Earnings Call Transcript - DKNG Q3 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the DraftKings Q3 2023 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, Stanton Dodge, Chief Legal Officer. Please go ahead.

Stanton Dodge, Chief Legal Officer

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 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 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 our business; and Jason Park, Chief Financial Officer of DraftKings, who 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.

Jason Robins, CEO

Good morning, and thank you all for joining. The first three quarters of 2023 have been outstanding for DraftKings. We have made thoughtful investments in our product throughout the year and are winning with our customers, and our team executed tremendously around the start of NFL and college football season. Importantly, we remain focused on our core value drivers, acquiring customers efficiently, retaining and monetizing our existing customers, entering new jurisdictions and building an efficient and scaled organization. I'm pleased to share that this strong execution and focus resulted in another excellent quarter. Revenue and adjusted EBITDA exceeded our expectations and our momentum continued into the fourth quarter with the start of the basketball and hockey seasons. We are raising our expectations for fiscal year 2023 and introducing initial guidance for fiscal year 2024. In 2024, we expect revenue of $4.5 billion to $4.8 billion and positive adjusted EBITDA of $350 million to $450 million. We also expect to generate meaningfully positive free cash flow in fiscal year 2024. As we look back on the third quarter in 2023, here are our key takeaways. First, we are winning. Our revenue in the quarter increased 57% year-over-year, and we achieved number one combined OSB and iGaming gross gaming revenue share in the U.S. We've efficiently added over 1,000 basis points of combined OSB and iGaming shares since the second quarter of 2022, which we are very proud of. Second, our investments in product and technology are paying off. We have created what we believe is the strongest product in the industry and are seeing overall engagement on our app and structural hold percentage continue to increase. Importantly, we have a clear roadmap to extend our product advantage over the coming years. Third, our older states are generating significant contribution profit, and newer states are generating positive contribution profit faster than previous states. Fourth, we expect attractive adjusted EBITDA flow-through percentage on incremental revenue as we believe our organization is largely at scale and therefore, has a long runway of margin improvement. Finally, the best is yet to come. We are excited for the future and look forward to presenting our latest views on the U.S. opportunity, sources of competitive differentiation, core business drivers, including additional details on unit economics and our multi-year financial outlook at our Investor Day on November 14. With that, I will turn it over to Jason Park.

Jason Park, CFO

Thank you, Jason. I'll hit the highlights, including our very strong third quarter performance, increased 2023 guidance and our initial expectations for 2024. 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 $790 million of revenue in the quarter, which is 57% higher than our third quarter 2022 revenue, and our adjusted EBITDA of negative $153 million improved by $111 million on a year-over-year basis. Customer retention and engagement far exceeded our expectations as customers enjoyed our live same game parlay offering as well as our live and player prop markets. MLB was a bright spot throughout the third quarter and we successfully transitioned many of those customers into the football season. Customer acquisition was also healthy and exceeded expectations. For example, we have already acquired more than 5% of the adult population in Kentucky following the launch of our Sportsbook product in that state on September 28. Structural hold was above 9.5% during the quarter and well ahead of expectations as we continue to improve our parlay mix and optimize our trading capabilities. Our actual Sportsbook hold percentage was approximately 9%, inclusive of customer-friendly sport outcomes, primarily in college football and the NFL. Promotional reinvestment as a percentage of GGR outperformed our expectations due to stronger than anticipated retention of existing customers, which resulted in a slightly higher mix of existing customers versus new customers. Promotions as a percentage of GGR continue to improve on a year-over-year basis for our OSB and iGaming states. Our adjusted gross margin was in line with expectations and increased almost 300 basis points year-over-year. Strong handle growth combined with improving structural sportsbook hold rate and better promotional reinvestment for OSB & iGaming contributed to higher adjusted gross margin. External marketing and fixed expenses were consistent with our plans as we executed our football season kickoff and continued to exert discipline against our compensation expenses and vendor-related costs. We're very pleased with our results in our more mature OSB and iGaming states. In the states that launched from 2018 through 2021, we continue to drive very strong handle and revenue growth year-over-year with a corresponding improvement in adjusted gross margin rate, while our external marketing costs decreased at a double-digit rate. Our strong third quarter results and our visibility into continued improvement have enabled us to significantly raise our expectations for 2023 revenue and adjusted EBITDA. We are improving our full year 2023 revenue guidance range to $3.67 billion to $3.72 billion or by $195 million at the midpoint. We are also improving our full year 2023 adjusted EBITDA guidance range to negative $95 million to negative $115 million or by $100 million at the midpoint. The bridge from the 2023 revenue and adjusted EBITDA guidance that we shared in August to our 2023 guidance as of today include stronger customer retention, acquisition, and engagement and structural sportsbook hold improvement, partially offset by customer-friendly sport outcomes in the third quarter and our expected launch in May. You can see the details of the bridge in the earnings presentation we posted to our website. In terms of our full year, we are increasing our 2023 adjusted gross margin rate guidance to 43.5% to 45%. We now expect contribution profit, which we define as adjusted gross profit less external marketing to approach $800 million in fiscal year 2023. We continue to expect fixed costs to grow less than 10% and external marketing to be consistent with prior guidance even when including our investment in May. 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 $1.2 billion of cash. As a reminder, we expect approximately $120 million of capital expenditures and capitalized software development costs for fiscal year 2023, and changes in net working capital to be a modest source of cash. We expect this level of CapEx to continue in 2024. Moving on to our full year 2024 guidance. We are poised for a rapid increase in adjusted EBITDA due to continued strong revenue growth, coupled with a scaled fixed cost structure. For 2024, we expect revenue in the range of $4.5 billion to $4.8 billion or nearly $1 billion of incremental revenue growth compared to the midpoint of our fiscal 2023 revenue guidance and more than double our revenue from 2022. Our guidance range for 2024 adjusted EBITDA is $350 million to $450 million, which equates to more than $500 million of year-over-year growth compared to the midpoint of our fiscal year 2023 adjusted EBITDA guidance and more than $1.1 billion of adjusted EBITDA improvement since 2022. Our guidance range for 2024 includes investments to launch approximately 5% of the adult population. In addition, based on the midpoints of our fiscal year 2023 and 2024 guidance ranges, we expect year-over-year adjusted EBITDA flow-through percentage up 53%, which we look forward to delivering. In sum, we had an excellent third quarter and are very excited about the trajectory of our business. We look forward to sharing more details at our upcoming Investor Day.

Operator, Operator

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

Shaun Kelley, Analyst

Hi. Good morning, everyone. Thank you for taking my question. Just wanted to start with sales and marketing. I think one of the many things we learned this quarter was seeing your overall sales and marketing actually declined year-over-year, and I believe implying external marketing down even more during the quarter. As we look out to next year, I think that pattern actually continues. And I was just wondering if you could elaborate a little bit on what's enabling you to do that and still make the investments that you hope to? And sort of just talk to us a little bit about both mix, meaning new customers acquired versus existing and also seasonality, if you could, just how should we think about external marketing across the year? Thank you.

Jason Robins, CEO

Thanks, Shaun. So you're correct that we do expect to further decline in external marketing next year, and that is inclusive of potential launches in North Carolina as well as some other states. So all specifically the states that have legalized not any new states we're predicting legalization. And I think the biggest reason why is that as our existing states mature, we see less and less external marketing spend there. We are still continuing to acquire customers even in our old estate vintages. So we do still have marketing spend allocated to those. But it’s certainly not nearly at the same level as in the first year, two, three of the state. So as states mature, that comes down. And so just generally, as the business is maturing, we’re seeing that happen, which is what we expected. Of course, if we see some very significant new states come online next year, that could change. But right now based on the kind of launch that we expect to launch, we’re forecasting an external marketing decline next year.

Operator, Operator

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

Joseph Greff, Analyst

Good morning, guys.

Operator, Operator

Sorry, Joe, sorry about that.

Joseph Greff, Analyst

When you consider 2024 and review your guidance and forecast, do you anticipate a more substantial contribution from the older states compared to the newer ones, or how are you evaluating the differences among the various cohorts and vintages?

Jason Robins, CEO

Yeah. It's a great question. We actually are going to dive into that very specific topic in much more granular detail at our Investor Day on the 14th. So I very much look forward to sharing detail there. And I think the way you could think about it is, if you look at sort of the relative population sizes of the different vintages and then think about the maturity curve, obviously, the older states are still growing. So on a per capita basis, they will be larger. And then if you kind of think about how big each vintage is based on the percentage of population, and then also think about the mix of whether it’s just OSB or OSB and iGaming, that will give you a picture of how much. But we actually are going to go into a much more specific detail on this on the 14th. And I was very certainly warned by my IR team not to run the front run in the Investor Day. So it won’t – but it’s a great question and look forward to sharing more with you in a couple of weeks.

Joseph Greff, Analyst

Great. Thanks, guys.

Operator, Operator

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

Stephen Grambling, Analyst

Hey, thanks. Clearly, there's been a lot of concerns or questions about the competitive environment, whether new entrants or existing folks who perhaps need to protect share. How are you planning for promotions into 2024 versus '23 in the guidance that you provided and could there be a reallocation from marketing savings that you're discussing?

Jason Robins, CEO

We continue to expect a decline in promotions. While some states provide differing reports, it can be tricky to analyze a few data points. In Q3, we actually observed a year-over-year decrease in the promotion rate for our overall OSB and iGaming business. As you know, we experienced a gross margin increase of about 300 basis points compared to last year. For next year, we project a gross margin increase between 200 and 300 basis points, primarily due to the decline in promotions. There is also a slight hold rate increase factored in. We will remain disciplined, having dealt with multiple waves of competition previously without raising our promotion rate, and we do not anticipate doing so this time. We have considered various scenarios in our guidance and believe we have substantial experience and historical data on potential competition. It’s crucial for us to maintain our approach, focusing on reducing the promotion rate through optimization. As our user base matures, a significant amount of promotion is directed towards new customers. If we continue executing effectively, we expect the positive trends we’ve observed over the last seven to eight quarters to persist.

Stephen Grambling, Analyst

Sounds good. Thank you.

Operator, Operator

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

Carlo Santarelli, Analyst

Thank you, Jason. When you consider your guidance for 2024 in light of the consistent share gains you've demonstrated, particularly in the third quarter, how are you thinking about the 33% mentioned in your release that is averaged across both channels? How do you view that share in relation to next year's net revenue and EBITDA guidance? Is it expected to remain stable, increase, or something else?

Jason Robins, CEO

Yeah. It's a great question. I mean what we've always sort of typically guided the same way, which is we look at historical cohorts and data, project forward based on that. So implicitly, that generally implies a flat share. And I think a lot of why we outperformed this year by such a significant margin was just our share increase. So certainly not banking on that for next year. We're confident that we have some opportunity there, and we believe that we can. But as far as what's embedded in the guidance, our methodology hasn't changed. We look at historical cohorts, which kind of implicitly implies flat share and any projection going forward.

Carlo Santarelli, Analyst

Thank you. Given your current scale and the expected flow-through moving forward, my next question relates to your March Analyst Day when you mentioned gross margins around 56% at a steady state, along with various contributing factors such as platform processing. How do you view the potential for reducing some of those costs, whether in processing or revenue share? Additionally, how close are we to discussing improvements in that gross margin?

Jason Park, CFO

Hey, Carlos. It's Jason Park. That's a great question regarding the flow-through. I’ll begin by discussing the lower end of the income statement. Jason has already mentioned the trends in external marketing costs for 2024. Additionally, we have demonstrated strong discipline in managing our fixed costs over the past 18 months, and we will maintain that approach. Regarding the cost of goods sold, we anticipate a 200 to 300 basis point improvement in our gross margin rate, mainly due to the ongoing enhancements in promotional reinvestment. We also have several initiatives aimed at optimizing our cost of goods sold, primarily through vendor negotiations and scaling up for volume discounts. These factors are included in our gross margin rate guidance and indicate a promising future for improvement at both the gross margin and EBITDA margin levels.

Jason Robins, CEO

Yeah. And I think as Jason mentioned, definitely the largest driver of gross margin improvement is continued just maturity of the base, which brings promotion rate down. But certainly, in addition to some negotiations, we also just have existing contracts with volume thresholds that we expect over time will bring gross margins down. That's one of the benefits of having scale.

Carlo Santarelli, Analyst

Yeah, Jason. I was wondering about the timeframe for that. Is it expected to occur within the next year or two, or is it more of a continuous process?

Jason Robins, CEO

I think it's an ongoing process. At some point, you reach a limit, but I believe that Google likely secures better rates from vendors than we do. As you grow larger, you can leverage that growth to negotiate better terms since you can afford to invest more, even if the percentage of revenue is smaller. Generally, as volume increases, the rates tend to decrease. So yes, I believe this will continue. We have a dedicated team that focuses on this throughout the year and is always searching for ways to optimize our cost of goods sold structure.

Carlo Santarelli, Analyst

Great. Thank you, both.

Operator, Operator

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

David Katz, Analyst

Hi. Good morning, everyone. Thanks for taking my questions. I'd like to talk about something that just has never come up until now, which is your cash flow statement. If we start to think about what next year brings with the '24 guidance, and I think in the prepared remarks, you talked about keeping CapEx at a similar $120 million level. You do start to pile up, you start to accumulate some cash. And I'd love to get a sense for how you think about managing around that. Obviously, you want to keep yourself positioned for a state like Florida or California or whatever may happen. But can you just maybe give us a little more color on how you're thinking about that?

Jason Robins, CEO

Yeah. It's a great question. And it's something we've actually been spending increasing time going through looking at all different options, including organic investments we can make opportunities for capital structure optimization, buybacks, looking at just basically how do we deliver the maximum value over the long term to shareholders. So that is a great question. It's something that we feel fortunate that we now really are in a position to have real value creation from optimally making those decisions to now. We've been, as you said, focused on getting to this point. But definitely feel very good about our trajectory on the cash flow side. And we'll have more to say as we think it through, but definitely a great question and something that we're actively discussing here.

David Katz, Analyst

Okay. Thank you.

Operator, Operator

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

Joseph Stauff, Analyst

Thank you. Good morning, everyone. I have two questions. In your guidance for 2024, Jason, you mentioned an assumption for improved structural hold within the gross margin improvement. What does that entail? Additionally, could you provide insights on the level of adult penetration and user growth in mass and Ohio? It seems like you reached 7% quickly. Is it reasonable to assume that this number is now higher, considering we are two months into the U.S. sports calendar?

Jason Robins, CEO

So great questions. On the hold side, we forecasted basically that we continue on the same level of structural hold rate we're on today. Obviously, there's some opportunities, we think, to potentially increase that. But right now, that's what we have line of sight to. So that's what we put in. And I'm sorry, what was the second question?

Joseph Stauff, Analyst

Yeah. Just a comment on trying to estimate adult penetration, how many more customers are out there, user growth, et cetera. And you had given Ohio and mass in terms of where you've been, you got to 7% pretty quickly. And I'm wondering where that is now.

Jason Robins, CEO

Yeah. It's another great question. I mean we haven't found a ceiling yet in the older states. We continue to acquire customers. Even in a state like New Jersey, which is our first state that we launched and obviously is bordering a lot of other states that have since launched, we continue to have healthy customer acquisition. So hard to say where the ceiling is. We're well into the double-digits in terms of adult population penetration in some of our older states. So I think it really has a lot to do with how we continue to evolve the product. If we continue to make the product more appealing to a wider audience and continue to find ways to innovate to reach more customers than – I think it can continue to go up over a long period of time. But certainly, at this point, we have not found the ceiling yet.

Joseph Stauff, Analyst

Thanks, Jason.

Jason Robins, CEO

Thank you.

Operator, Operator

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

Daniel Politzer, Analyst

Hey. Good morning, everybody. I was hoping you could talk a little bit more about hold. Maybe as you see it philosophically or the long term. I mean is there kind of a target or upper limit you see relative to the kind of mid-9 level you're at now? And I guess maybe along with that, how do you think about the trade-offs for hold relative to LTV for the customer?

Jason Robins, CEO

Yeah. I mean I think this is something that we'll just always continue to be analyzing and optimizing. And it's almost a tricky question to think about in that sense because it really depends on where you're getting hold increase from. If you continue to create products that the customer wants and they have demand that have higher hold, then that can do a great job, I think, of continuing to raise your hold and I think on the other side of it, if you're raising hold by either forcing people into things that they really don't want or making your pricing worse than the market. I think that’s obviously potentially going to have a negative impact on LTV. So we’re very focused on the customer and on creating – we think – and we’ve seen this with a number of products we’ve created from SGP to cash out. We have a new one that we’re going to be talking about at our Investor Day that we’re launching, which I love that, I’m really excited about that kind of fits this double objective of being great for the customer and holding better than the average. So I think we have a long runway on that front. And it’s really about focusing on the customer and maximizing the LTV. So in the end, if we do see that anything, whether it’s sort of just the concept that holds higher or a particular product or anything that we’ve introduced is having an adverse effect on LTVs. And obviously, we’ll try to turn the dials accordingly. But that’s really what the team is focused on. Hold is obviously a variable promotions are variable, but retention is the most important variable. So very much focused across all value creation drivers across the LTV spectrum. And I think that hold is something that, again, it’s a little tricky because it depends on how you’re doing it, but I do think there’s a lot more room for upside there than not.

Daniel Politzer, Analyst

Got it. Thank you.

Operator, Operator

One moment for our next question. Our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Robert Fishman, Analyst

Hi. Good morning. On iGaming, despite still early days on legalization, has your confidence increased over the past year of how big of a driver iGaming can be for total company revenue? Maybe also importantly, total company profitability. And then just separately, with some of your competitors using that vision for streaming NFL games this year, can you discuss your updated thoughts on streaming live games in your app and whether you think there's any long-term benefits for DraftKings.

Jason Robins, CEO

Great questions. Regarding iGaming, I believe it's a segment of our business that isn't discussed enough, especially since we currently serve only 11% of the population, leaving 87% still not legalized. This represents a significant opportunity. Additionally, there's still a substantial market with nearly half of the U.S. population lacking access to legal sports betting, while our established markets continue to grow. As we've mentioned before, we estimate that iGaming has roughly double the total addressable market on a per capita basis compared to online sports betting. This presents an amazing opportunity, and I anticipate seeing more progress in various states in the coming years. As we predicted, sports betting is leading the way, but iGaming is definitely an underappreciated opportunity, and I appreciate you highlighting it. We believe we are well-positioned in this market with a leading position. As for your question about streaming and the app, we are actively exploring these options. One of the exciting aspects of our current position, both as a company and in the industry, is the abundance of innovation available to us to enhance value for both the customer and the business. We entered the NFL season with a well-defined product roadmap, but we didn't prioritize streaming at this time, although it remains under consideration. There are value-creating initiatives that, despite our agreement on their potential, were not prioritized due to the multitude of other exciting projects we believe will drive value and yield positive results. This is a remarkable phase in market evolution, with plenty of opportunities and innovation. This illustrates our extensive product roadmap of initiatives that we are confident will deliver value, and it's just a matter of time before we can implement them all.

Robert Fishman, Analyst

Perfect. Thank you.

Operator, Operator

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

Barry Jonas, Analyst

Hey, guys. Good morning. Can you maybe talk about your expectations for the next wave of state to legalize OSB and where you could get access? Thanks.

Jason Robins, CEO

Yeah. Great question. It's hard to say. Obviously, if you look at the map, a lot of the biggest states outside of the top three have already legalized. Obviously, Georgia is still one that's in that top 10 that has had some momentum in the last couple of years and hopefully, we get some traction there this year. Obviously, the big prizes of California, Texas and Florida are still out there, but those might be a little longer path with Texas not meeting again until '25 and Florida and California requiring ballot initiatives. So those are really kind of the big states in terms of population left out there. And I would say probably the clearest path now of them is in Georgia, but still really hard to say what the timing and likelihood of that is. And then more on the midsized states, we had good traction and progress in Minnesota last year. I think that could be one that's in play. Missouri, I think there continues to be a lot of interesting routes. There's some complications there too, but I think there's potential for that one. And then like every year, there are always some states that we didn't anticipate going into the legislative session and all of a sudden, there's some momentum around. And we usually figure that out either towards the end of the year, or early next year as people are starting to think about introducing bills in the upcoming sessions, many of which start in Q1. So we'll know a lot more in the next three or four months, but definitely I think we'll get some more states this year, and those are a handful of the ones we have our eye on.

Barry Jonas, Analyst

Great. And then just for a follow-up, with ESPN bet coming online mid-football season, do you expect some trialing from your user base? And is this at all reflected in your guidance explicitly? Thanks.

Jason Robins, CEO

We've seen so many waves of competition now, and we really always had a highly competitive market. It's not like we haven't had a fierce competition pretty much from the start. So we always expect that there will be competitors that will come and try to give our customers an experience and we have to just give them a better experience. And certainly, there are people that will go take promos and that will happen. But in the end, we believe that most customers will gravitate to the best product, the best experience. So we’re going to stay disciplined, and I think it will probably play out in a very similar fashion to other times. But we’ve contemplated all sorts of scenarios in our guidance. That’s why it’s guidance with a range. We definitely have thought through what we think the competitive environment and different flavors of that could look like. And we feel that based on now, we’ve been through this a few times, not only do we have experience managing it. We also have a lot of data. So we feel pretty confident that our guidance range is going to encompass any variety of scenarios that could possibly emerge on the competitive front.

Barry Jonas, Analyst

Great. Thanks so much.

Operator, Operator

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

Robin Farley, Analyst

Great, thanks. I have two questions. The first is a follow-up to the previous topic. It seems like your forward guidance is based on maintaining flat market share from your current position. I'm curious if you've considered that some competitors might be temporarily out of the market but could return. How does that influence your outlook for market share next year compared to this quarter? Do you believe this quarter's share was unaffected by that situation? My second question is about consumer behavior differences between OSB customers and iGaming customers. While we can see total revenues by state, I'd like to understand what’s happening on an individual basis. Are there noticeable differences in consumer strength or concerns in each segment right now? Thank you.

Jason Robins, CEO

Great question. To address the first part, the guidance tends to lean toward a stable market share over time due to our methodology. This doesn’t mean we have an unchanged share at this specific moment, as we consider historical cohorts and seasonal trends. It really reflects more of an average market share over a recent time frame rather than a snapshot of this month. This approach takes into account a variety of scenarios and competitive influences, including potential changes in customer behavior affecting our market share. Based on past data, we believe we've included all relevant scenarios in our guidance range. Additionally, we feel confident that our existing customers remain loyal despite facing competition. A flat market share would not meet our expectations since we have been growing our share. Our team would be disappointed if we do not continue this trend, though that isn't the guidance we're providing. In some contexts, a flat market share could indicate an unexpected impact that we didn't foresee. Ultimately, our aim is always to gain more market share. The methodology behind our forecasting leads to an implicit assumption of a stable market share. Now, regarding your second question about iGaming and OSB customers...

Robin Farley, Analyst

Kind of the consumer behavior, if one or the other is looking a little bit different in the last few months?

Jason Robins, CEO

Yeah. The key difference between the iGaming and OSB customers, really the OSB customer is very seasonal and event-driven. There are certainly people that bet on sports throughout the year. But the fact of the matter is that the sport calendar changes throughout the year. So you're just going to have more betting in times of heavy sport like right now versus the dead of summer or something like that. iGaming is kind of there and it's the same all the time. So while certainly, we have overall activity differences because more customers on the platform for sport mean more cross-sell into iGaming. On the individual customer basis, their behavior isn’t going to change a whole lot throughout the year. There’s some seasonality to it, but people tend to during holiday times, have more downtime and things like that, but it’s much more – much less pronounced than the OSB customer, much more steady throughout the year.

Robin Farley, Analyst

Okay. Great. Thank you.

Operator, Operator

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

Bernard McTernan, Analyst

Great. Good morning. Thanks for taking the question. Revenue growth has just been really explosive over the last couple of years, but the guidance for '24 has the year-over-year growth stepping down. What are some of the tailwinds that have been supporting the revenue growth slowing as we move from '23 to '24?

Jason Robins, CEO

Yeah. I think it's really just the size of the base increasing. I mean if you look at the absolute revenue growth, it's actually close to $1 billion in our guide for next year. So very healthy growth, just certainly, as the base gets bigger, that percentage is going to be harder to keep in the 50, 60 plus range. So I think that's really the big thing. Obviously, there's an effect on new states that can either increase or if there's a lack of new states to decrease that. So that’s something, as you think about long-term TAM always to keep an eye on. But I think really what we’re seeing next year because we still do see very healthy growth across all of our state cohorts. It’s just a matter of we’re coming off of a very large base of revenue. And adding $1 billion of revenue doesn’t give the same percentage or nearly $1 billion, I should say, doesn’t give the same percentage increase as it did in the past.

Bernard McTernan, Analyst

Understood. Thanks, Jason.

Operator, Operator

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

Brandt Montour, Analyst

Hey. Good morning, everybody. Thanks for taking my question. So just one on iGaming, another quarter of sequential market share growth there. I'm curious if you call out sort of your OSB share, OSB momentum cross-sell as the main driver of that sequential share lift, how much growth in comparison to that, are you getting from penetration in the Golden side and sort of getting more of those older customers, those slots customers and growth from that angle. And if you saw any benefit in the quarter from disruption at a certain competitor that had a headline stuff in the news.

Jason Robins, CEO

Yeah. So I think really, the iGaming business, I mentioned a few questions ago, I think is under talked about. It's just such a strong business, steady growth. And we just continue to be able to cross-sell better and acquire more efficiently as we get more data and test more things. So I think there's a ton of upside as you see more states legalize iGaming there. We don't have to reacquire a lot of the customers because such a large percentage of our share does come from cross-sell. The other thing I’d note that we got a little bit of boost on is we launched Golden Nugget in Pennsylvania. That was the first state that Golden Nugget is actually on the DraftKings platform. So – very excited about that. We saw some really strong early results there and continue to feel really positive on the trajectory there. And then we do expect to see more benefit from continuing to migrate Golden Nugget in other states. Pennsylvania was a new launch. We haven’t migrated any states yet. That’s all on the docket over the next couple of quarters, we’re going to migrate pretty much – we’re going to migrate every state for Golden Nugget online gaming. So really, I think that’s something that also contributed to a little bit of the share increase, and hopefully, there’s some more juice in that as we migrate these other states and continue to optimize the iGaming.

Brandt Montour, Analyst

Great. Thank you.

Operator, Operator

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

William Lampen, Analyst

Thanks. Good morning. Appreciate the question. I actually wanted to follow up on some of the comments that were just made around Golden Nugget. I know you launched the standalone app in Pennsylvania. In fact, kind of as you were saying, that means the migration is done or at least most of the heavy lifting is behind us. if I heard right, it also sounds like with direct cost guidance next year, that there really isn't much in terms of savings contemplated. Could you remind us, I guess, as you're moving the legacy product onto the Golden Nugget stack. Is this something that's really going to benefit share? Are there other efficiencies that accrue to you guys, I guess, from move on to that stack or is it mainly I guess, sort of the share and then exploring, I guess, sort of first-party versus third-party product mix opportunities? Thanks.

Jason Robins, CEO

Yeah. So it's a great question. We actually will get cost of goods sold synergy. There's some timing things with contracts that have certain time frames that affect the timing of when those synergies will actually fully materialize. And what we determined is they're not very material to next year, but they are there, and we do expect to see some impact on the cost savings side. And then as you also alluded to, I think there's some upside on the revenue and share side as well given that we have pretty consistent data showing that our product and our platform converts new customers better, monetizes existing customers better, retains better. So really feel like there's some upside there as well. And Golden Nugget one, the same kind of story. We haven't built in a massive share increase or anything there. So it will be interesting to see what we can do with that brand. Obviously, we have high hopes and are very excited about the migration coming up. And hopefully, there’s some upside in that for us. And it's certainly been a contributor. I mean, as I noted, we did gain share on the DraftKings brand too. But when you combine the two brands, we're almost at 30% share now in iGaming, which is if you think about where we thought we could cap out a year or two ago that was lower than that. So we're pretty bullish on the iGaming opportunity and feel like lots of exciting potential tailwinds in the 2024 product roadmap there.

William Lampen, Analyst

Does it enable you guys to be a little bit more aggressive, I guess, with first-party products next year also or should we think about, I guess, sort of the same relative mix that we saw sort of this year and in the past?

Jason Robins, CEO

As the iGaming sector expands, the opportunity to spread our investments across a larger revenue base becomes clearer, making it increasingly appealing to invest in first-party products and to bring more operations in-house, including some of the longer tail games. While we will always collaborate with third-party partners due to certain content rights, our ability to grow our revenue base will support these efforts. We aim to innovate and develop unique games that will help us gain market share, even if that means impacting third-party games. As we grow, we expect to see a stronger economic justification for incorporating some of the longer tail games that we don’t currently have.

William Lampen, Analyst

Yeah. Makes sense. Thank you.

Operator, Operator

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

Michael Graham, Analyst

Thank you. I want to follow up on the product development topic for a minute. You had such a great pace of innovation over the last couple of years. Like can that accelerate over the next couple? And related to that, one of the things we've seen historically from the great big tech giants, I'm thinking like Netflix, Google, Facebook, they've been able to institutionalize an engineering-led product development ethos that has really enabled them to kind of extend leadership over time. I'm just wondering how prominent that is in your strategic thinking?

Jason Robins, CEO

I mean, that is absolutely essential on our strategic thinking. We've said pretty much from day 1 that product wins, and that is, first and foremost, the thing that we feel like has to be at the absolute forefront of the industry in order to be the best. Obviously, there are a lot of other things that go into customer experience, marketing, analytics, many other elements of the business are important, and we invest across those too. But really, the heart and soul of the organization is product and technology. And I think you're absolutely right that that's something that we really feel like over the last several years has been a differentiator, really from day 1 has been a differentiator for us. And as far as the first part of your question, the pace of innovation, I actually expect it to increase. A lot of the work that we had to do once we had acquired our own technology platform and then some of the cleanup afterwards, that was really ongoing until late into 2021. So it's really been less than two years that we've kind of had just full runway. Not to mention the fact that there’s many other infrastructure investments that we had to make over time that now positioned us to just more rapidly innovate. So we’re always balancing whether it’s implementation of AI to improve developer efficiency on our PAM, we’re building out an API-driven structure so that teams outside of the PAM team can unlock different features in there and integrate products in a better way. We’re always trying to think about not only how do we innovate for the customer, but also velocity and pace of innovation. How do we make our teams more efficient, how do we make them quicker. And some of that, as you said, is cultural for sure. But there is also an infrastructure investment piece of just making it easier. And as it gets – the organization gets larger or more jurisdictions, the natural tendency is for it to get more complex. So there’s just a constant, I think, push on our end to not accept that and to try to drive more efficiency so that we can innovate at a faster velocity.

Michael Graham, Analyst

Thank you, Jason.

Operator, Operator

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

Jed Kelly, Analyst

Thank you for taking my question. As you engage more customers in various sports and introduce more parlay products, does that lead to a decrease in the volatility of your ability to forecast hold? Does it become more consistent? Also, regarding the fourth quarter guidance, does it assume that the hold percentages observed in October will continue into November and December? Thank you.

Jason Robins, CEO

So on the first question, I think really, just as we get more data in, as the market matures, everything, whether it's hold rate or any other metric of the business, the forecasting gets tighter and tighter, which is great. I do think we're already pretty tight on full forecast in terms of expected hold. There's just sport outcome. And as far as your question on mix and how it affects it, really, as time goes on, having more variety, meaning more sports, more different types of bets will certainly make it more steady. So as live betting grows, as more sports get adoption, all of that, it's exactly what you think like the more concentrated in one type of bet or one sport, anything is the more susceptible you are to sport outcome effect. So as time goes on and as the base matures and as more people play more things and try more products, we do expect that volatility to decrease. And also, as we see more iGaming, I think same thing, more iGaming states will also smooth it out because the whole rate does not vary as much on iGaming based on any sort of outcome-driven event. So that's a couple of ways to think about it. As far as the Q4 guide, we’ve assumed structural hold. The same – we did see some favorable sport outcomes kind of the opposite of Q3 in October. So I wouldn’t necessarily say the exact hold in October is what we expected in the remainder of the year, but we believe that structural hold will be in line, and we sort of always take an outcome agnostic approach when we’re forecasting but then appropriately build into our guidance range, all sorts of different scenarios that might occur.

Jed Kelly, Analyst

Thanks. Great quarter.

Jason Robins, CEO

Thank you.

Operator, Operator

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

Ryan Sigdahl, Analyst

Hey. Good morning. DraftKings hasn't participated directly via its DFS business. But any thoughts on Michigan, New York, Florida, all cracking down on the illegal betting and player props via DFS and some of your competition there? And secondly to that, could that potentially be good for your sports betting OSB player prop business in New York and Michigan?

Jason Robins, CEO

Yeah. It's a good question. I definitely think that cracking down on the illegal market is a good thing for us. And the AGA, I believe, I hope I don't mess this number up, said that just in legal betting states alone, there's about $4 billion right now of revenue leakage that's happening into the illegal market. So it's a real issue and probably costing states close to $1 billion in tax revenues at this point. So definitely a big deal and something that we're happy to see states doing. But we haven't really thought about any direct impacts on the business. It's not something we contemplate in our guidance and I think depending on the situation, there could be a potential for some of that revenue to leak into the illegal market to come back into the legal market. And if that happens, we certainly hope that we get our fair share of it.

Ryan Sigdahl, Analyst

Impressive performance guys. Good luck.

Jason Robins, CEO

Thank you.

Operator, Operator

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

Jordan Bender, Analyst

Great. Good morning. From the market share gains in recent quarters, I was wondering if you guys had a sense of how much of that is true player conversion coming from other apps versus finding new players in the existing space versus even hold rates pushing a GGR share and just overall growing the market? Thank you.

Jason Robins, CEO

I think it's a combination of multiple things. I mean, internally, we see all of our metrics going in the right direction. Retention rates are up, hold rates up, promotional reinvestment rate across OSB and iGaming is down. All of that independent of any sort of competitor of wallet dynamics, all of that is true. So just sort of based on that math, yes, that certainly led to a reasonable amount of the share increase. It's really hard to say how much of it is that, how much of its new players coming into the market and us disproportionately acquiring those players relative to competition and then retaining those players better relative to competition versus truly stealing players from competitors. We don't really know. We certainly know that amongst some players that they have tried multiple apps. And we think they're getting them to decide that we're the best and where the place they want to concentrate their play is an advantage, but it's hard to say historically how much of share gain has been driven by one factor or another.

Jordan Bender, Analyst

Great. And then for my follow-up, Jason Park, I believe you said you're assuming next year 5% legalization that's legalized not launched yet. Is that to say you guys are moving away from assuming incremental legalization within your revenue guidance?

Jason Park, CFO

That's correct. Our revenue guidance includes assumed launches of states that in total represent 5% of the population.

Jordan Bender, Analyst

Thank you very much.

Operator, Operator

One moment for our next question. Our next question comes from Stephen Glagola with TD Cowen. Your line is open.

Stephen Glagola, Analyst

Thanks for the questions. DraftKings took pretty significant OSB share in New Jersey in Q3, and the state license, I think, got to like almost 49%. Can you just provide some more color on what's driving that, what you're doing with the VIP activity there? If you can quantify on the revenue upside for the quarter, how much was driven by New Jersey? And then do you expect this market share to be maintained in Q4 and 2024? Thank you.

Jason Robins, CEO

Very good question. New Jersey has been a real great story for us. It was our first state. It continues to be one of our largest states. But early on, we got off to a hot start and then we, candidly, in our first state had a weaker product at that point, and we lost a lot of share to the competition and ended up dropping down quite a bit relative to where we are today. And I think the team is really focused on building out that great experience, driven by a great product, and we're winning across segments from the most casual to the VIP in New Jersey. All of our segments are performing well. Customer acquisition continues to be very strong in New Jersey, whoever thought that once New York and Connecticut and everywhere else in Pennsylvania launch that New Jersey would not have any growth anymore, I was wrong, continue to see quite a bit of customer acquisition and growth in New Jersey and iGaming has been around for like a decade there and continues to grow at a steady clip. So I think when you kind of put all that together, New Jersey has obviously always been a big focal point for us, and we knew that there was a lot of opportunity to recapture there given that it was our first state, and we've made so many enhancements to our products in some of the early days. And we're very grateful that many customers have given us a shot and have seen a lot of the product and experience improvements that we've made.

Stephen Glagola, Analyst

Thank you.

Operator, Operator

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

Chad Beynon, Analyst

Good morning. Thanks for taking my question. Understanding that the focus remains in North America, given some settling out in some international markets, given regulation changes. Has anything changed just in terms of the risk-reward kind of looking outside of North America given where your product is right now and where the balance sheet is?

Jason Robins, CEO

We obviously are aware of the global gaming market. And I think long term, there's a lot of upside for us there. We believe that the product and technology investments and other operational infrastructure, marketing infrastructure we're building will be very portable throughout the globe. That said, we also understand that the largest market in the world is developing right now, and we're in a really strong position. And a lot of what we feel has helped us and benefited us has been our singular focus here. So that's something that we're very cognizant of. And as we think about longer-term opportunities, it's really important that we always keep that in mind and continue to make sure that the focus is here. And if we can figure out over time a way to find other ways to capitalize on the global opportunity, we will. But certainly would never do so at the expense of our focus in the U.S., which obviously we think is just the tremendous opportunity in front of us. And as I said, I think a lot of what's benefited us is having that focus, and we don't want to give that up easily.

Chad Beynon, Analyst

Thanks. Appreciate it.

Operator, Operator

One moment for our next question. Our next question comes from John DeCree with CBRE. Your line is open.

John DeCree, Analyst

Good morning, everyone. I'll address several topics. I have a question regarding consumer behavior from your perspective. Could you share your observations on how customer behavior differs between more established states and newly launched ones, particularly regarding average betting and deposit sizes? Are these metrics you track? How have these figures been changing? I'm curious if new states are adopting these practices more quickly or starting at a more advanced level compared to older markets. It’s a broad question, but I would appreciate any insights you can provide on these trends.

Jason Robins, CEO

Yes, that's a great question, and there's a lot of insights that can be gained from examining the various states. To address your question from a high-level perspective, as you've pointed out, the penetration rate among the adult population has certainly increased. This surge means we are attracting a larger and more diverse base of customers, not just those similar to what we acquired in earlier markets. We're also engaging customers that we brought in later in those markets. Nevertheless, the initial group remains highly valuable. We’ve observed that this growing influx of new customers has significantly improved our customer acquisition cost (CAC) efficiency in many of the new states during the early phases. Moreover, improvements in our product and customer relationship management (CRM) processes are also playing a role. Customers in new states tend to start with a higher engagement with our new products compared to those in older states, where it can be harder to shift established behaviors. This leads to better immediate monetization. Overall, we're witnessing a positive influence from both product and CRM enhancements, which are boosting our performance metrics right from the start. The rapid penetration of a broader customer base, including both casual and dedicated customers, is benefiting us greatly. We're seeing very favorable CACs compared to the early stages of entering new states, and the lifetime values from these initial cohorts remain robust.

John DeCree, Analyst

Understood. Thanks, Jason. I appreciate the additional color.

Operator, Operator

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

Jason Robins, CEO

Thank you all for joining us on today's call. Really excited about 2023, shaping up to be an excellent year for DraftKings. So proud of the team for our Q3 results and looking forward to closing the year with a bang. And really equally, if not more, excited about 2024 and beyond, lots of great things ahead on the product side and also very excited to be having a very meaningfully positive adjusted EBITDA year for the first time. So lots of good milestones ahead. We're excited about the opportunity, and we look forward to sharing additional insights at our Investor Day on November 14. I hope everybody has a great rest of the next couple of weeks. We'll see you again on November 14. Thanks.

Operator, Operator

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