DraftKings Inc. Q2 FY2023 Earnings Call

Good morning, everyone, and thanks for joining us today. Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties, and other factors as discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will also discuss certain non-GAAP financial measures that 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. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings presentation, which can be found on our website and in our quarterly report on Form 10-Q filed with the SEC. Hosting the call today, we have Jason Robins, Co-Founder and Chief Executive Officer 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, and we will then open the line to questions. I will now turn the call over to Jason Robins.

Good morning. Thank you all for joining. I'm excited to be with you today to talk about our outstanding second quarter and significantly improved outlook for fiscal year 2023. Revenue and adjusted EBITDA exceeded expectations in the second quarter, and importantly, we generated significant positive adjusted EBITDA. Second quarter revenue increased 88% year-over-year to $875 million. Our revenue growth trajectory has been very strong due to our continued focus on enhancing our products and improving our customer experience, which is driving excellent retention and rapidly improving monetization. At the same time, we remain relentlessly focused on efficiency, and our mantra of revenue growth and cost efficiency is now a core tenant of the organization. As a result of our strong revenue growth and ongoing efforts to capture efficiencies, we delivered $73 million of positive adjusted EBITDA in the second quarter. We are increasing our full-year revenue guidance to a range of $3.46 billion to $3.54 billion, implying growth of 56% year-over-year at the midpoint. Our fiscal year 2023 revenue guidance includes our expectation of nearly $1.2 billion of revenue in the fourth quarter of 2023. We are also improving our full-year adjusted EBITDA guidance to a range of negative $190 million to negative $220 million, an improvement of 35% at the midpoint versus our May full-year guidance. Our fiscal year 2023 adjusted EBITDA guidance includes our expectation of $150 million to $175 million of adjusted EBITDA in the fourth quarter of this year. Turning to our OSB product. We have continued to focus on powering our own same game parlays and differentiating our live betting content. We now have live same game parlays built in-house for most of the major sports, including NFL, NBA, MLB, college football, and college basketball and added to our live markets for golf, tennis, and MLB. We are improving our product to have a very fast philosophy with very high quality. In iGaming, we're executing our two-brand strategy while focusing on differentiating through more in-house content, including live dealer and jackpot offerings. Our persistent focus on product differentiation is already apparent in share trends. In the states where we are currently live, we achieved OSB handle share of 35% and OSB GGR share of 32% in the quarter, which were the highest they have been since the COVID-impacted second quarter of 2020. We also maintained number one iGaming GGR position and set an all-time record for our iGaming GGR share at 27%. Looking ahead, we are very excited for football season. Our entire organization is dialed in and ready for the start of NFL and NCAA football. I am proud of the team and the culture we have put in place. In particular, I am proud of our team for their relentless focus on efficiency and expense management over the past 12 months. Our work of achieving and is not done, and we feel great about the trajectory of the business. With that, I’ll turn it over to Jason Park.

Thank you, Jason. I'll hit on the highlights, including our Q2 performance and our improved 2023 guidance. Please note that all income statement measures discussed, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, the organization is executing very well, and that is showing up in our results. We achieved $875 million of revenue in the quarter, which is 88% higher than our second quarter 2022 revenue, and our adjusted EBITDA of positive $73 million significantly outperformed our expectations and improved by nearly $200 million on a year-over-year basis. Customer retention and engagement outperformed expectations as we successfully transitioned customers from the NBA season into MLB. We have seen significantly better than expected engagement on MLB due to our enhanced product. Structural hold was also above expectations at approximately 9% for the quarter, while promotional intensity improved, together supporting a more than 550 basis point year-over-year improvement in our adjusted gross margin rate to 47%. Fixed expenses were slightly better than expected as we managed vendor-related costs and exerted discipline on our compensation expense. We were particularly pleased with the results in our more mature online sports book in iGaming states. In our states that launched from 2018 through 2021, combined handle growth accelerated quarter-over-quarter and increased more than 35% compared to the same period in 2022. In these states, revenue increased more than 70% year-over-year. Adjusted gross margin rate increased more than 800 basis points, and external marketing declined more than 10% while total unique customers increased approximately 25%. These strong results and our visibility for continued improvement have enabled us to raise our full-year 2023 revenue guidance range to $3.46 billion to $3.54 billion from $3.135 billion to $3.235 billion or by $315 million at the midpoint. We are also improving our full-year 2023 adjusted EBITDA guidance range to negative $190 million to negative $220 million from negative $290 million to negative $340 million or by $110 million at the midpoint. The bridge from our May full-year 2023 guidance to our current full-year 2023 guidance includes increases due to stronger customer retention, acquisition, and engagement, structural sports book hold improvement, and favorable sport outcomes in the second quarter. These items are partially offset by Kentucky now launching this year and being included in our forecast and Ohio’s tax rate increasing effective July 1. Customer retention, acquisition, and engagement are exceeding expectations and account for $225 million of the revenue improvement and $100 million of the adjusted EBITDA improvement. Our structural sports book hold percentage forecast is also higher, supported by our introduction of in-house same game parlay capabilities and new live betting markets. This trend accounts for $40 million of the revenue improvement and $30 million of the adjusted EBITDA improvement. Favorable sport outcomes in the second quarter contributed $30 million to the revenue improvement and $20 million to the adjusted EBITDA improvement. We are very excited that Kentucky’s Horse Racing Commission recently set a target launch date of September 28, 2023, for online sports betting, which is sooner than we previously anticipated. As a result, we expect $20 million of additional revenue in 2023 and a headwind of $30 million to 2023 adjusted EBITDA. Last, we expect Ohio's increased tax rate from 10% to 20%, which went into effect July 1, to result in $10 million of additional costs this year. In terms of our full-year 2023 adjusted gross margin percentage, we now expect to be in the 43% to 45% range, an improvement from our previous guidance of 42% to 45%. We expect contribution profit, which we define as adjusted gross profit less external marketing, to grow to approximately $700 million in fiscal year 2023, which includes our investment into Kentucky. With regard to our balance sheet, we ended the second quarter with $1.1 billion of cash and now plan to end the year with more than $1 billion. As a reminder, we expect approximately $120 million of capital expenditures and capitalized software development costs for fiscal year 2023 and change in net working capital to be slightly positive for the year. In sum, we had a strong second quarter and are very excited for the upcoming football season. That concludes our remarks. We will now open the line for questions.

Thank you. Please hold for a moment while we gather the next question.

Hi. Good morning, everyone, and thank you for taking my questions. Jason or Jason, maybe just to start off, obviously, dramatic market share gains. And I think a lot of this comes back to just truly core product improvement. So I was wondering, if you could give us just a little bit of color on what you think the big success stories have been over the last three, six, nine months on the product side? And then maybe to put it in quantification terms, what would it take to narrow the gap between your OSB handle share that you outlined at 35% and the OSB GGR share at 32%? Is that a realistic goal?

Thank you, Shaun. So first on the question around product, it's been a lot of things. I think it's a very complicated product, and there's a lot of things that can create customer friction if you're not careful. And I think really a big focus for us over the last year and a half has been removing customer friction throughout the journeys, so that's been a big deal. We've obviously greatly enhanced our same game parlay offering, and that's been a huge part of the story over the last six months to eight months. And I think our live betting options have gotten better as well. I can objectively say, I think in H2, we feel we're going to have the best product in the market. So really excited about that. And I think that's the big difference maker as you noted. As far as hold rate goes, we're continually working to improve that. We've obviously closed the gap quite a bit between handle share and GGR share, and I have no reason to believe that we can't continue to do that.

Thank you. One moment please for our next question.

Hey. Thanks for taking the questions. I wanted to change over to marketing and costs. It looks like in the back half, the assumption is for effectively, I think, very much lower growth. So it seems like you're continuing to be focused on reducing costs. Are there still big contracts out that could be up for renegotiation or that, we could be considering as we look into the second half or into next year as we look at the guidance or beyond?

That's a great question. We are constantly reevaluating each deal that comes up to determine whether it makes sense to continue and at what price, which is an ongoing process. Throughout our journey, we will continue to seek optimization in that area. The same applies to marketing and promotion, and I believe there’s also an opportunity to boost our top line if we can increase our market share. These are the primary focus areas for the company. Regarding corporate costs, we have made significant efforts over the past year and a half, so I think we've addressed most of the easy opportunities. However, the goal is to achieve a much slower growth rate for fixed costs next year, and I do believe there are still some areas where we can optimize further.

Jason, as a quick clarification, are any of the bigger kind of national marketing contracts embedded in the guidance in terms of cost reductions or those still kind of outstanding?

No, we don't have any cost reductions embedded in the guidance from any of that.

Great. Thank you so much.

Certainly. As I mentioned, we always look at when things come up, but we're at this point not building any favorable renegotiations into the guidance.

Makes sense. Thank you.

Thanks. And Stephen, as you know, our approach to guidance in general has been, we're going to bake what we know. If we have lots of things that we're working on, some of them may come through, some of them may not. So we don't kind of forecast like a probability adjusted number. We really bake what we know. And then we look at anything like you're describing as well as potentially any additional market share gains or anything else that might drive top line. We look at that as upside.

I would add, Stephen, that these types of team and league deals are a much smaller percentage of our total marketing expense than some of the other operators in the industry. And as a general philosophy, we have implemented more short-duration deals to give us a chance to evaluate actual performance more frequently.

Thank you. One moment please for our next question.

Hi. Good morning. Thanks for taking my question. So in the comments, you talked about backward-looking friction removal as a product focus. Can you just talk a bit more about how that focus looks going forward and what the to-do list is to sort of keep your product on a winning track?

It's a great question. There's still a lot to be done in this area. Any product in the digital space is always in need of optimization and enhancement, especially in regulated gaming where many requirements must be met. With several states launching quickly, our primary focus has been on going live and ensuring compliance with all relevant laws and regulations. We also need to evaluate how our processes might have led to bad customer experiences, including missed flags or situations that may have been legitimate but didn’t provide clear pathways for customers to resolve issues or understand them better. The customer experience is our top priority. We analyze the product from the customer's perspective, identifying what could be frustrating or lead them to consider alternatives. We're dedicated to improving those aspects while ensuring we remain compliant with all regulations and laws in each jurisdiction. Given the fast pace of state launches, there’s still a lot of opportunity to enhance our offerings in this area.

Understood. And as my follow-up, I do have to ask, periodically, there's a lot of discussion and I think it's been obviously ramping up M&A. What are the boundaries and what thoughts might you be able to share in terms of what you might want for or need to keep the momentum going?

I understand there's a lot of talk about mergers and acquisitions. Right now, we just had a great quarter, and while we’re excited about that, our focus is on the current quarter. This period is crucial for us as we approach the fall, which includes the NFL and the football season. This is our prime time of year when we acquire the most customers and have the biggest chance to increase our market share and revenue, leading to the highest EBITDA. It's vital for DraftKings that we remain laser-focused on execution, and everyone is fully engaged. We have a lot of exciting developments coming up for the NFL, college football, basketball, hockey, and more, and we’re really looking forward to it. While there are always discussions happening behind the scenes and our smaller teams are aware of those developments, as a company, we are very concentrated on executing and succeeding in the U.S.

Okay. Thank you very much. Good luck.

Thank you.

Thank you. One moment for our next question. Our next question will come from Robin Farley of UBS. Your line is open.

Great. Thanks. I wonder if you could talk a little bit about the percent of players that migrate from the OSB side to the iGaming side and how that's kind of changed from before Golden Nugget till now?

Hi, Robin. Thank you. So it's been pretty consistent actually around 50% in states that have both products tend to cross over. That hasn't really changed with Golden Nugget because Golden Nugget is such a smaller piece of the pie. It's less than 5% of our revenue. So that doesn't really move the overall needle. We do see Golden Nugget is certainly more dominant casino brand. So the crossover is a little bit less there. But it doesn't really move the needle on the overall business. The overall business stays pretty consistent in the 50%-ish range.

Okay. And do you expect that to change when you talk about migrating in the next couple of months to the DraftKings tax stack or not necessarily, it sounds like?

I don't think so, at least not in the short term because it's such a small piece of the revenue. But certainly, we hope that that's a brand that grows and becomes bigger and bigger, and it could potentially impact long term. But I don't think we expect an immediate change when we migrate. I think, if anything, the focus will be on continuing to build out the casino audience and the CRM and cross-sell multi-brand strategy within the casino. But as time goes on, I think that we’ll have to see how the brand is growing and developing and if it can become more of a sports brand than it is today. But I think as of now, we think of it as more of a casino brand.

Okay. Great. Thank you.

Thank you. And one moment for our next question. Our next question will come from Joe Stauff of SIG. Your line is open.

Thank you. Good morning, guys. I was curious, I guess just in terms of understanding maybe the speed of adoption, especially looking at newer states, you've reached about 7% adult penetration of the adults in the newer states. And I'm wondering how you think about maybe that continuum in terms of the level of penetration that we have in some of your older estates, call it, New Jersey or whatever? And then the second question I had was whether it be the number or the percentage of jurisdictions you operate in that are now contribution positive? Hello?

Pardon me.

Yes. We are back.

All right. I'll ask the questions, I guess. Again, I was curious if the speed of adoption especially as we think about maybe the new estates, you've reached about 7% penetration or so in the newer states and wondering how quickly you think that adoption rate will get to levels in those newer states that you have in New Jersey or so? And then the second question was really about the percentage or the number of jurisdictions that you operate in where your contribution is positive now?

It's hard to say because it's still very new. We are seeing positive customer acquisition in those new states. We will have a clearer picture in a couple of months after the NFL season starts, as this will be the first time that NFL betting is available online in Massachusetts. We can expect to see another wave of customer acquisition then. We will have more information on how things are progressing in the next couple of months and will provide an update during the next earnings call.

And I'd add, Joe, in older vintage states, we continue to see really healthy acquisition. We're obviously bringing marketing spend down in those older states to match the level of acquisition and achieve appropriate CAC. But we haven't really found a ceiling in even our most mature states.

Interesting. And one follow-up, if I could. Are you willing to maybe share with us the percentage of jurisdictions or the number where you're contribution positive?

Yeah. We'll definitely be talking more about that this fall on our Q4 earnings call and at the Q3 earnings call in November and in our Investor Day. So I don't want to run the team on that one, but we have a clearer understanding.

Thank you. One moment please for our next question. Our next question will come from Dan Politzer of Wells Fargo. Your line is open.

Hey. Good morning, everyone. First one specific question and maybe one more high level. Just in terms of the quarter, I think the adjusted hold was 10%. I think adjusting for the favorable sport outcomes around 9%. Can you maybe give us just some more detail there in terms of the mix and leg count? And then in terms of how you're thinking about this over time, I think your largest competitor has called out a goal of 12%, so it feels like you're closing that gap pretty quickly. How do you think about this evolving over time? And maybe any guidepost for how you think about this year versus next year?

It's a great question about the ceiling. We're still determining the appropriate level to aim for and will continue to analyze the data. I believe we don't have enough information yet to set a specific target, but there is still potential for increase. So far, we haven't seen any significant impact on handling, indicating that there’s definitely room for growth. The parlay mix met our expectations for this quarter. I see potential for an increase in average leg count with the introduction of our new bet slip powered by our in-house SGP models. This should enhance the experience of adding legs in the user interface and hopefully boost the average leg count this fall. However, in terms of Q2, we were right where we anticipated.

One moment, please. Speakers are you able to hear us?

Yes. Could I just squeeze in one more for my follow-up?

One moment, please. Mr. Robin, Mr. Park, can you hear us? Just a moment, we are experiencing a technical issue. Please remain on the line.

Yes. Hi.

Okay. Yeah. Just looking out the next few years, maybe more long term. As you think about seasonality involving, do you envision a scenario where you could be EBITDA positive in all four quarters? Are you going to always kind of have this big jump just given the start sport season and then maybe the shoulder season?

No, we definitely expect that as the business inflects towards more permanent profitability there.

One moment, please. Speakers will be back on momentarily.

Hello.

Yes. We can able to hear you.

Fine service; I apologize. I don't know if there's a technical issue on the service providers' end, but we've tried several different phones here. I apologize to those on the call. Go ahead, please.

That's all for me.

Okay. Thank you.

Thank you. One moment please for our next question. Our next question will come from Carlo Santarelli of Deutsche Bank. Your line is open.

Good morning, everyone. Back in March 2022, you mentioned a long-term goal where sales and marketing would account for about 10% of net revenue, and promotions would represent approximately 22% of gross revenue. Given the recent trend of reducing promotions and observing customer responses, along with your experiences in various markets after cutting some external marketing, are those targets still in line with your thinking? Also, do you have any idea of the timeline for reaching those levels?

One moment, please. Speakers are you there.

Hello.

It is unclear. Please repeat your question.

Is there a way to fix this issue? It doesn't seem to be on our end.

One moment, please.

We join as a participant?

It’s possible for you to call in on a different line. I'm going to pause the call for a moment and work on a solution. We ask everyone to please stay on the line. We'll resume the conference shortly. We apologize for the delay. We are experiencing some technical difficulties. Mr. Carlo Santarelli, I'm going to bring you back to ask your questions. Can you hear us?

I could hear you, yes. Thanks.

Welcome. If you could please repeat your questions?

Is the management team there?

Yes, we're here.

Hey, guys. While you guys were gone, I just gave guidance for '24 to the rest of the focus on the call. I hope that's all right.

Note it down. Thank you.

My question is about your experiences with reducing promotions and cutting back on sales and marketing. Back in March of 2022, you indicated that sales and marketing would aim to be about 10% of revenue, with promotions around 22% of gross gaming revenue. Given your experience in lowering those expenses, do you think there is an appropriate timeline for these targets, or do you believe they have changed?

So we'll definitely talk more about this at our upcoming Investor Day in Q4. But I don't think that there's going to be a material change to either of those targets from what we're seeing today. But obviously, over the next few months, we’ll continue to do the work to prepare and we’ll have more to say on that in the fall.

All right. Thank you, Jason.

Thanks, Carlo.

Thank you. One moment please for our next question. Our next question will come from Bernard McTernan of Needham & Company. Your line is open.

Great. Thanks. Good morning. Thanks for taking the question. Jason, could you expand on some of the comments in the letter regarding AI? Should we view them more as opportunities for generating revenue or as ways to improve cost efficiency? Are there any specific initiatives or products in development that you could share?

I think it's definitely both. When you can do more for less, that drives both revenue and cost efficiency. So I think that's really the thematic. Obviously, depending on what it is and where in the stage of development, it is that will affect the relative ways that we use it. I think, for example, right now with our developer efficiency initiatives, we're focused on how do we get more done with our development team. So I think that what that probably means is over time, we don't need to add as many engineers to get the work done that we didn't want to do as we continue to scale the business and build out the product and serve the customer. But I do think it's a combination, if you think about it from a P&L standpoint, of both cost opportunity and revenue opportunity. None of that is baked into any of our guidance or any of the things we've shared in the past at Investor Day. This is something that we really view as upside. And it's in the category of the long list of things that we're working on that we think could create even better long-term economics for our shareholders.

Is it helping some of the product roadmap that's coming out for this current NFL season or is that too early, and it's more of a '24, '25 event?

I believe there will be some impacts. We've been developing machine learning and basic AI for a long time. Recently, advancements in third-party tools have really reached a turning point, presenting a significant opportunity to elevate our efforts. However, we've been working in this space for years, so we can expect some effects from our machine learning and AI initiatives in the upcoming season. Yet, the most substantial changes that could fundamentally alter the business outlook are still on the commercial horizon.

Great. Thanks for taking the questions.

Thank you. One moment please for our next question. Our next question will come from the line of Jed Kelly of Oppenheimer. Your line is open.

Hey. Great. Thanks for taking my question. Two, if I may, are you now just seeing structurally lower tax just on getting better amortization from your brand spend? And then can you speak to, I know that the product enhancements, but what is keeping players more engaged outside of football is some of the merchandising you're doing on the front page or products? Just can you talk about the engagement trends you're seeing? Thank you.

Yes, that's a great question. Regarding customer acquisition costs, it's a mix of several factors. Firstly, as you mentioned, the national scale of our brand is a significant advantage. Additionally, we are continuously analyzing and optimizing this area of the business. We have a dedicated analytics team, and we are utilizing machine learning, along with the implementation of AI to assist with bidding on various platforms and generating more diverse creative options for testing and marketing optimization. This is an ongoing process, and I believe it has the potential to lead to significant improvements, especially with the AI initiatives we are exploring. It certainly aligns with what you're saying. We have that foundational advantage of being a recognized brand at a national level, coupled with a skilled team focused on perfecting our marketing efforts. It's a complex task, as we allocate resources across numerous channels with various partners and creatives during our peak season. The ongoing ability to optimize this marketing engine presents an opportunity that I expect will provide us with substantial benefits for many years to come.

And then on player engagement like with football?

This year, the significant change was our ability to retain NFL players into the NBA season, which has now carried over into baseball season as well. Both have surpassed our expectations. Additionally, we've observed a strong cross-sell into iGaming. As mentioned earlier, this creates a positive effect: when we retain more players and transition them into the NBA on the sports side, it also positively impacts iGaming, with more active players on our OSB platform engaging with our iGaming products. That’s mainly what I would attribute to Q2. Historically, we've seen revenue typically decrease from Q2 to Q1, so this was unexpected for us. This was driven by a significant year-over-year market share gain, and we've had several metrics that we've been refining over the last year and a half that have reached an excellent level of optimization. The product is significantly improved compared to last year, and I believe we will have the best product in the market during the second half of the year.

Yes. I think, look, I think all the work we do in that sport retention or sport-to-sport cross-sell, however you want to think about it. You got to cross-sell them, but most importantly, the product's got to be great. When you're bringing an NFL player into NBA or an NBA player into MLB, and we're just super proud of how strong both our NBA product and MLB product have improved on a year-over-year basis.

Thank you. Good quarter.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Michael Graham of Canaccord. Your line is open.

Thanks a lot, and yeah, awesome quarter, guys. I wanted to ask on the growth outlook for the rest of the year. Can you maybe deconstruct that from the perspective of the vintages of your states, like how much of the growth do you think is going to come from some of your newer states versus more established ones? And related to that, just maybe a layer of depth into how you layered the launch of Kentucky into your outlook for Q3?

Absolutely. So definitely, the bulk of the growth is going to come from the states that we launched from 2018 through '21. We are starting to get some real good contribution from some of the 22 states as well. But I think the degree to which we are still seeing growth in our older states, it's very significant, and they're obviously a bigger piece of the pie. So when you can get that kind of growth in your older states, it makes a very big impact on the overall business. And then, I'm sorry, what was the second part of the question?

Kentucky.

Kentucky. So Kentucky, I think we had a slide on this, but we're projecting roughly, we're expecting, I should say, $20 million of revenue and $30 million EBITDA loss from Kentucky in fiscal year '23. And I think that assumes a September 28 launch date. Last time, when we guided, we did not actually have a clear launch date for Kentucky, and now that we do, we put it into the guidance. And I'll note that despite that not being in our prior guide and now being in our current guide, we still had a massive improvement in the guide at the same time. So that shows that not only can we fund new state launches through the results that we're generating in all states and the cost efficiencies we're finding, but we can do that and continue to see upside on top of that, which is a great story, I think, from years past where we always had to kind of increase the loss outlook every time that we’ve had a new state launch.

Thank you. One moment please for our next question. Our next question will come from Brandt Montour of Barclays. Your line is open.

Hi. Good morning, everybody. Just one from me. So back to the same game parlay enhancements for the upcoming NFL season, it sounds like you're pretty confident, chasing that parlays the best as you call it, I guess, it sounds like you baked in higher holds for this. It sounds like you baked in higher retention and no share gains, if I'm reading your comments correctly. I guess the question is, are the product enhancements differentiated enough that it could be a driver of market share, or is it the kind of thing where you would have to go out and get people to flip from your main competitor to try it? How does the mechanics work of gaining share off something like that?

I mean, you're right. It's a combination of two things: it could be actual wallet spend that was going to your competitors, customers that were using competitors before, or it could simply be just better engagement and monetization of customers on your platform. And I think what we felt like in Q2, it was a combination of both definitely being able to increase the whole rate year-over-year, which made a big difference in share. But it was a combination of both. We think we got handle share from people that were playing NBA with competitors last year as well. And I think that's really a result of just the product improvement year-over-year. So to answer your question, absolutely, could there be upside? Yes. I mean the goal for the team is to go out and beat anything that we put out there. And I think that we feel like we have quite a few initiatives that could help us gain share and could help us further retain, engage, and monetize our users in the back half of the year. We've just consistently taken an approach of not putting things that we don't feel we have full line of sight to in the guide; our guide, we consider to be what we commit to. And then we go out and we try to deliver above that by executing better, and hopefully, some of the things that you hope come through. But we don't put hope in the guide; we put what we know in the guide.

Great. Thanks for the comments. Congrats on the quarter.

Thank you.

Thank you. Again, one moment please for our next question. Our next question will come from Stephen Glagola of TD Cowen. Your line is open.

Thanks for the question. On the updated implied second half guidance and quarterly cadence versus your prior guide, could you just walk us through your assumptions for the greater implied EBITDA upside to Q3 versus Q4 and particularly in light of the Kentucky launch and favorable sport outcomes in Q3 last year? And then also just what are the hold percentage rates you're assuming for Q3 and Q4? Thank you.

Thank you. We're expecting a hold rate similar to what we experienced in the latter half of last year. In regards to Q3 and Q4, Kentucky certainly had some impact, but our ability to raise the guidance for the second half of the year, including the Q4 guidance, is mainly due to the strong performance of the states we are currently in and our business's cost efficiency. This should more than compensate for the negative EBITDA we anticipate from Kentucky in the second half of the year. We're quite optimistic about a strong second half and will have to monitor developments in states like North Carolina and Vermont. Currently, we believe Kentucky offers a valuable chance for us to invest in customer acquisition both there and in our existing states. Additionally, several new states have yet to experience a full NFL season; for instance, Massachusetts has not had any NFL season, and Ohio only launched last January. Therefore, we expect significant growth in customer acquisition numbers in the second half of this year.

Hey, Jason. Just one more, if I can. In light of the Ohio move to double its tax rate, could you maybe just discuss the long-term risk to your business and state governments would look to take increased taxes on gross gaming revenue? And sort of what are the incentives that would keep state governments maintaining lower tax rates? Thank you.

Yeah. I think it's a great question. Obviously, disappointing to see, but I think most state governments understand that if you start taxing this too high, you kind of defeat the purpose because it makes it really impossible for the legal regulated operators to compete with the illegal offshore operators that are not paying or some of them onshore now. They're not paying taxes and are not following regulations. There is, I think, great awareness of that and state legislatures. So I'm optimistic that states are going to keep taxes at a reasonable level. I think that they understand that they're ultimately going to drive volume back into the illegal market if they try to tax the industry too heavily.

Thanks, Jason.

Thank you. One moment please for our next question. Our next question will come from Robert Fishman of MoffettNathanson. Your line is open.

Hi. Good morning, guys. Two questions on partnership. First, ahead of the NFL kickoff, can you help us understand how the Amazon Thursday night football partnership helps your business last year and whether there are more opportunities to build upon that success this year? And then anything you can share on how the ESPN partnership has been a driver of your strong month growth or overall business? And would you be willing to expand your ESPN partnership depending on which direction Disney ends up going with his strategic review?

Yeah. So Amazon has been a great partner. Last year, we were really happy with Thursday night football results that that was a big driver of customer acquisition for us. Those games are also really well built for seeing game parlay offerings to really help drive a lot of parlay mix through better promotion of being game parlay on Thursday night. We have a few extra things that we're going to be doing on Amazon this year. I'm pretty excited about that, and we'll be, I think, coming to everybody in due order once the season launches. So it really should be a great year with Amazon, and we're really just thrilled with that partnership. And as far as the ESPN goes, same story. We've been really happy with them as a partner. They've been great. We continue to get great value out of that relationship. And we'll have to see. I think, obviously, we saw the same comments everybody else did from Bob Iger, and I think it's still fairly early days for them, but I don't want to speak for them. They'll know better than I will what their plans are. But we're always happy with great partners like ESPN; if there's a way to have a deeper relationship that makes sense for both companies and something we would certainly consider. And if it doesn't make sense and there's something that doesn't really work for us or for them, then we won't. We're perfectly happy with the relationship as it is now. So I think that's how we're thinking about it.

Okay. Thank you, Jason.

Thank you. One moment please for our next question. Our next question will come from the line of Ryan Sigdahl of Craig-Hallum Capital Group. Your line is open.

Good morning, guys. Just one for us. You mentioned MLB has been a positive surprise. There specific product that's resonating better with the player, whether it be live same game parlay, etc.?

Yeah. I think first of all, MLB itself has made some great changes that have helped increase engagement with the stores, so they get the credit for that. But I think betting has helped a lot too. And MLB first of all is very well built for live betting. So that's been a real product that works very well with that sport, and we're excited about the offering we have there this year. Also, the same game parlay product has been significantly enhanced this year. We brought our own models into the fold, and I think really just improved both the UI and the overall offering of same game parlay for MLB, and there's been a number of other things we've done. We've done some work on the cash-out feature. I mean there's a lot of different areas that we've worked on that I think have really helped improve the MLB offering year-over-year, and that combined with really strong engagement from a viewership perspective, I think has driven unexpectedly positive to the upside results for MLB season so far.

Thanks, Jason. Nice job, guys.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Barry Jonas of Truist. Your line is open.

Hey, guys. You've previously given some advice on how to think about NFL results and corresponding hold. Last year, it correlated maybe a little less, but the season went on. Just curious as we head into football season, if there's anything you can give us to help think about sort of that week-to-week success?

Yeah. I think it's very similar to what we had shared last year, that the results can definitely range between negative 10% and probably positive 20% depending on if you're really taking like that 95% confidence interval; it can get that wide in any given week. Obviously, over the course of several weeks, over the course of the season, that's been tight. But that's how I would think about a week-to-week thing. And really, it's a result generally in NFL of two things: One, do the favorites win or lose? And second is how the player props do. And that second part has become increasingly important as the industries evolve because so much betting is now happening on player props and so much time being parlayed depends on player props. So that's really made a big difference. I think given Q3 is always one that for our business planning group, it's their least favorite quarter because so much volume comes in the last three weeks of the quarter and not that it's the only thing going on, but relatively speaking, July and August are slower months. So it's really the last few weeks to get always the NFL volume, and a few good or bad weeks can definitely swing the results a little bit. But I think that as we've gotten bigger and our customer base has become more diversified, the effects of that are lower as we've gotten more of a mix of player parlays; it's not just straight game outcomes. So I think we have to look at this season. I think this year, we might see a little bit tighter band, certainly over three weeks, we will. But I think still fair given what we know today. I think week-to-week about that minus 10% to plus 20% possibility on hold depending on the game outcomes and player prop outcomes.

That's helpful. Just quick follow-up. Wanted to get your thoughts on Florida, given the recent court decision. Do you see a pathway for DraftKings to compete in the state?

I think too early to tell what the path is, but I'm optimistic there will be a pathway there because I think people in Florida want great products. And so, I do think that it will get figured out. But right now, I think it's really hard to say. There's still going to be a few steps to play out in a few things with court rulings and other things. So it's really at this point a little bit murky, and I think we'll know a lot more in the coming months.

Great. Congrats on the quarter.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Jordan Bender of JMP Securities. Your line is open.

Great. Thanks for taking my question. So you gave comments on where your GGR margin could potentially go over time, more of a wait-and-see. But maybe just on the NGR margin side, that still lags international markets. Given the parlay mix, can we maybe exceed 10% to 12% NGR margin that we see in the international market?

I believe we have no reason to think we can't achieve the same NGR margins as seen internationally. However, it's still early to determine the outcome. Over the past few years, we have been optimizing our hold rate and promotional mix, which has led to improved customer engagement and retention. Therefore, I am optimistic and see no reason why we cannot reach similar numbers as those in more developed markets around the world.

Great. And just following up, you mentioned states that have legalized but not launched yet. One market we haven't discussed is Nevada. Is there any interest from DraftKings in entering that state at any point?

Yeah. We're definitely interested. I mean, Nevada is obviously an important state for gaming. There's a robust sports betting market there. It is in-person registration. So I would attempt for any expectations for the possible contribution there, but I do think it's an important state because people go there who are our customers, and they want to be able to make bets. And so I think being able to give them that option as well as to access the Nevadans that are now betting with others, and I think would like to try DraftKings product is definitely something that we're exploring.

Great. Nice quarter.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Jeffrey Stantial of Stifel. Your line is open.

Hey. Good morning, everyone. Thanks for taking our question. Nice quarter. My question is on the continued structural hold rate expansion. It seems that a lot of time has been spent talking about the parlays and the impact on mix, but maybe not as much on the optimized trading and risk management improvements you guys have made. Can you just unpack this a bit more for us? I guess, are there specific bet types or sports or you've been getting better at minimizing these trading inefficiencies? And how do you think about further upside here? Are there any comps you would point to or perhaps you're tracking an even better spread between, call it, the underlying VIG and the realized hold rates? Thanks.

That's a great question. You're correct that we've discussed the parlay mix and average leg count extensively, as these factors are significant drivers of improvements in hold rates. However, there are additional factors at play that you've highlighted. Overall, we believe we've made progress across the board. The outperformance in Q2 can largely be attributed to these other aspects, as the parlay mix, despite its year-over-year increase, aligned with our expectations. The improvements in customer risk management and trading have been crucial; we've devoted considerable effort to developing tools that help our traders adjust lines, identify soft lines, and optimize them more effectively. We've also made significant investments in our modeling and strategies for customer risk management. These enhancements have contributed to our improved hold rates and the strong performance in Q2.

Thanks, Jason.

Thank you.

Thank you and one moment please for our next question. Our next question will come from the line of John DeCree of CBRE Securities. Your line is open.

Good morning, Jason, Jason. Thanks for taking all the questions. Maybe one back to the roots on DFS, a much smaller piece of the business now, but I was wondering if you could give us a little insight as to how that business is trending in the context of customer acquisition. So as you enter new states, are you still getting a similar kind of initial cross-sell out of DFS that you did maybe two to three years ago in your older vintage states? And then is DFS still kind of an ongoing tool in those older vintage states? Are you still acquiring customers via DFS first?

Absolutely. I mean DFS actually is at a great year so far, and that's been driven by a lot of improvements we've made across the product. Best fall has seen a big jump year-over-year, and that's something that you can sort of use as a little bit of a litmus test for or maybe the advanced test for how NFL season is going to go because a lot of those drafts happen in the July, August time frame, so very exciting year for DFS. We have some really good stuff planned for the back half of the year on that product. And it is continually adding new customers. We have seen really strong crossover continue from DFS when we launch new states. So everything seems to be working on that front and continue to be a big source of engagement for customers in states that don't have sports betting, as well as a great funnel for new states that launch.

Thanks. I think you addressed my follow-up, but I want to ask it directly. When customers transition from daily fantasy sports to sports betting or iGaming, do they remain engaged with daily fantasy sports, or are you seeing them alternate between the two? What occurs when they move to online sports betting? Do they spend less time on daily fantasy sports, or is there still engagement with multiple products among the customer base?

Definitely seeing multi-product use. I mean there's some cannibalization, of course, but it’s not very significant. The products are pretty different. And people like them for different reasons. People also are not spending a ton of money on DFS. So it’s really not like a big wallet thing to – it’s more of an engagement thing. And they are different products, and I think that they provide different types of experiences for people. So we are seeing a great deal of crossover, but we’re also seeing great retention across all of those products. It appears that the cannibalization is fairly minimal. And a lot of it also happens in the initial launch stages. People are very excited about sports betting. They maybe forget about DFS for a little bit, but we’re seeing some of our older state vintages, as time goes on; they come back and some of the cannibalization, even though it wasn’t that significant to begin with, even that small bits of cannibalization, we’re seeing reverse in some of our older states.

Great. I appreciate that, Jason, and congratulations on a fantastic quarter.

Thank you so much.

Thank you. And this will end the Q&A session. I would now like to turn the conference back to Jason Robins for closing remarks.

Thank you all for joining us on today’s call. We had an excellent first half of 2023. We are laser-focused on the back half and on the fall, and we’re very excited about the rest of the year and beyond. I look forward to speaking with you over the next few weeks and hope you all stay safe and well. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.