved DraftKings‘ retail sports betting license application on Thursday, despite expressing deep concern in regards to the company’s long-term financial outlook.
At Thursday’s meeting, the MLGCC determined by “clear and convincing evidence” that DraftKings met the qualifications necessary for receiving a Sports Wagering Facility Operator License. The near-unanimous vote included one abstention. DraftKings, which filed the application under Crown MD Gaming LLC, has plans to open a sports wagering facility at the Maryland State Fairgrounds in Timonium.
Under the terms of DraftKings’ agreement with the Maryland state fair, the two parties will share the cost of renovating an area under the grandstands of the Timonium racetrack for a new sportsbook facility. DraftKings has been granted the exclusive right to operate the retail sportsbook at the fairgrounds.
A number of DraftKings’ top competitors, including FanDuel, BetMGM, Caesars, and Barstool Sportsbook, have already begun accepting sports wagers at retail sportsbooks throughout the state. Online sports betting in Maryland is not expected to launch until early 2023.
Following a thorough background investigation, the Maryland Lottery determined that Crown MD Gaming had sufficient financial resources and it had no “derogatory information” regarding the applicant’s qualifications.
Improved financial strength
During Thursday’s meeting, the MLGCC did express some apprehension over DraftKings’ financial performance. E. Randolph Marriner, chair of the MLGCC, indicated that DraftKings posted net losses of $3.05 billion over a five-year period through Dec. 31, 2021, when the Maryland Lottery conducted a detailed analysis of the company’s operating performance. In particular, Marriner called attention to DraftKings’ latest earnings call, on which CEO Jason Robins expressed satisfaction with the company’s performance over the second quarter of 2022 despite projecting full-year losses of around $800 million.
“These numbers are quite staggering,” Marriner said, before asking DraftKings executive Joseph DeCristofaro to provide a thorough explanation of the company’s near-term financial outlook.
In response, DeCristofaro noted that DraftKings started 2022 with a much-wider loss expectation, one that has narrowed considerably in recent weeks. As DraftKings gains scale by acquiring customers, the company is optimistic that its prospects for profitability will improve over time, he explained. DraftKings is targeting the fourth quarter of 2023 as a reasonable expectation for delivering its first three-month period of profitability.
“There is an upfront cost, and then you earn a return on that over a period of time,” said DeCristofaro, who serves as DraftKings’ vice president of investor relations. “When you have more existing players than new players, you turn profitable. That’s the business model and why we’re optimistic about it.”
Another important metric is DraftKings’s marketing spend. Every new state means new customer acquisition, which can be expensive
The company’s “sales & marketing” jumped to $197M in 2022 Q2 (it was $170M in 2021 Q2)
It has tended to go way up in the 2nd half of each year pic.twitter.com/h6FGARVxaP
— Lev Akabas (@LevAkabas) August 5, 2022
In its conclusion on DraftKings’ financial suitability, the MLGCC found that DraftKings’ operating performance over the five-year period was consistently poor, due in large part to its rapid expansion into new markets and the competitive environment across the industry for acquiring customers. DraftKings now offers sports betting and/or online casino gaming in 18 states nationwide. As a result of its poor operating performance, DraftKings is not generating positive cash flows from its operations, the investigation found.
Nevertheless, the MLGCC noted that DraftKings’ financial strength has improved in recent years, due mainly to a stock offering and the issuance of promissory notes that resulted in a “substantial influx in cash.” DraftKings advised the Maryland Lottery that its liquidity position remains strong with about $1.5 billion in cash, as of June 30.
“Although DraftKings’ operating performance is an area of concern and the prospect of improvement in the near future is limited, there are no overwhelming issues that would lead us to conclude that the company is unsuitable for licensure,” said John J. Mooney, managing director of regulatory oversight for the Maryland Lottery, in a presentation before the commission.
As a condition of approval, DraftKings agreed to an annual review of its financial performance and suitability. Typically, such reviews are conducted on a five-year basis.
Quiet summer months for sports
In separate comments to the MLGCC at Thursday’s meeting, several casinos reported that sports wagering volume was down in July due to seasonality. At MGM National Harbor, BetMGM processed about 53,000 sports wagers on the month, posting a 7% hold.
Meanwhile, Horseshoe Casino reported one of its lowest monthly holds on record, primarily due to a considerable local bias in wagers on the MLB’s Baltimore Orioles. The Orioles went 16-8 in July, including a 10-game winning streak early in the month. The Orioles entered Thursday with a 64-59 record, trailing the Toronto Blue Jays by 1.5 games for the American League’s final wild card spot.
