DraftKings Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the DraftKings' Q3 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to introduce your host for this conference call, Mr. Stanton Dodge. You may begin.

Good morning, everyone, and thanks for joining us today. Statements we make during this call that are not statements of historical facts constitute forward-looking statements that are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. For more information, please refer to the risks, uncertainties, and other factors discussed in our SEC filings. During the call, management will also discuss certain non-GAAP measures, which we believe may be useful in evaluating DraftKings' operating performance. These measures should not be considered in isolation or as a substitute for DraftKings' financial results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our quarterly report on Form 10-Q filed today with the SEC and in our earnings presentation which is available on our website at investors.draftkings.com. Hosting the call today, we have Jason Robins, Co-Founder, Chief Executive Officer, and Chairman of DraftKings, who will share some opening remarks and an update on our business; and Jason Park, Chief Financial Officer of DraftKings who will provide a review of our financials. We will then open up the line to questions. I will now turn the call over to DraftKings’ Co-Founder, Chief Executive Officer and Chairman, Jason Robins.

Good morning, everyone. Before I begin my remarks, in recognition of Veteran’s Day this week, I would like to thank our country's veterans for their sacrifices and service. In order to more directly support our veterans and their families, DraftKings has launched Tech for Heroes in 2018, a companywide initiative that provides veterans and military spouses with free comprehensive high-tech job skills training and connects veterans to DraftKings' employees who provide mentoring. Since launching the Tech for Heroes program, we have invested over $1 million in providing accredited training to veterans and their spouses across the country. I'm proud to announce that in 2021 we will be expanding the reach of our Tech for Heroes program and are committed to training approximately 250 veterans in 2021, double the number we trained this year. We want to give veterans and their spouses the tools they need to start a new career in tech or advance in their current position. Everyone at DraftKings is proud to do our part to thank veterans and their families for the sacrifices they make on our behalf. I would also like to thank our investors for their continued support and welcome those investors who joined us with our follow-on equity offering in October. On today's call, we will cover the following topics: First, I want to share some insight into our third quarter accomplishments. Next, I will provide an update on our recent state launches in the pipeline of new states. Third, I will discuss our product and technology investments as well as the migration to our in-house proprietary sports betting technology. Then before turning it over to Jason Park, I will share some insights into our sales and marketing approach and our recent equity offering. DraftKings had a very productive third quarter on a number of different fronts. First, our Q3 performance confirms what we foreshadowed on our previous earnings call. The return of major sports has generated tremendous customer engagement. Third quarter revenue of $133 million was at the high end of the range we outlined in our recent S-1 and grew 42% year-over-year. In Q3, we also had more than 1 million monthly unique payers, which means that the average for the months of July, August, and September was greater than 1 million. Given the impact COVID had in July, monthly unique payers in August and September were higher than in July. We expect these positive trends to continue as shown by the very encouraging outlook for the fourth quarter that our 2020 guidance suggests. As noted last quarter, there have been and may continue to be disruptions in the sports calendar due to COVID. We are optimistic that sports will continue to be played and believe any disruptions will be short-term in nature and not impact the long-term prospects of the sports gaming industry or our competitive positioning. Looking ahead to 2021, we are likely to see another unique sports calendar with the NBA and NHL expected to kick off their seasons either later this year or early next year as compared to their typical start dates in October. Second, we continue to build smart and effective relationships with media companies, including ESPN and Turner Sports, as well as professional sports teams, including the Chicago Cubs, the New York Giants, and the Philadelphia Eagles. These commercial and strategic agreements provide us with access to unique and valuable content, intellectual property, and marketing assets, as well as highly relevant target audiences in markets where sports betting has recently been legalized. We evaluate these opportunities with the same data-driven approach we used to guide other areas of our business. We also strengthened our corporate foundation by appointing two new Board members, Jocelyn Moore and Valerie Mosley, and we also added Michael Jordan to our team as a special advisor on our Board. I am excited to welcome Jocelyn and Valerie to our Board as they each bring unique skills, experiences, and ideas, and they will each play an important role in shaping the future of DraftKings and helping us achieve our long-term goals. Jocelyn’s former roles, which includes serving as Executive Vice President of Communications and Public Affairs for the National Football League, equipped her with valuable insights into our customers as well as with respect to government and regulatory affairs. Valerie's experience in the investment management industry, which includes over 20 years at Wellington, provides us with an important voice on the capital markets front. The addition of Michael Jordan to the DraftKings team is also a great fit. Both Michael and DraftKings live and love to compete. Michael will provide input on a variety of dimensions including our focus on brand strategy, product development, inclusion, equity and belonging, marketing activities and other key initiatives. Turning to new U.S. states for DraftKings and legalization trends. In the third quarter, we launched iGaming in West Virginia and sports betting in Illinois. Illinois, given its size and passionate sports fan base, is a large and important market. The state was a focus of our Q3 marketing efforts and a key reason for the increase in third quarter sales and marketing expenses. The governor's suspension of the state in-person registration requirement has enabled us to acquire players directly onto our mobile product. Our investments in technology, regulatory affairs and compliance put us in a great position to market to customers and launch mobile registration quickly. We are pleased to have launched mobile sports betting in Tennessee on November 1st. We are excited about entering another state with passionate sports fans and highly competitive teams both at the collegiate and professional level. With our launch in Tennessee, DraftKings is now live in 10 states for mobile sports betting and live in three states for iGaming. As you also know, Virginia has legalized sports betting and Michigan has legalized both sports betting and iGaming. Those two states accounted for approximately 6% of the U.S. population. We are working together with state officials in Virginia and Michigan on regulations and licensing and are hopeful that we will launch in each state at the earliest practicable opportunity. Last week, on Election Day, Maryland, South Dakota, and the majority of parishes in Louisiana passed referendums in favor of sports betting. These three states in total account for approximately 3.5% of the U.S. population. The margins approving the referendums were decisive, showing the public support for sports betting is strong, and we are hopeful that this will help the momentum continue across the U.S. As a reminder, launching in a new state is a multi-step process. Legislators need to pass bills, regulations need to be written, and licenses need to be granted. Last night's votes were certainly a good first step, though it is probable that these states will not have a material impact on our financials in 2021 and may not even launch until 2022. In addition, Ontario's government recently presented its annual budget, which included language that would modify the longstanding statutory Internet gaming framework to allow private operators offering sports betting and iGaming products to operate in the province. This is exciting because Ontario is a large market for us. If it were a U.S. state, it would rank as the fifth largest state by population. And we have offered our DFS product in Canada since 2012. We are now two and a half years since PASPA was struck down by the U.S. Supreme Court. Twenty-one states representing about 40% of the population have legalized sports betting. Fourteen states, representing 26% of the population, have legalized mobile sports betting. Twelve of which, representing 21% of the population, currently have operators live. DraftKings is now live with mobile sports betting in ten of those states, which is more than any other operator. These ten states collectively represent about 20% of the U.S. population. We continue to be very excited with the products and technology investments we're making, as well as with our progress on the technology migration and business integration of SBTech. We anticipate completing the technology migration by the third quarter of 2021. And once we do so, our vertically integrated proprietary sports betting technology will create a sustainable and differentiated advantage for DraftKings. We also expect to benefit from a long-term improvement in our gross margin percentage once the migration is complete. As a reminder, with the acquisition of SBTech, we now have almost 1,100 engineers worldwide dedicated to creating best-in-class technology and games and experiences for our users. During the third quarter, we launched our standalone casino app for iGaming in Pennsylvania and West Virginia. We also launched Best Ball, which is our first season-long product for DFS. In addition, we introduced several new DraftKings created games for the online casino including new versions of blackjack, roulette, and baccarat. Beyond our customer-facing investments, we continue to prioritize our internal capabilities around data science which drive our cross-sell and LTV to CAC metrics. With our technology, talent, and resources, as well as with our proprietary betting engine, we will be able to clearly differentiate our offering in the United States from any other gaming provider and create a sustainable advantage for DraftKings both as a B2C and B2B company. Regarding B2B, we continue to obtain new business in international markets. In October, we announced the launch of PalaceBet, a mobile and online sportsbook powered by DraftKings B2B technology through our relationship with Peermont in South Africa. We also announced the renewal and expansion of our relationship with MansionBet, the Gibraltar-based sports betting brand of Mansion Group, which is the leading provider of online gaming with a portfolio of well-known online casino brands and a sportsbook. In the third quarter, we saw a significant increase in customer activity, as evidenced by our 64% year-over-year increase in MUPs for the quarter. On average, more than 1 million monthly unique paying customers engaged with DraftKings each month during Q3. A number of the factors we have discussed including the unique Q3 sports calendar, pent-up demand, the earlier than expected mobile registration opportunity in Illinois, and the stay-at-home nature of COVID made this a unique and valuable time for customer acquisition and our CAC came in better than our expectations. We have confidence that our CAC levels are appropriate given our insight into our customers and revenue retention, which are the bedrock of our LTV calculation. Our sales and marketing approach is data-driven. We base our decisions on the return on ad spend we are seeing, not on what our competitors are doing and leverage our data to optimize customer acquisition spending based on player profiles and preferences. This approach means that we'll spend more if the data indicates that we should, as was the case in Q3. We will take the same data-driven approach to our commercial and strategic agreements. For example, states with sports betting and iGaming generate higher customer LTVs, which informed our agreement with the Philadelphia Eagles. In our agreement with the Chicago Cubs, we considered the value associated with the potential to open a world-class DraftKings sportsbook at Wrigley Field. Our agreements with sports media organizations like ESPN and Turner allow us to integrate our content, programming, and collaborate on new content, which we believe will improve our overall marketing performance while advancing mainstream adoption of sports betting. Finally, our relationship with Bryson DeChambeau, the world's sixth-ranked golfer in 2020 U.S. Open Champion underscores the significance of golf within the gaming industry. Golf remains DraftKings fourth most popular daily fantasy sport while our golf sportsbook handle has grown over ten times year-over-year. I would also like to talk about our recent equity offering, which is the second one we've completed since going public, including the rationale behind it and how I see things going forward. We conducted the October offering for two primary reasons. First, the process we are going through is part of the reality of transitioning from a VC-backed company to a publicly traded company. It is only natural for early private investors to exit their investment and realize the returns for their investors. The offering allowed us to smooth this process out by facilitating and organizing an orderly process in anticipation for lockup restrictions on many shareholders that were set to come up on October 20th. In fact, now 80% of our common shares are unlocked at this point, and all of our shares will be unlocked at the beginning of January, after January 5th. We have provided more specific information regarding the unlocking of our shares in the earnings presentation which can be found on our investor website. Secondly, DraftKings has always been proactive with ensuring we are well-financed to pursue our growth objectives. We see a number of attractive avenues to deploy the capital we raise in ways that will create long-term value for our shareholders. This may include continued investment in customer acquisition, especially while the CAC remains very efficient, as well as positioning the business for the hopeful acceleration of state legalization. In addition, while we have no specific M&A targets at this time, we are always considering companies that may help us fuel our growth and bring more excitement to the skin-in-the-game fans. As I look to the future, I am very confident in the continued growth of the online sports betting and iGaming market in the U.S. Though not a proxy for revenue, the handle growth figures we disclosed in our S-1 supports our OSB and iGaming TAM estimates as do the number of new users we are adding and the data that the states are reporting. DraftKings is well positioned to capitalize on the U.S. market growth as we expand our leadership position with live operations in more states than any competitor. I will now turn the call over to DraftKings’ CFO, Jason Park, who will discuss our third quarter results and how we are currently thinking about the rest of 2020 and 2021.

Thank you, Jason, and good morning, everyone. Before I begin, I want to remind everyone that we will be discussing our results on a combined company pro forma basis to improve comparability as if the business combination had closed on January 1, 2019. Pro forma means that we are including B2B for the nine months ended September 30th for both 2019 and 2020 rather than just from April 24th through September 30 in 2020. In Q3 2020, we delivered $133 million of revenue, a 42% year-over-year increase. These results were fantastic and would have been roughly $15 million stronger, were it not for the unusually low hold for NFL games during the first three weeks of the season. On a year-to-date basis, we have generated $321 million of pro forma revenue, representing 19% year-over-year growth, which obviously includes several months that were deeply impacted by COVID. Our B2C segment, which represents our U.S. product offerings of Daily Fantasy Sports, Sportsbook, and iGaming generated $104 million of revenue in Q3, up 55% compared to the same period in 2019. We launched iGaming in West Virginia and online sports betting in Illinois during the third quarter, and we were live in seven new states for NFL week 1 versus Q3 2019. These factors, combined with the packed sports calendar were the major drivers of our growth. On a year-to-date basis, our B2C segment has grown 29%. B2C monthly unique payers in the quarter increased 64% year-over-year to 1.02 million. The increase reflects strong unique payer retention and acquisition across DFS, OSB, and iGaming. On a year-to-date basis, MUPs have increased 20%. MUPs also grew at an impressive year-over-year rate in October as we continue to realize the positive impact of our external marketing spend. Average revenue per monthly unique payer, or ARPMUP, was $34 in Q3, representing a 6% decrease versus the same period in 2019. Our ARPMUP was impacted by the aforementioned low NFL hold and promotional activity, offset by increased engagement with our iGaming and online sportsbook product offerings. On a year-to-date basis, ARPMUP has increased 7% versus 2019. Turning to our B2B results, our B2B business generated $29 million of revenue in the quarter, an 11% growth rate compared to the same period in 2019. Adjusted EBITDA for the quarter widened to negative $197 million as we rolled out our new state playbook in multiple jurisdictions and continued to invest in our product, technology, and G&A functions. The gross margin rate for the business declined as we shifted our business away from higher-margin DFS, as well as increased promotional activity. The GAAP gross margin rate declined more due to the amortization of acquired intangibles related to the business combination. Our sales and marketing spend was $203 million on a GAAP basis and $191 million after excluding stock-based compensation, and depreciation and amortization. The year-over-year increase in marketing investment had a positive impact, as you can see from the increase in our MUPs. The majority of the $191 million in Q3 sales and marketing spend was for external marketing. The primary driver for our year-over-year increase in external marketing is that we had seven states where we were live for the first time for NFL week 1, including Illinois. In addition, the pent-up demand and unique sports calendar combined for strong engagement and return on advertising spend. Products and technology and general and administrative expenses were $54 million and $127 million on a GAAP basis, respectively, and $31 million and $36 million, respectively, after excluding stock-based compensation, transaction expenses, and other non-cash and non-recurring charges. The year-over-year growth in these cost categories was primarily from headcount increases, including the annualization of hires we made in 2019. Moving on to our balance sheet and liquidity. We are well capitalized to execute our multi-year plan and address our key priorities of taking advantage of this unique time for customer acquisition, entering new states as they legalize, continuing to lead the market on product innovation, and exploring opportunistic and accretive M&A. We ended the third quarter with $1.1 billion of cash on our balance sheet and no debt. Taking into account our follow-on equity offering in October as well as a $295 million use of cash to net settle restricted stock units, we expect our cash balance to be approximately $1.7 billion at year-end. Regarding the net share settlement, the RSUs that vested on October 20th resulted in a requirement for the company to withhold taxes. The company held back shares to satisfy the withholding obligation, delivered only the net shares to the participants, and paid the taxes. As a result, we reduced our diluted share count by about 2%. I want to reiterate that no shares of Class A common stock were transferred or sold by our officers in connection with the vesting of these RSUs or the October offering, other than the shares withheld by the company, which are reported as a disposition of shares. Having now generated $321 million of pro forma revenue in the first nine months of 2020, we are increasing our guidance from $500 million to $540 million, to $540 million to $560 million of pro forma revenue for the full year, which equates to year-over-year growth of 25% to 30%. This increase reflects strong performance in October and substantial user activation due largely to our Q3 marketing spend. We assume that all sports calendars will continue as announced and that we continue to operate in states in which we are live today. The range also assumes that the Governor of Illinois does not extend the suspension of the in-person registration requirement. Future revenues and marketing spend will be higher for each month Illinois chooses to extend the suspension. In terms of MUPs and ARPMUP, we expect MUP growth for the full year 2020 to exceed 2019's growth rate, while ARPMUP growth for 2020 is expected to be below 2019's growth rate but slightly higher than our year-to-date growth rate. Turning to pro forma adjusted EBITDA. We are continuing to invest in marketing, given the strong marketing spend efficacy we are seeing as well as our investment in the launch of sports betting in Tennessee. As a result, we expect our adjusted EBITDA loss in Q4 to be a little more than half of the loss recorded in Q3, again, based on the states in which we are live today. As a reminder, our marketing spend is highly flexible and it can be reduced or paused altogether if the sports calendar shifts. In the future, we expect to provide full year guidance only once annually, on our year-end call. However, since we provided a 2021 revenue outlook of $700 million during the de-SPAC process and because we are seeing strong results from recent marketing investments, we want to provide an update on our 2021 revenue outlook on this call. Though we are still in the process of finalizing our 2021 plans, we believe that our 2021 revenues will likely be in the range from $750 million to $850 million. This range is based on the same assumptions we used for our 2020 guidance, in particular for all professional and college sports calendars that have been announced coming to fruition, including the commencement of their 2020 to 2021 seasons, and that we continue to operate in states in which we are live today, which collectively represent 20% of the U.S. population for mobile sports betting and 7% of the U.S. population for iGaming. We will continue to refine and update our internal budgets as we move through Q4, and we'll issue formal 2021 revenue guidance on our Q4 and full year earnings call. That concludes our remarks. And we will now open the line up for questions.

Our first question comes from Michael Graham with Cannacord.

Can you just please talk about your 2021 guidance for a second, and thanks for giving us that? And just maybe at a high level, talk about the relative contribution from MUPs and ARPMUP? And then Jason, did you say that, that only includes state where you're live today? So should we expect that as you can add more states potentially, that could drift higher?

Thank you for the great question. Yes, we have maintained a philosophy of including only those states where we are currently operational or have a set launch date. While we are optimistic about adding states like Michigan and Virginia next year, we do not have confirmation yet, so they are not included. The increased guidance is primarily based on the outcomes we observed in the last quarter, especially regarding customer acquisition, which is expected to increase our revenue and ideally lead to more MUPs in the upcoming year.

Our next question comes from Ben Chaiken for Credit Suisse.

Ontario seems like a great opportunity. I don't know if you have any color on steps or timing? And then with regard to OSB versus iGaming, not sure if either segment has momentum or if it's an all-or-nothing dynamic?

Ontario has recently included in its budget provisions that allow private operators to provide both sports betting and iGaming within the province. Until now, Ontario had only one operator, the provincial lottery, which has been handling sportsbook and iGaming, although there have been some gray market activities for a while. As Canada's largest province, Ontario would rank among the top five U.S. states if it were part of the United States. DraftKings has been active in Canada, including Ontario, for nearly a decade, giving us a substantial user base there. We see this as a significant opportunity. Regarding timing, as seen with processes in U.S. states, it's often not very clear when things will happen. Nevertheless, we believe it was a positive development for Ontario to make this move, and we are optimistic about the prospect of launching both sports betting and iGaming in Ontario next year.

Got you. And just a quick one. Is that something you anticipate needing a partner like most states in the U.S.? Or is it just going to be more similar to maybe how Tennessee is structured?

The indications we've been given is it will be a direct license. Obviously, anything could change, but that's what we've been so far told. So that's our expectation that we'd be able to, like Tennessee, obtain our own license. I will say, though, that a lot has been left to the regulator. It was a very sort of brief change in terms of the budget and the law. So a lot is still left up to the discretion of the regulator, including questions like that.

Next question comes from Chad Beynon with Macquarie.

From a product standpoint, on your sports wagers in the quarter, can you kind of help us think about what you’ve learned about your database, meaning are your customers skewing more towards football than what you were originally thinking just because of the DFS or were there any surprises just in terms of kind of how the proportions split out with different sports?

Great question. One of the challenges in even answering that is the sports schedule itself has been so strange this year. So looking at things like year-over-year comparisons or even comparing sport to sport has been challenging to draw conclusions from. From what we can see, the balance of sports is quite similar to what we've seen in the past and less in sports betting skewed towards NFL than in daily fantasy sports. However, NFL is definitely the largest sport both in daily fantasy sports and sports betting. It's just the gap is a little bit smaller. In part because things like college sports make up a little bit more of the room on sports betting, and they're not as popular on the daily fantasy sports side. But really tough to tell if anything has changed this year as more states have done sports betting from what we can tell happened, but that's what the caveat there. Typically, when we look at things, we look at year-over-year comparison to control for seasonality, and that obviously was not very possible this year.

Okay. Great. And then can you elaborate a little bit more on the ESPN sportsbook link-out, the timing of that and when the full integration will be in place?

Yes, we're very excited about that. We have a great relationship with ESPN; Disney continues to be one of our largest shareholders. So, we think there's a great long-term relationship that we hope to build upon there. As far as timing of any individual features, we plan to announce anything that we do want to announce in sort of our normal course as things roll out. So we don't have at this time anything that we’re publicly saying about timing of any sort of direct integrations or other things, but teams are working very hard on it. So we hopefully will start to see some of the things very soon.

Our next question comes from Kevin Rippey with Evercore ISI.

I just had one on sort of marketing spend and the efficiencies you're seeing there. Looks like marketing spend per MUP addition came down quite a bit. I am wondering if you could help us parse out how much of that comes by way of pent-up demand, given the unique sports calendar, and how much of it is coming by way of internal efficiencies that you're driving? Thanks.

That's a great question. That is a million-dollar question that I don't know if I do have an answer for you. It's hard to quantify how much pent-up demand is driving increased response, how much the stay-at-home nature of COVID is driving increased response, how much the overlap in the sports calendar is affecting things. All those are new data points for us. So very tough to compare to other periods. Overall, we're seeing great performance; the efficiency, the CAC is actually better than what we expected. And we were able to spend deeper at a lower CAC. So while it's hard to pinpoint exactly how much is sort of a function of the current environment versus just better optimization, while that's tough to tell, we do know it's better. And I'm certain it's some combination that’s just hard to kind of parse apart how much of each. But the team is always optimizing the marketing. So I would always expect continued improvement. And then also, we're getting close. We're not quite there yet. But we're getting close to that 30% plus level of the U.S. population having sports betting, which then will allow those national marketing efficiencies to start to kick in. And I think that's part of why you're seeing us start to do some of these more national media deals.

Next question comes from Stephen Grambling with Goldman Sachs.

Hey, this is Stephen Grambling. I guess one just following up on the ESPN deal. And maybe I missed this. But are there any potential implications as you think about the impact to customer acquisition costs? And then also, if you can just touch on more broadly how you think about content and media as a future area of growth?

So, our expectation when we do any strategic deal is that it will have a positive effect on our customer acquisition costs. And the true win-win is when you're able to actually spend more at better efficiencies that benefits both the media company that's on the other side of the deal, as well as us. And I think the ESPN deal is a perfect example of that where they're allowing us access to inventory like link-outs and integrations that normally you can't buy on the open market. And those are very high performing from past experiences that we've had in similar deals, as well as deals we've done on the daily fantasy side with ESPN in the past. So we have a high degree of confidence that this is a win-win deal that should improve our customer acquisition efficiency over time. And certainly, we're excited about partnering with ESPN as well as other great media partners like Turner that we form relationships with over the last quarter.

Great. Maybe one quick follow-up on marketing and promotion, can you remind us of where you're kind of targeting the win rate? And does your flexible marketing approach try to manage around that?

Sorry, can you repeat the question one more time?

It's a question on marketing and promotions and where you kind of target win rate. And does your flexible marketing and promotion approach effectively enable you to manage around that? So should we be generally thinking that the win rate if it's higher, maybe you promote a little more? And if lower, promote a little bit less?

It's a great question. I think, in effect, it sort of works that way. It's not exactly how we manage it. We look at promotion much like external marketing, based on an LTV analysis and the cost on the other side. And we look at whether we think that whatever value we're generating on an MPV basis exceeds whatever costs the promotion has, and that's quite very similarly like our external media to new customer promotions, as well as promotions designed to reactivate or generate new sport play and things like that. I think the effect though, just, practically is similar probably to what you're saying because promotions will certainly work better in times where maybe the company is holding more and players are seeing fewer wins come forth versus in times where they're winning a lot. But that's not really the driving force behind how we manage it. That's just more of kind of a correlated output.

Our next question comes from Jack Kelly with Oppenheimer.

Just a couple. Can you sort of share how October is trending right now relative to your overall guidance? And then just with Illinois, you immediately launched there. You put some promotions. Is that state now starting to move the needle in revenue wise, or is it still not as much with some of the promotions? And then I have a follow-up.

So the first question was about Illinois, what was it again?

Just how is October trending relative to your overall Q4 guidance?

You know, we haven't really said much about October, but as you see, we raised our Q4 guidance. So, prior to today, we had been guiding to a midpoint that would represent 22% year-over-year growth; we're now guiding to a midpoint that will represent 40% year-over-year growth. So fairly substantial increase to the Q4 guidance. So without commenting specifically on October, I can tell you, we feel very good about the way Q4 is trending. And as far as Illinois goes, Illinois has now become our second largest state by handle behind New Jersey. It's also our fastest growing state. So we're pretty excited about it. I think you'll start to see some contribution on the revenue side in Q4. Usually, the first couple of months of a new state launch, we don't see a whole lot of contribution on the revenue side. Tennessee is a great example of that, where we just launched Tennessee, but we don't actually expect it to have a ton of any impact on revenue this year. Illinois, I think, will start to have some impact on Q4. And that is part of why we think that we're going to be better than where we thought we were previously in Q4 this year.

And then just a longer-term question for you, Jason. You mentioned product development on your integration with SBTech. And as we try to get into next year, what do you think is ultimately going to drive the customer stickiness in this industry? Is it going to be more product development, where you can actually generate or drive product differentiation among live betting? Or is it going to be more CRM management where you know how to manage the customer, provide them bonuses? Just how do you see long-term stickiness with the consumer?

Well, we definitely try to have best-in-class product and CRM programs. We have a great data science team. And a lot of what we do is model-driven. But I think if you want to kind of simplify it, we believe that promotions drive trial and activation, product drives long-term stickiness and monetization. I think really, we feel that it's also a stage of the industry thing, we are just starting, haven't even you know migrated yet. We are just starting to put those investments behind building out that live betting and new forms of teasers, prop bets, and other things that you're going to see us develop in the coming years. And so I also think as the industry progresses, and we have more time and more energy that we have been able to put behind that, we feel we'll be able to put more and more distance between our product and customer experience and what else is out there, and I think that will increase the effect of that on stickiness over time. Right now, it's very much so many new states opening up; it’s customer acquisition mode for everybody. And that's an important part of it too. But people we believe will ultimately stick with the best experience. And that's what we're working hard to build.

Our next question comes from Thomas Allen with Morgan Stanley.

There's a lot of investor focus on gross to net win margins and concerns that there'll be impaired long-term, because of how competitive the market is right now. Can you discuss your thoughts on the topic?

Yes. I mean, we're two years into the industry. Just to put in perspective, we had exactly two states, New Jersey and West Virginia live; it started last NFL season, we're in ten states now. So, I think the long-term margins and other aspects of the industry are going to shake out over time. And we saw this in DFS. So it doesn't surprise me that those questions are coming up in the early days of daily fantasy sports. We ran at much lower margins than what we did longer term, and it ended up, once we moved to more of the harvesting stage pretty quick, being a pretty easy change. And then the last point I make is the margins are actually pretty good right now. Even when you factor in a lot of the promotional activity and free bets, that all comes out of our net revenue, and net revenue is up significantly, 42% in Q3, we’re guiding to 40% growth in Q4, 45% growth next year. So, if there is any upside on the margin, it should be on top of what is already a very healthy growing net revenue number.

And just a follow-up on the similar topic. Where are you in terms of profitability in the more mature markets?

We are planning. So more mature markets are really New Jersey and West Virginia; those are the only two that we weren't even present last year at the start of NFL. So, we had in the past, right, some projections, multi-year projections on New Jersey, obviously COVID threw things for a loop. But we actually think we're in a pretty similar spot to where we had hoped to be. That said, we still have another month and a half of the year. So what we're planning to do is in our next earnings call in Q1 we will provide an update on New Jersey specifically and we'll talk about how that's tracking versus what we have previously talked about.

Our next question comes from Shaun Kelley with Bank of America.

Hi, good morning, everyone. Jason, I wanted to follow up on the last question regarding the promotional aspect. Should we consider modeling this similarly to the way external marketing spend operates? As you enter the early launch phases, those numbers are likely to rise significantly before tapering off over time. Or will the promotional aspect, particularly in terms of net versus gross, decline more rapidly since it mainly pertains to initial bonuses, as you mentioned during activation?

I think that they really wish I thought of that, that’s a great way to describe it. It's very correlated to the acquisition. Certainly, some promotions are aimed at activation or getting people to try new sports or new products, but the bulk of the promotional dollars are aimed at acquisition. So as acquisition in any given state becomes less of a focus and even if we do continue to spend there, just as kind of we build our user base, naturally, new customers will be a smaller percentage of the total user base, absolutely we would expect promotional dollars to follow a similar trend. And it's really, as you kind of alluded to, a new repeat mix thing that's driving it; it's not us deliberately doing anything differently. Obviously, if we see things in the data that suggest something is not working, or working, we will alter. But even if that doesn't happen, just the simple shift between new customers being a very high percentage of our current actives and eventually repeat being a much higher percentage for new sportsbook states, that will obviously change the promotional dollars, as well as the external marketing spend.

Our next question comes from Vasily Karasyov with Cannonball Research.

Thank you. Good morning. So back early this year at the Analyst Day, you argued that a good proxy for us to model states that you're rolling out and as New Jersey and that the revenue and gross profit and marketing spend index to 1% of the population should be more or less similar. So I was wondering if you could give us an update of if that is holding true right now in the states for comparable periods compared to the comparable period in New Jersey. And if it's still a good assumption, on average going forward? And if not, whether you think it is driven by big sports calendar, or it's just something systemic there?

I think you mentioned the sports calendar; it's hard to compare this year. This has been such an unusual year. And we had only two states, New Jersey and West Virginia live at the start of last NFL, so most of the data we have is from a COVID-impacted 2020. And really tough, I think there's a difference, obviously in New Jersey, and that it had iGaming, so some of the states that had sports betting only that fell off a cliff in Q2. Very different story in New Jersey, where iGaming was still there to carry a lot of the weight during that period. So very hard to compare. We're planning if we can, and we're certainly working hard analytically to do so to have a more definitive viewpoint on that at our next Analyst Day, which will be in Q1 of next year. So hopefully, we'll have enough data and enough things sort of back to, I guess normal as far as you can call anything normal, to be able to do that. But right now, we don't feel that we have enough data to really be able to compare state to state effectively. And we don't want to put anything out there that we're not very confident in.

Our last question comes from Carlo Santarelli with Deutsche Bank.

Acknowledging there's a lot of ambiguity in the outlook, but the $750 million to $850 million revenue guidance, can you guys talk a little bit about kind of what defines the endpoints of that guidance and kind of what are some of the key things that were pushing towards the high end and/or towards the lower end, acknowledging that states like Michigan and Virginia are not in there at this point?

Yes, you've touched on an important point. There are no assumptions regarding new states; that's purely potential upside. We're still in the early stages of this industry. We've recently launched in several states. For example, Illinois recently had the governor temporarily suspend the requirement for in-person casino registration, which has transformed Illinois from a minimal market for us to our second largest market after New Jersey and our fastest growing. This is quite significant, and if this suspension continues for several more months, it could greatly impact our customer acquisition and, consequently, our revenue next year. Ultimately, it's about these types of variables, and being in so many new states means we don't yet have the confidence to be precise in estimating a specific range.

Great, Jason. If I could just ask one follow-up. As it pertains to your customer acquisition, one thing that I think has stood out with you guys relative to peers has been your aggressiveness towards the higher end, more of VIP type of sports betting customers specifically. Have you seen any of your peers start to change their strategy at all around seeking that type of action or those types of players, especially in some of the newer markets, like in Illinois, for example?

I think right now, we're seeing a pretty competitive market overall, and that includes the VIP, higher-end segment of customers. I appreciate you saying that we're doing a good job there. I think a lot of that comes from having very strong analytics and discipline around using that data to make determinations on where we invest and where we don't. And I don't necessarily think we're being that much more aggressive than any competitors. I think we're just hopefully being a little bit smarter about where we choose to push and where we don't. And as we get more data, we should get better and better at that. And we feel like time is our friend, and we should be able to widen that, much the same as we feel like we should be able to continually put distance between ourselves and the competitors on the actual experience we can give those customers once they do join the platform.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back to Jason Robins for any closing remarks.

Thank you all for joining us on today's call. We really appreciate your insightful questions and look forward to continuing our conversations with you. At DraftKings, we are excited about the future. We continue to build the quintessential sports brand and align with well-known media organizations, such as ESPN and Turner Sports as well as many major professional sports leagues and iconic franchises. We are well positioned with a strong debt-free balance sheet to capitalize on unique customer acquisition opportunities, enter new states as soon as practicable, drive continued product innovation to stay ahead of the competition, and explore opportunistic and accretive M&A. I hope all of you stay safe and well, and we look forward to speaking with everyone again soon. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.