DraftKings Inc. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to DraftKings' Third Quarter 2024 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. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Ellingson, DraftKings' Chief Financial Officer. Please go ahead.

Good morning, everyone, and thank you 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 forecasts. 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 release and 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 the business. Following Jason's remarks, I will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robins.

Good morning, and thank you all for joining. As you can see in our results, our core value drivers are strong. In the third quarter, we acquired more online sportsbook and iGaming customers year-over-year, while CAC declined nearly 20%. Structural sportsbook hold percentage continued to increase. Our trajectory here is encouraging with NFL parlay mix tracking up more than 500 basis points year-over-year. Our promotional reinvestment rate improved by 300 basis points year-over-year as a percentage of gross gaming revenue even though we acquired more customers and had higher new customer promotions. These core value drivers collectively contributed to a 300 basis point year-over-year improvement in adjusted gross margin for the third quarter of 2024. While we experienced the most customer-friendly stretch of NFL sport outcomes we've ever seen early in the fourth quarter, which pressures our revenue and adjusted EBITDA in the short-term, the overall trajectory of our business is strong. We are excited to reiterate our fiscal year 2025 adjusted EBITDA guidance range of $900 million to $1 billion and introduce our inaugural fiscal year 2025 revenue guidance, which calls for 31% year-over-year growth at our guidance midpoints. Even more importantly, our sportsbook product is continuing to improve, which positions us well for this NBA season and beyond. This fall, we launched new and exclusive NBA markets, specifically designed to engage customers with key game storylines and expanded our in-house same game parlay offering to more than 50 new NBA markets. We also appreciate being recognized in a recent third-party report as the number one overall sportsbook app in the U.S., ranking first in user experience, betting interface, and features categories. Our app is now ranked number one in sportsbook and number one and two in iGaming with the DraftKings Casino and Golden Nugget Casino brands respectively. Lastly, I'd like to touch on the ballot initiative in Missouri. Earlier this week, Missouri voters passed a ballot initiative legalizing online sports betting in the state, following a productive and efficient campaign that was backed by a wide consortium of sports teams and gaming operators. Missouri represents approximately 2% of the U.S. population, and we expect to launch our sportsbook product in the state pending market access, licensure, regulatory approvals, and contractual approvals. In closing, our business fundamentals are healthy, and we are excited about our financial trajectory into 2025 and beyond. With that, I will turn it over to our Chief Financial Officer, Alan Ellingson.

Thank you, Jason. I'll hit the highlights, including our third quarter performance and our fiscal year 2024 and 2025 guidance. Please note that all income statement measures discussed, except for revenue are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, our business fundamentals were healthy in the third quarter. We grew revenue 39% year-over-year to $1.95 million and generated a $59 million adjusted EBITDA loss. Our online sportsbook gross gaming revenue increased 39%, and iGaming gross gaming revenue grew 26% when compared to the third quarter of 2023. Newly acquired online sportsbook and iGaming customers increased 14% year-over-year, while our CAC for these customers improved nearly 20% year-over-year. Structural sportsbook hold percentages increased year-over-year as customers continue to enjoy our parlay offerings. Promotional reinvestment rates for our online sportsbook and iGaming improved by 300 basis points year-over-year as we reduced promotions for lower-value customer segments and began to mitigate the impact of the Illinois tax increase. Adjusted gross margin was above our expectations at 40% and increased 300 basis points year-over-year. Looking ahead, I'll briefly comment on our fiscal year 2024 guidance before discussing our expectations for fiscal year 2025. On August 1, 2024, we guided fiscal year 2024 revenues of $5.05 billion to $5.25 billion and adjusted EBITDA of $340 million to $420 million. Our third quarter financial performance was consistent with our expectations. NFL outcomes early in the fourth quarter, however, have resulted in headwinds to revenue and adjusted EBITDA of $250 million and $175 million respectively. We have also made significant progress in identifying customers with lower lifetime values across our footprint and are improving our expectation for promotions for the remainder of the fiscal year 2024 accordingly. And we are continuing to drive expense efficiency throughout the organization as we balance growth and profitability. As a result, we now expect fiscal year 2024 revenues of $4.85 billion to $4.95 billion and fiscal year adjusted EBITDA of $240 million to $280 million. Moving on to our fiscal year 2025 guidance. In November 2023, we stated our expectation that fiscal year 2025 adjusted EBITDA would be in the range of $900 million to $1 billion. We reiterated this expectation in August. Given strong underlying momentum in our core value drivers, we continue to expect fiscal year 2025 adjusted EBITDA of $900 million to $1 billion. Today, we are introducing a fiscal year 2025 revenue guidance range of $6.2 billion to $6.6 billion, which equates to year-over-year growth of 27% to 35% compared to our updated fiscal year 2024 revenue guidance midpoint. We expect structural sportsbook hold percentage of 11% in fiscal year 2025 with further upside in fiscal year 2026 and beyond. We expect our fiscal year 2025 adjusted gross margin to be in the range of 45% to 47%. We expect stock-based compensation expense to represent approximately 6% of revenue in fiscal year 2025. Additionally, we expect the bridge between adjusted EBITDA and free cash flow to be $100 million, and therefore, expect to generate free cash flow of approximately $850 million in fiscal year 2025. That concludes our remarks, and we will now open the line for questions.

Thank you. Our first question comes from Shaun Kelley with Bank of America. Your line is open.

Hi. Good morning, everyone. Thanks for taking my question. Jason, to start off, many of our questions this morning from investors have been focused on the flow-through assumptions for next year. There are definitely some pros and cons to consider. Last quarter, you mentioned a long-term flow-through target of 50%, which aligns with some of the long-term objectives you've highlighted. For the upcoming year, you're estimating a flow-through of 39%. Can you discuss the factors influencing those numbers, along with how they relate to what you're observing in terms of revenue and customer acquisition at this stage? Thank you.

Thanks, Shaun. Yeah. So definitely feel 50% is about the right number long-term for flow-through. I think next year, what you're seeing around 40% rather than 50% is that we have, as we've noted in the last couple of quarters been seeing unexpectedly strong customer acquisition. And that's a really great thing for the long-term potential in the TAM of the industry. But obviously, we want to be cautious next year that we don't end up underestimating customer acquisition promotions, and therefore, having a higher flow-through guide than what actually materializes. So that's really the thinking behind that. As we've noted in the past, should customer acquisition slow, I think whenever that happens, there'll be some short-term adjusted EBITDA upside. So that could very well be the case in '25. Obviously, we want to see the continued customer acquisition because that bodes well for '26 and beyond. But should there be less-than-expected or I should say a slowdown in customer acquisition, could definitely be some upside to that flow-through rate that you mentioned.

Thank you very much.

One moment for our next question. Our next question comes from David Katz with Jefferies. Your line is open.

Good morning, everyone. Thanks for taking my question. So, just rolling through the rest of the year, one of the discussions we've been having is how do we get comfortable month-to-month and quarter-to-quarter that the kinds of impact that we see here don't recur and/or flip back in the more positive direction. I guess what I'm asking is if you could talk about some of the levers that you have at your disposal and how the business evolves to mitigate some of the lock factor that showed up here?

No, that's a great question. The shorter the timeframe, the more volatile sports outcomes can be. Since we’re just about a month into Q4, the timing of the guidance shows that this month is naturally more volatile. As you pointed out, outcomes can vary significantly. For example, if the Bengals had not made that 2-point conversion and the touchdown parlay missing one leg, the results could have been very different. Over longer periods, those fluctuations tend to balance out. This year has been a little down, and we anticipate a structural hold of around 10.5%, with actual results expected just over 10%, though there may be improvements in sports outcomes. Generally, over a year, things tend to smooth out. As our business grows, our adjusted EBITDA is currently a small portion of revenue; as it increases towards our long-term goal of over 30% margins, the effect of sports outcomes will have a minimal impact on EBITDA, although they still influence revenue. For next year, we expect our adjusted EBITDA to double at the upper end of our guidance, with revenue growth over 30%. The influence of sports outcomes on revenue will remain the same, but on EBITDA, it will increase significantly since the total will be much larger. As we scale up and generate more EBITDA, these impacts will become less significant, but for now, as we’re just achieving positive adjusted EBITDA for the first time in our history, the impact will be more pronounced.

Understood. Looks like past interference to me. Thank you very much.

One moment for our next question. Our next question comes from Robin Farley with UBS. Your line is open.

Okay. I have a quick question about the hold percentage in Q3. Also, regarding Illinois, you've mentioned adjusting promotional activities to counterbalance the higher tax. Can you share if you've fully figured that out, or is it still a work in progress? Are you where you want to be with that trade-off? Thanks.

Hold was as expected in Q3. It was nice to have a neutral quarter, especially with the NFL starting. Regarding Illinois, we have begun to implement some changes, but we are still determining the right levels. In the bridge we shared, we included some promotional efficiency, which includes some mitigation in Illinois. We have started to implement that, but it's not fully realized yet and isn't a significant part of next year's guidance. There could be some upside depending on how things develop.

Okay. Great. Thank you.

One moment for our next question. Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Hey, guys. Thanks. Good morning. Jason, I was wondering, so within the context of the 31% revenue guidance for next year, to the extent you can – like, how would you parse that between market growth across both iGaming and sports betting, market share and promotional extraction? If you could kind of bucket maybe the growth across those three verticals or any kind of direction you can give on that.

Sure. So we do bottoms up builds. So we typically will look at cohort data. Implicit in that, I think is that market share doesn't change because we're basing our cohort data on what we've seen in the past and we're basing our customer acquisition estimates on what we've seen in the past. So I think that's going to be basically implying flat market share. That said, we don't actually forecast it that way. It's more of a top-down exercise. We say, okay, if we kept market share flat, what would this imply for market growth in sanity check it that way. On the promotional side, we've been, I think, as I noted, a little cautious with the customer acquisition environment having been so hot. So that one, I think, could be, potential upside if there is slower customer acquisition, but of course, that's not as much a benefit in 2026 and beyond, but could be some upside on the EBITDA front for next year. But we weren't too aggressive with that number. So it's not a huge component of it. So really, it's more about just kind of natural market growth, handle growth on our side and then a little bit of structural hold improvement.

Great. And then, just on the promotional side, is obviously 300 was the number this quarter? Is that kind of in the ballpark of what you're looking to extract next year for the entirety of the year or is it something a little more muted just based on what you just said already on the customer acquisition environment?

Yeah. It's a little more muted just because we've been cautious on the customer acquisition environment, but it's really going to depend on that. I mean, the decline is going to happen just based on the fact that the base is maturing and it's more existing users. It's just a question of how hot customer acquisition is. So I think we've been a little more cautious and have had a bit more muted of an assumption, and we'll see how that plays out.

Great. Thank you. And if I could, just one follow-up. You guys obviously provided some good disclosures around your MUPs and ARPMUPs in the period ex-Jackpocket. The ARPMUP growth, I believe, was 8%. Is that just a mix issue of some of the newer customers you're bringing in or is that something that maybe relates to some of the legacy customers and you guys getting a little bit smarter with managing volatility and whatnot?

Yeah. I think it's more the latter. Obviously, as we bring on new customers, Jackpocket, there's a lot of moving parts. So one of the things that we noted in our letter is that we do intend to make some additional disclosures at the product level next year. We're still sort of sorting out exactly what those are. But I realize it's kind of confusing with the way we have it now, especially with all the different product lines that we have. So that's something we're taking a look at, so that we can hopefully provide some more useful disclosures for all of you.

Great. Thank you very much.

One moment for our next question. Our next question comes from Joe Greff with JPMorgan. Your line is open.

Good morning, everybody. I'll start with the question that Carlos just asked, maybe ask it somewhat differently. If you can look back at the 3Q and parse between OSB and iGaming segments, can you talk about spend per existing user versus newly acquired users, how much of a delta or maybe lower spend new users might have relative to some of your longer-term, maybe more VIP customers?

Sure. So obviously, with the caveat that it's still early. I do think that the users we acquired in Q3 look a lot like customers we've been acquiring recently, certainly maybe not the first year in a state cohort, but very similar to the more recent cohorts. So it seems like really the story is that after the first year or two, you do get some decline in customer LTV, but then it seems to plateau. It doesn't really seem to be lower in years four, five, six and beyond. So that's kind of what we're seeing. But again, very early, we're basing this on, for most of these customers, only a month or two of data. So obviously, we'll see how that plays out as NBA progresses and things like that. But from what we can tell, it seems like they're very similar quality to who we've been acquiring.

Great. Thank you. And then with respect to your 2025 revenue and EBITDA guidance range, what's contemplated at the high end versus what's baked into the low end? What's that $100 million EBITDA bridge? What's the delta there?

The biggest difference is just customer acquisition environment, because that's kind of the hardest thing for us to predict at this point. We feel very good about the models we have for our existing cohorts and have been very accurate in forecasting those. Obviously, other levers like fixed costs and marketing spend are controllable. So it's really much more what does the new customer volume look like and how does that end up affecting new customer promotion levels.

Great. And then one final question here. Given the aforementioned customer-friendly results in October, have your handle expectations versus a quarter ago called change? In other words, would 4Q handle actually have gone up relative to three months ago, given these outcomes and what might be stronger engagement?

We have seen a little bit of evidence that handle can go up or down based on whether customers are winning or not. But it’s actually not really that big a number if it is an impact at all. I think much more what we see is that people don’t need to deposit as much more, but they tend to keep their betting levels at a pretty similar level. And on the margins, you see some incremental betting. But for the most part, people just continue to kind of bet as they’ve been betting at this point. So not something that we built into our assumptions. If there is any of that, it could be upside. Also could be some upside on the payment processing cost side because you don’t need to have people depositing again if they have money in their account. So all those things could potentially create upside. But I think if it is, it’s not very significant. So we haven’t built it into the guide.

Thanks, Jason.

One moment for our next question. Our next question comes from Ben Miller with Goldman Sachs. Your line is open.

Great. Thanks for taking the questions. I guess just on the ‘25 EBITDA guide, I was wondering if you could expand on what some of the embedded assumptions are in there versus last quarter? And what some of those moving pieces are that leave the range unchanged against factors that may or may not be new this quarter? You obviously have a revenue guide versus prior expectations. It seems like you're mitigating some tax in Illinois. Are there any assumptions from Missouri? Any color around that would be helpful. Thank you.

Sure. Yeah. So I mean, I think the general story is that, in Q3, we kind of performed as expected. And Q4, outside of sport outcomes, all the fundamentals are pointing towards exactly kind of what we thought, maybe even a little bit better going into Q3 and Q4. So there is maybe some reason to feel more optimism. Obviously, we also got stung by sport outcomes. So I think between that and also wanting to be cautious on customer acquisition, we didn't feel comfortable raising the guide at this point. But we do see some really interesting things with parlay mix being up 500 basis points year-over-year in NFL, and NBA off to a very strong start from a mix perspective, that do give us some confidence that there could be some upside. But right now, we feel like with the data we have, this is the right place to be in, and felt like the real macro story was maybe a little upside, but more so that we really reaffirmed over the last couple of quarters all the key fundamentals that led us to feel $900 million to $1 billion was the right number.

Great. And then maybe just a big picture one, Jason. I'm curious your thoughts on the non-sports betting prediction markets, and whether that's an opportunity, or how you think about that from a product standpoint, from a competition standpoint, as either cannibalizing or an opportunity for OSB and iGaming? Thanks.

I think it's very interesting. The dominant market in this area is election markets, especially during presidential elections. There's been a lot of attention on it recently, and I believe there could be potential for it beyond elections, but currently, that's where the customer demand appears to lie. We're definitely considering this as we approach the next presidential election, and there might even be an opportunity to explore it sooner. It operates under a different framework; it's not licensed as a betting product but as a financial market, which makes it distinct. We'll need to determine where it fits in our priorities, but we plan to evaluate it ahead of the next election.

Great. Thanks so much.

One moment for our next question. Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Hey. Thanks. I'm going to try to roll two into one here. One is just on the guidance for 2025. I guess, what level of customer acquisition or user growth do you have embedded in the revenue guide? And then secondarily, you talked about the 500 basis points increase in parlays within the football season; I guess, what do you think is explicitly driving that and is that going to carry over into other sports in the next year? Thanks.

Great question. Regarding customer acquisition, we are being cautious with our promotional budget, and we are not relying heavily on new customer volume. Our focus is primarily on existing customers. This strategy is supported by years of cohort data, which gives us confidence in our assumptions. Additionally, we anticipate a structural hold of around 11% next year, which is another important assumption we have. Now, what was your second question?

Just as you think about what's the drivers of the 500 basis points increase in parlays and does that carry over into other sports, or specific product changes?

Yeah. It's a great. So I mean, a lot of it is product. We've introduced a lot of new features. We have live SGP markets across NFL, NBA, and other sports now. So a lot of it is just product and product availability. I think we've really increased our abilities around merchandising and creating interesting player props and combinations of player props into prepacked parlays, and I think that's been a factor. So it's a number of things, our marketing approach. It's a lot of different pieces moving towards that objective that have driven it. As far as does that carryover in other sports, definitely have some encouraging early signs in NBA that we're seeing. And for us, that's the other big one, right, because May is the other big sport, but also it's the sport that has such a heavy SGP mix in general and it's just naturally player oriented as a sport. So that's a big one. And then baseball, we're also very excited about that being a driver of parlay mix and baseball too. We really pushed on touchdowns this year. I think home runs is a good analogy for that in baseball. So definitely a lot of translatable insights, I think, but obviously, each sport is different too. So we'll have to see as each season starts how it goes.

Great. Thank you.

One moment for our next question. Our next question comes from Ben Chaiken with Mizuho. Your line is open.

Hey, thanks. Jason, the elevated external marketing for '25 totally makes sense. But I guess the question is, in '24, you had a similar opportunity to acquire customers that you didn't see coming at the beginning of the year. How are you estimating that opportunity in '25 a year plus out? And I know you, I think you said you're taking a conservative angle. But again, just more so, how did you quantify the magnitude of the opportunity for something that seems maybe hard to predict? Thanks.

I believe it's challenging to predict, so we are being cautious from a cost perspective. In terms of revenue, we don’t expect a significant year for customer acquisition. We're being careful on both fronts because predicting outcomes is difficult. Additionally, the impact of Jackpocket, which we’ve had for just over half a year, is significant. This year lacked major jackpots, which isn’t typical; last year, there were three jackpots exceeding $1 billion. We want to ensure that if major jackpots occur in the lottery next year, we have a budget allocated for customer acquisition. Transitioning from having Jackpocket for a little over half a year to a full year means more marketing and acquiring new customers, which is an important factor in our plans.

Got you. And then just some back of the envelope math, is it fair to say you held the light by about 500 basis points in October? I'm basically saying the 250 of hold divided by an estimated October handle on our end? Does that sound right?

You are about right. Good math work.

One moment for our next question. Our next question comes from Clark Lampen with BTIG. Your line is open.

Thanks for taking the question. Jason, I wanted to follow up on structural hold rates. You called out 11% for next year; you're pacing towards 10.5%. Hopefully, without sounding too myopic, why only a 50 basis points of increase expected when I think a lot of the conversations that we've had so far around product mix shifts and the momentum that you guys are seeing with packaging product, stuff like that, it all feels quite positive?

Yeah. I think that's what we feel; we have the line of sight to commit to right now. And it's more of how we view our commitment than what we really want to achieve. Our internal goals will certainly be higher than that. But as we think about what we want to guide, and not even being into 2025 yet, just wanted to make sure that we really only committed to something that we are highly confident in based on what we know right now.

How does micro-betting, I guess, sort of factor into that, if at all, also next year? I'm curious if you could give us an update maybe on the Simple Bet integration and perhaps when we might start to see, I guess, some of the product that's sort of in the pipeline starting to roll out? Thank you.

Yeah. It's a great question. So I mean, Simple Bet's been a partner of ours for a while. So a lot of this was, one, about bringing a cost in-house, and two, really being able to take it to the next level. So we do have a lot of micro-betting offerings now, but I think a lot of what we're going to develop going into next year will really be at the top of the market, and I think will separate us and really differentiate us on the live betting side. And it won't just be micros; there are all sorts of live betting and derivative markets that Simple Bet will help us with. So we're very excited about that. I think as you think about the impact on hold, live betting does have lower hold rates. So as we mix more into live betting, it will naturally have some impact on lowering the overall average hold. But obviously, we believe it's highly incremental volume. So that's a good thing. And at the same time, the other lever is we do believe that there's places that we have the opportunity to move live betting hold rate up. So while as a whole, it's lower, we might be able to offset any of the mix shifts and maybe even offset it to the positive with having actually higher hold rates within live betting in pockets where it's not high enough today. So those are all things I think Simple Bet will really help us with. And then obviously, on the pre-match side, we'll continue to push hard on parlay mix. And I think overall, we expect, as we noted, structural hold to go up, but it will certainly be a mix of live betting and overall kind of performance on the pre-match side.

Thank you.

One moment for our next question. Our next question comes from Joe Stauff with Susquehanna. Your line is open.

Okay. Good morning, Jason. I had a question. Maybe if you could describe maybe retention levels and what they look like between, say, an OSB and a casino customer. And the reason I ask is, certainly within OSB, you have a significantly larger competitive advantage given your product and number of iterations and so forth and the amount of share that you have versus the casino market that certainly seems finite today and more competitive. And so I was just curious about what do retention levels look like between, say, both of those customer cohorts?

The retention rates for sports betting are somewhat better, but the difference isn't as significant as you might assume. We consider our iGaming offering to be among the best in the market, with our DraftKings and Golden Nugget brands being rated as the top two apps in terms of product quality. We believe our iGaming app stands out as the best product available. While the competition has increased, leading to some fragmentation, our share in iGaming remains close to our share in sports betting. We anticipate potential growth in this area as we enhance our product further.

Thank you.

One moment for our next question. Our next question comes from Dan Politzer with Wells Fargo. Your line is open.

Hey. Good morning, everyone and thanks for taking my question. I know a lot of the focus has been on the 2025 guide. But one of the things I was looking back at your Investor Day last year, you actually forecast revenue of 2026 at $6.2 billion. So as you think about that relationship and maybe that could be just stale at this point, but should we think about kind of the path forward outside of 2025, the flow-through and maybe the leverage as maybe you kind of look to exceed those prior targets given there seems to be upside on revenue, how should we think about that kind of going forward? And along with that, sales and marketing, you guys did a lot of deals in 2020, 2021, probably rolling off soon. So I mean, is that also an opportunity as we think about kind of the flow-through as we move past 2025?

Yeah. I do think, to your last point, that is an opportunity. And I'm glad you brought up the Investor Day. I think that we were a little conservative in the Investor Day in terms of the overall industry growth. I believe we are around 9% CAGR and flat share. So what we're seeing is that the growth is just much stronger. And as you noted, we're actually going to be where we thought we'd be in 2026 and 2025 with much stronger customer acquisition and continued growth. So I think there is some upside there. And obviously, that means that the flow-through is going to have to catch up as the growth slows down in the outer years. But I think right now, we’re seeing really encouraging signs that the TAM is bigger than probably we thought when we did the Investor Day. And as you noted, we’re already a year ahead of where we thought we’d be.

Thanks so much.

One moment for our next question. Our next question comes from Brandt Montour with Barclays. Your line is open.

Good morning, everyone. I'd like to explore the 11% hold number further. Jason, how do you view the 50 basis points increase in relation to the average parlay mix compared to the improvement in the average number of legs? Can you achieve that just by building on the current parlay mix growth? Acknowledging that there's variation in your product offerings across different sports, I also want to know about your main competitor and the gap that exists. What would it take to reach a performance closer to theirs next year? Is it feasible to aim for a 12% or 13%? What would be required to attain that?

Yeah. To your first question, it's really mix driven. And I think we can get there based on just the mix shifts we're seeing, albeit, obviously, there's some assumptions around which sports they're likely to transfer into. For example, we are not expecting next year nearly the mix shift in college sports because they tend to be less player prop-oriented and, therefore, less parlay heavy. But with the kind of nuances aside, I think, yes, we can get there based on the mix shift we're seeing. And I think that, with the path to 12%, 13% is really mix-driven. I mean, there are other things, of course, on the margin you can always do to improve your sharp modeling, improve your risk mitigation, things like that, but 90% plus of that is just mix. So we’re continuing to focus on that. It’s been a real great point of success this year. We feel like we have a great plan going into next year, drive it even higher. And it’s exciting to know that there’s a clear path to getting much higher on hold rate. And we think that is actually a big upside lever of the business that maybe people aren’t counting on.

Excellent. Thank you.

One moment for our next question. Our next question comes from Jed Kelly with Oppenheimer. Your line is open.

Thank you for taking my questions. Regarding iGaming, can you discuss the trends in promotional velocity over the past few quarters and what to expect in 2025? Also, I thought the King of the Court promotion was very effective. Can you share any insights on engagement and the possibility of implementing a similar social promotion again? Thank you.

Thanks. The King of the Court promotion has been a significant success for us, and we are very pleased with the results. I believe it’s something we can leverage in the future. We are always experimenting with different approaches; some succeed while others do not, but we aim to understand what works. If we identify promotions that are effective, we don’t just replicate them; we analyze why they worked and compare them to other promotions with similar mechanics. This initiative was built upon various successful elements we had observed, and we felt confident launching it at the start of the season. So far, it has been a big success. By the way, could you remind me what your first question was?

iGaming promotional velocity?

Yeah. It’s been pretty steady year-over-year. New customer acquisition has been up, as we noted. So with that adjusted out, it’s been pretty steady year-over-year. Each year, though, we continue to see a decline because same as Sportsbook, as you have less and less new customers as an overall percentage of the mix, you’re just going to naturally see declines.

Thank you.

One moment for our next question. Our next question comes from Barry Jonas with Truist Securities. Your line is open.

Hey, good morning. With Missouri approving OSB, curious what states you're eyeing next for OSB or even iGaming? And maybe specifically, I wanted to get your thoughts on Florida given recent comments from the Seminoles maybe opening the door for others? Thank you.

It's always challenging to predict which states will take action at this stage. Everyone is shifting their focus from the election to the upcoming legislative sessions next year, so discussions are beginning to take place. Looking back at last year, some bills made significant progress; for instance, one passed through the Texas House, although it still faces substantial obstacles. I'm optimistic we can find a way forward there. The situation in Georgia is similar, as a bill was approved by the Senate, and I believe there's a possibility for progress. Minnesota was very close to success last year, and I am hopeful we can achieve that this year. On the iGaming front, New York and Illinois are two key states we are monitoring that could gain traction. Additionally, Maryland and North Carolina might also have a chance of advancing in the next year or two. These are all the states we are focused on. However, going into the process, we may expect a few promising results, but often the outcomes can be unpredictable, with some states that seemed unlikely to succeed actually having a real chance. It's still early after the election, but based on the past sessions and current momentum, those are the states to watch.

Great. And any thoughts on Florida?

Very encouraged to hear those comments. We really have a ton of respect for Hard Rock and for the Seminoles and Jim Allen has done a fantastic job and enjoyed spending time and getting to know him and his team. So we’ll see how that all plays out. Obviously, Florida is a big state and something that we’d be very excited if there were a path to be able to offer our product to customers there. But not really up to us. We’ll have to see what they want to do and how the discussions progress. And obviously, if there’s anything material, we’ll come talk about it. But at this point, I wouldn’t say that it’s very far along. And there’s been a lot of speculation in the press, but really, I think it’s pretty early stage.

Great. Thank you very much.

One moment for our next question. Our next question comes from Bernie McTernan with Needham & Company. Your line is open.

Great. Good morning. Thanks for taking the question. Maybe just to start with the expectation of $850 million of free cash flow for '25, how should investors think about the use of cash, particularly for buybacks next year? And then just a follow-up on hold. We all can track what happens with certain game outcomes and how that with favorites winning, how that can negatively impact hold. Is it possible to disaggregate the total impact on hold between what was going on with team outcomes versus player props in the quarter?

Yeah. Let me quickly touch on the latter and then I'll have Alan take your first question. We're not at this time breaking down the hold. But what you can probably guess is that it's a mix of both. So typically, when favorites win, it's good for the customer. And typically, when the big-name players get lots of yards and score touchdowns, it's good for the customer. So when you see in the backup tight ends and running backs get in the end zone in low-scoring games where the underdogs are winning, typically, that's good for the house. So that's how I think about it. It was a mix. And if you're going to see the type of result that we saw to start the quarter, it has to be because it was that bad. But when it swings the other way, it could swing the other way hard too. So a lot of time left in the quarter and, obviously, a lot of time left in the season. And Alan, do you want to touch on that $850 million in free cash flow and how we're thinking about that?

Yes. We feel really good about having positive free cash flow, not just in 2024, but the $850 million you mentioned that we’re expecting in 2025. We’re keeping our eyes on the markets, we expect to act responsibly. But you should expect us to be more active with repurchases in future quarters as we scale into our free cash flow and as we have more liquidity. Thank you.

Fair enough. Thank you, both.

One moment for our next question. Our next question comes from Michael Graham with Canaccord. Your line is open.

Thank you. I wanted to ask about one of your slides in the presentation. You mentioned having 3.6 million MUPs at the end of the quarter and 9.3 million total customers. Could you provide an update on your strategies for reactivating customers who haven't engaged recently? Is it mainly about promotional spending, or are you implementing other initiatives?

I'd say it's a great question. It's a really important thing, as obviously just core retention is important as the base gets bigger. And we view retention, activation, monetization as the ultimate keys to winning. Obviously, acquisition is very important too. But over the long term, it's about retaining and getting great usage and gameplay out of your customers. So definitely an important topic. I kind of look at it along two dimensions. So one are just the constant always-on type of tactics where if we see particular things that we believe either are going to lead to attrition or recent lapses in customers, we can trigger different types of CRM treatments and retargeting treatments that will go and try to get them to reactivate. And then the other factor, I would say, is really more seasonal around like event-driven activation. So think like start of NFL season as an example, or Super Bowl. And so really thinking about how do you use those moments when you know there's going to be a lot of natural reactivation in the market to get not only additional reactivation but also to make sure the natural activation you're getting as much of that as possible. I kind of think of the start of NFL season as a lot of people who maybe at one point signed up for more than one book are going to decide where they want to start playing in the season. So you want to make sure it’s with you. And obviously, as you do that season after season, they tend to not think about it and just come back to their favorite apps. So that’s a lot of what we try to do is really use those big moments to win our share of the activation and also try to drive incremental activation through CRM.

Thank you, Jason.

One moment for our next question. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Hi. Good morning. Thanks for taking my question. Obviously, with the 30% growth for '25, you have a lot of focus areas that you need to be dialed into. But Jason, I wonder if anything has changed just in terms of beginning to look at some international markets, or more importantly, when is the right time to start considering growing in other markets as top line might begin to slow if there's no legislation here in North America? Thanks.

I don't see it as a necessity right now; it's more about seizing the right opportunity. If a suitable chance for international expansion arises, we would certainly consider it. However, we don’t feel pressured to pursue that at the moment. As you mentioned, we're still experiencing strong growth, and even without many new states launching next year, we are comfortably meeting the criteria of a Rule of 40 company with over 30% growth and a 15% EBITDA margin. We're pleased with our growth trajectory and not currently focused on these international opportunities, but we remain open to them if the right situation presents itself. We're taking a patient approach and waiting for the right opportunity.

Thank you very much.

One moment for our next question. Our next question comes from Jeff Stantial with Stifel. Your line is open.

Great. Good morning, everyone. Thanks for taking our question. Jason, I wanted to drill down into a comment you made early on in the call. If I caught it correctly, you said both the volume of users acquired and the signup offer per user acquired were both up year-on-year, though promotional reinvestment, as you note, in the latter was down about 300 bps year-on-year. Is that mostly retention bonusing optimization and structural hold expansion that's driving that improvement? And then strategically, should we think about the higher nominal sign-up offer as being mostly opportunistic in the current user acquisition environment or how much is it may be informed by more what certain competitors are offering? Thanks.

Sure. A couple of points to mention. Firstly, we've definitely observed some improvement in retention compared to last year. Secondly, while we've seen an increase in new customer volume year-over-year, the mix has shifted more towards existing customers due to the growth in retention. This combination has led to a slight decline in the overall promotion rate. Looking ahead, we expect that even if more new customers enter this rapidly growing industry, it won't reach a level that prevents the mix from continuing to favor more mature existing users each year. As a result, we anticipate that the promotion rate will continue to decrease annually, unless a significant new state like California or Texas opens up, which could temporarily change the dynamics. However, based on our existing state analysis, we don't foresee that happening.

Great. Thanks very much.

One moment for our next question. Our next question comes from Jordan Bender with Citizens JMP. Your line is open.

Good morning. Thanks for taking my question. The original gross margin guidance for '24 was 45% to 47%. So as we think through the bridge, on one hand, Illinois is a negative, which you've noted there should be some offset, game outcomes are onetime and Jackpocket should be actually positive to gross margin. So I'm just struggling to get why gross margins are essentially in the same place in '25, kind of blending those factors together. Is there anything else that we're missing here?

I mean it’s really new user growth. That’s been the thing that’s been driving the overall promotion level to a point where we hadn’t seen quite the level of gross margin improvement we wanted. But remember, Q3, we did see a 300 basis point year-over-year improvement in gross margin. So it is definitely trending in the right direction.

Thank you very much.

One moment for our next question. Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Your line is open.

Hey, good morning. How much of the $55 million of promotion optimization was because of customer-friendly sports outcomes and you just didn't have to retention-promote quite as much to them versus an actual structural change in the promo strategy and playbook that we can run with going forward?

No, it's really nothing to do with sport outcomes. It's really two things. One, some mitigation of Illinois from the tax increase. And two, we've recently made some real progress in identifying customers that are lower LTV that needed a lower level of promotion in order to make sense from an LTV perspective. So we made some optimizations there. And actually very happy to say that that resulted in basically no change to revenue, but it did drive significant adjusted EBITDA. So that’s something that we really think should be more permanent. But obviously, we’ll keep an eye on what happens and continue to adjust and test it accordingly.

Thanks, Jason.

I'm showing no further questions at this time. I'd like to turn the call back to Jason Robins for any closing remarks.

Great. Thank you all for joining us on today’s call. We’re looking forward to a really strong finish in 2024 and are really excited and optimistic about 2025 and beyond. Thank you for your continued support, and we look forward to speaking with you again soon.

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