FanDuel’s dwindling cash reserves

FanDuel's latest financial update shows the company burnt through US$225m of its cash reserves since June 2015 and has 'just' US$48m left in cash reserves. The question FanDuel and the likes of DraftKings have to contend with is whether they can win their race against the clock and start being profitable.

by Scott Longley 

We know times are tough for daily fantasy sports (DFS) operators as US state-by-state regulatory concerns hem them in and their once ubiquitous advertising and marketing disappear from view. 

Confirmation of this tougher environment for DFS operators came late last week when one of the two market leaders, the Edinburgh, UK-based FanDuel issued its financial results.

They contained a warning from the company’s auditors at Deloitte that the current legal and market uncertainty in the US casts a “significant” doubt over the company’s future as a going concern.

This isn't all that surprising given the financial situation detailed in the report, which shows an alarming rate of cash burn at the company. The results cover the 18-month period to June 2015, at which point the company had cash reserves totalling US$274m.

Less than a year later, in May this year in fact, that total had whittled down to a mere US$47.8m due “predominantly to marketing and developmental-related costs”.

This circa-US$225m decline occurred after the company received US$340m in investment in 2014 and early 2015 from its Series D and Series E investment rounds and after it raised a further US$55m from existing shareholders after the period close in June 2015.

The depletion of resources is almost wholly down to the extraordinary advertising and marketing blitz that accompanied the start of last season in the NFL. The question is whether the outlay was justified by the rewards.

Previous marketing efforts had clearly succeeded: paid active players ballooned to 1.25 million in the 18 months to June 2015 from 253,149 in the year to December 2013 and service fees rising from US$14m to US$102.2m.

Yet the company still produced a whopping loss of US$94.9m in the 18 months to June 2015. This on a turnover of US$87.7m, which is the service fees minus player acquisition incentives of US$9.8m and player retention incentives of US$4.6m.

Despite being down to its last circa US$50m, the company remained upbeat in the results statement, suggesting it operated in a market which had “tremendous growth potential”. Yet the report is suffused with negatives, particularly with regard to the regulatory and legal updates.

These issues point to an uncomfortable situation for FanDuel and other leading DFS operators: they are guided by events rather than being masters of their own destiny.

Regulatory uncertainty reigns
The fracturing of the regulatory picture in the US since last summer certainly throws into doubt the model to date employed by FanDuel and its nearest competitor DraftKings.

With the status of the daily fantasy sports model being questioned by the Attorneys General in New York, Nevada, Illinois and Texas among others, the fear is that neither of the duopoly at the top have enough momentum to power themselves to profitability.

FanDuel admits the saturation marketing and advertising strategy witnessed in the past year will not be repeated. In reporting its declining cash pile, the company said its current forecasts and projections “do not require the level of marketing and development costs” incurred up to May this year.

Clearly, the advertising spend of the recent past cannot be matched without further shareholder funds, and it has to be wondered what happens next.

Though we have no further detail on what happened at either the top- and bottom-line level in the last 12 months, the level of cash balance deterioration is an indicator that even as player numbers and revenues have risen, the likelihood is that profitability remains a distant prospect.

The situation is all the more complicated in revenue terms because of the regulatory landscape. The report also points out that the actions taken by various US states within the last year, which have led FanDuel to suspend operations in soem of them, represent “less than” 20% of its turnover in the 18 months to June 2015.

Even the good news regarding previous cash raising from investors comes with caveats. The various classes of share related to each raise come with a number of stipulations pertaining to preference dividends and redemption repayments.

Such as the terms of the various shares that they have to be classed as debt in order to satisfy accounting rules in the results. Hence, in total the company paid out a total of US$17.1m in interest payments in the 18 months to June 2015, despite being largely debt free.

The company maintains it is a “leader” in calling for legal clarity for fantasy sports and believes that the combined lobbying efforts of the DFS industry means that more states will “eliminate some of the uncertainties” pertaining to the sector in many states.

Yet FanDuel is arguably in a race against time with its own balance sheet if it is to take advantage of these moves as and when they happen.