Earnings Call Transcript - DKNG Q2 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to DraftKings' Second 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 like to turn the call over to your speaker today, Alan Ellingson, DraftKings' Chief Financial Officer. Please proceed.

Alan Ellingson, CFO

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.

Jason Robins, CEO

Good morning, and thank you all for joining. There are five key points that I'd like to focus on during our call today. First, we are achieving strong and efficient customer acquisition. New OSB and iGaming customers increased nearly 80% year-over-year, while CAC declined more than 40% year-over-year in the second quarter, a period with no new state launches. We anticipate the healthy customer acquisition environment to continue through the back half of the year and possibly beyond, which may indicate that the U.S. online gaming opportunity could be even larger than we previously thought. Second, we believe we have a reasonable solution for high tax states, including Illinois. We plan to implement a gaming tax surcharge in the four states that have multiple sports betting operators and tax rates above 20% starting January 1, 2025. We believe additional upside potentially exists for adjusted EBITDA in 2025 and beyond from this gaming tax surcharge. Third, the Jackpocket integration is off to a great start. We are on track to hit the multiyear guidance for the transaction that we provided in the announcement and expect the deal to generate positive adjusted EBITDA in the fiscal year 2025. Fourth, we are excited about the future and are reiterating our expectation for $900 million to $1 billion of adjusted EBITDA in fiscal year 2025. Finally, we said last quarter that we would provide an update on capital allocation. We are pleased to announce that our Board authorized a share repurchase of up to $1 billion of our Class A common stock. This inaugural authorization reflects our conviction in the strong trajectory of our business and our expectation that we will generate significant free cash flow in the coming years. I'd also like to emphasize that all of us at DraftKings are very excited for the start of football season. Our product is in a great position as we are continuing to differentiate ourselves by investing in new features and functionality for Sportsbook and iGaming. In Sportsbook, we recently launched in-house player prop wagers for NFL, NBA, MLB, NHL, college football, college basketball, and tennis. We also broadened our progressive parlays to include spread and total wagers. In addition, we plan to integrate a bet and watch experience with NFL streaming. In iGaming, the DraftKings and Golden Nugget Online Gaming apps were ranked number one and number two overall in a recent third party survey. We are on track to double the number of new games we will release this year compared to last year and recently improved our interface to promote game discoverability. In closing, our business fundamentals are very healthy and we are excited about the second half of 2024 and beyond. With that, I will turn it over to Alan Ellingson.

Alan Ellingson, CFO

Thank you, Jason. I'll hit the financial highlights, including our second quarter 2024 performance and our updated 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 strong in the second quarter. We generated $1.104 billion of revenue, representing 26% year-over-year growth and $128 million of adjusted EBITDA. Importantly, customer acquisition exceeded our expectations as new to DraftKings, OSB and iGaming customers increased nearly 80% year-over-year. Customer retention and engagement were healthy and resulted in handle that exceeded our expectations. Handle was strong even with fewer than anticipated NBA playoff games. Structural Sportsbook hold percent improved year-over-year in line with our expectations to approximately 10%. Adjusted gross margin for the second quarter was 43%, primarily due to better than expected customer acquisition and the corresponding promotional reinvestment. Operating expenses, including sales and marketing, product and technology, and general and administrative expenses were consistent with our expectations as we continued to balance revenue growth with operating efficiency across the organization. Moving on to our fiscal year 2024 guidance. We now expect revenue in the range of $5.050 billion to $5.250 billion from a range of $4.800 billion to $5.000 billion. The updated range equates to year-over-year growth of 38% to 43%. The increase in revenue guidance is driven by strong customer acquisition, engagement and retention trends for our existing customers as well as the inclusion of Jackpocket and our recent launch of Sportsbook in Washington, DC. We are also revising our fiscal year 2024 adjusted EBITDA guidance to $340 million to $420 million from the range of $460 million to $540 million. The revision takes into account Illinois raising its Sportsbook tax rate, strong new customer acquisition expectations, as well as the prior mentioned inclusion of Jackpocket and our recent Sportsbook launch in Washington, DC. From fiscal year 2024, we now expect our adjusted gross margin to increase modestly. We expect sales and marketing expense to increase at a mid to high single digit rate year-over-year. The increase is primarily due to the investments in the Jackpocket brand. We continue to expect the bridge between adjusted EBITDA and free cash flow to be approximately $100 million based on approximately $120 million of annual capital expenditure and capitalized software development costs, as well as a modest source of cash from changes in net working capital combined with interest income. And we continue to expect 2024 stock-based compensation expense to be flat to down in dollar terms on a year-over-year basis and represents approximately 7% of revenue in fiscal year 2024. Looking ahead to fiscal year 2025, we continue to expect adjusted EBITDA in the range of $900 million to $1 billion due to our underlying business momentum, including the benefit of higher customer acquisitions in the second half of 2024. We believe additional upside potential exists when we apply the gaming tax surcharge in those noted high tax states that have multiple online Sportsbook operators, which we are not including at this time. We expect to provide more details on our fiscal year 2025 guidance with our next earnings report in November. That concludes our remarks. We will now open the line for questions.

Operator, Operator

Thank you. Our first question comes from David Katz with Jefferies. Your line is open.

David Katz, Analyst

Thank you, and good morning. I appreciate all the information. What I was really hoping to do was just talk about the surcharge for a moment, which is an interesting strategy, and how you thought about the degree to which competitors may or may not follow, and how you react under those circumstances? Just flushing out the strategy a bit more would be really helpful.

Jason Robins, CEO

Thank you, David. Great question. I think every company has to do what's best for their own business. I think we believe this is what's best for us. And I would imagine that if that's our calculus, then others would come to the same conclusion. But we really don't know and we'll have to see. And, obviously, there might be other ways, too, that other ideas for how to implement something like this might be better than what we came up with. We thought through this quite a bit, but you never know. So we do have some time between now and January 1st, and we'll see what happens.

David Katz, Analyst

Right. Interesting. And as a quick follow up, just with respect to putting the surcharge aside, if we think about the impact that we should be reflecting in our models for Illinois, assuming no surcharge, any help, Alan, as to how we might sort of think through that impact and include it for the future, just a lot going on in there?

Jason Robins, CEO

I'll answer quickly and then Alan can add any detail. But I think the best way to think about it is the overperformance that we are seeing with customer acquisition. The launch of Washington, DC, our expectation for Jackpocket to deliver positive EBITDA next year, as well as underlying trends with our existing customers and outperformance on the handle side. All should offset the Illinois tax increase next year. So even if we don't get any benefit from the fee, we will still see $900 million to $1 billion in adjusted EBITDA next year.

David Katz, Analyst

Yes. Okay. Okay. Thank you very much.

Operator, Operator

Our next question comes from Shaun Kelley with BofA. Your line is open.

Shaun Kelley, Analyst

Hi. Good morning, everyone. Jason or Alan, I think a lot of the rest of the subject of the sort of update here is about the increased customer acquisition environment. Obviously, some of the continued investments you're making. So the impact here seems to be — the net is obviously higher revenue expectations and lower profit flow throughs. Specifically asking about kind of 2025 to start, just the implied — the implied guidance right now implies some reacceleration. You haven't — I don't think you've given explicit revenue guidance. That seems to be kind of the undertone here. So what in your mind would kind of cause the environment to change from where we're at today? And if it doesn't, what would some of the offsets potentially be for DraftKings as we kind of move into next year? And, let's say, the customer acquisition environment remains rich and you continue to see strong adds there? Thanks.

Jason Robins, CEO

It's a great question. Just to explain a little bit about what's going on. One, even if we didn't spend another dime on marketing, new customer promos increase with new customers. So, you're right, that has a drag on revenue and EBITDA, and we're seeing enough outperformance on the revenue side elsewhere that while it certainly hits the bottom line a little bit for the remainder of the year, it didn't actually stop revenue from improving. That demonstrates, I think, the underlying strength of the business and the customers that we're seeing. So when you kind of put all that together next year, we do expect to get a little bit more revenue, because we'll need that to offset, in order to make the math work to offset the Illinois gaming tax increase. So that's kind of how you get to the $900 million to $1 billion. And then any additional upside beyond that Illinois gaming tax amount would be either revenue driven or from the impact of the fee that we're instituting in those four states. And then as far as the potential for hot customer acquisition next year, that can always happen. Right now, we feel we've built in some degree of the increased trends we're seeing. And obviously, a lot of that will depend on if there's more state launches and things like that. So, I think, you could sort of think of this as a same-state basis type of thing again. And obviously, if there's more state launches next year and more customer acquisition investment, then that might change things a bit. But that just means bigger numbers longer term over the following year. So, I think, that's the right way to think about it. But as of today, I see no reason to think that on a same-state basis, we wouldn't be able to deliver $900 million to $1 billion in adjusted EBITDA next year.

Operator, Operator

Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Stephen Grambling, Analyst

Hi. Thanks. Just want to maybe follow up on Shaun's question, but ask it in a different way. Are you seeing any change in the cost to sustain and engage existing players? And also on the new customer acquisition, is that primarily coming from new states? Are you still seeing even greater uptick from existing states?

Jason Robins, CEO

So we are not seeing an increase in the existing player cost. It's all new player driven and mix driven, meaning mix of new players to existing. And interestingly, it really is across the board. So certainly we got some boost from North Carolina having launched in late Q1. But if you remember, last year we had two big states, Ohio and Massachusetts, launch in Q1. So this year there were fewer new state launches around this timeframe and none in Q2. We did have DC launch recently, but that didn't affect the Q2 numbers that was in July. So really it has to come from existing states if you look at it that way. And then it's really across products, too. We did see some particular strength in the Golden Nugget brand as we migrated onto the DraftKings platform and product. We definitely saw a boost in conversion and got some lift there. But really it's been across states, across products.

Operator, Operator

Our next question comes from Joe Greff of JPMorgan. Your line is open.

Joe Greff, Analyst

Good morning, everybody.

Jason Robins, CEO

Hi.

Joe Greff, Analyst

Jason, just wanted to ask on the higher new user acquisition cost plans in the second half of this year. How much of this is offense, meaning to grow the new user base versus defense versus impacting the competition? And then my follow-up to that is, you mentioned that presently the customer acquisition environment is healthy. What if that environment changes to the downside? How do you react? How do you pivot?

Jason Robins, CEO

Great questions. I think we've been very consistent that we don't react competitively; we make decisions based on our three-year payback rule and what our data says our customer acquisition spend is returning. As we noted, we had an almost 80% increase in new players in Q2 year-over-year and an over 40% CAC decline. Those are significant. When your marketing team is telling you you can deliver more productive spend with the same type of results, it's hard to say no to that. We've been monitoring cohort quality. Everything looks very solid. So it's just a particularly strong environment right now. The market is growing quickly. You have to fish when the fish are biting, so to speak. It's absolutely offensive and really more so just following the data. If it goes the other way, we'll follow it back the other way. The vast majority of our marketing spend is flexible. We can move in and out of it very quickly. A lot of it's digital. Even TV we can move out of in a matter of days, usually. So it's quite easy for us to make adjustments as we see what's working and at what levels. If the data tells us to invest deeper, because the paybacks are strong, we will. If we start to see the opposite or a decline in cohort quality, we can adjust there.

Alan Ellingson, CFO

We'll probably start paying a minimum amount of cash taxes in 2025 and 2026, but we don't expect to run through all of our NOLs until 2027 or 2028 at the soonest.

Operator, Operator

Our next question comes from Clark Lampen with BTIG. Your line is open.

Clark Lampen, Analyst

Good morning, everyone. Thanks for taking the question. Jason, I want to come back to the sort of customer acquisition topic and the comments you made around existing state performance. I'm curious, in absence of obvious changes from last quarter to this one from a launch dynamic standpoint, what's creating the sort of more favorable environment that you're leaning into. Is it more of a push factor where CACs have come down enough where it makes sense to spend more and you can actually reach customer cohorts that you weren't previously addressing, or is something sort of ticked up in terms of interest that suggests the TAM maybe really is expanding at a faster pace than we expected right now?

Jason Robins, CEO

Great question and hard to exactly pinpoint, but I think it's a combination of both things you said, primarily. As we've increased our state footprint, we've talked about this for years: this is the gift that keeps on giving. We see the same cost from a national marketing perspective, regardless of how many states we're operating in. But the bigger your footprint, the more bang for your buck you're getting for it. As we've grown our state footprint, it continues to improve our efficiency, which allows us to unlock the ability to reach a little deeper and spend a bit more in pockets that weren't meeting our payback thresholds previously. Secondly, there is a ton of momentum in the industry right now. Lots of buzz coming up with NFL season. This is the most busy time of year for customer acquisition—Super Bowl aside—so the fall timeframe is usually the biggest overall period. I see no reason to think that that's going to slow down. We're in a relatively less busy time of year and we're still seeing very strong customer acquisition, so you would expect it to build going into the busiest time of year. We'll monitor the data and adjust as necessary.

Clark Lampen, Analyst

Understood. I have a follow up also for Alan, I guess, on the repurchase that was announced today. Alan, you guys just wrote a fairly large check for Jackpocket. There have been some rumors of other smaller scale deals. Football season last year was a pretty good reminder of result swings and the potential for intra-quarter outflows. Is it fair to think that utilization of that buyback authorization might be more of a 2025 event? And if so, is this something that's going to be more formulaic in nature or would you hope to be a little more tactical and take advantage of bigger dislocations in the stock price? Thank you.

Alan Ellingson, CFO

I think we anticipate being able to buy back the $1 billion of Class A shares over the next two to three years. And we would like to be ideally formulaic with it and create some consistency. But I do expect it to take more than just the next little while to get fully finalized.

Jason Robins, CEO

Yes. It will be a mix. We'll have flexibility to take advantage of any dislocations in the share price, but the bulk of it will likely be formulaic.

Operator, Operator

Our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Robert Fishman, Analyst

Hi. Good morning. Curious, are you guys seeing any signs of consumer weakness in some of your older states, maybe? And how would you think about the impact on OSB and iGaming if we see any more macro headwinds in the next couple of quarters? And then shifting gears a little bit, given the expected integration of the bet-and-watch experience with the NFL streaming, did you see anything last year? Some of your competitors had this functionality, I think. Anything that you learned last year about the NFL season that pushed you into this product enhancement? And any early thoughts about exploring these rights for the NBA? Thank you.

Jason Robins, CEO

On your first question, we're seeing absolutely no signs of any weakness in the consumer whatsoever. It's hard to know how much of that is unique to our industry versus macro, but on our end we're seeing super strong, healthy cohort behavior across the board. Customer acquisition is at an all-time high as well. So everything looks really good. On the bet-and-watch side, it wasn't that we saw something last year from competitors that forced our hand; it's something we wanted to do all along. It's a great feature we think will add a lot of value to customers doing live betting, but it didn't make the cut last year because we had many other priorities. We wanted to do it right rather than a haphazard integration of a video feed. We wanted a true experience so that when somebody tries it, they say this is great and come back. We felt that between other roadmap priorities, it was better to launch it this coming season the right way.

Operator, Operator

Our next question comes from Ben Miller with Goldman Sachs. Your line is open.

Ben Miller, Analyst

Thanks for taking the questions. I guess just back on the gaming tax surcharge, can you talk about the thought process behind using a surcharge as the mitigation measure as opposed to a more discreet lever? And then are there any insights you can share around customer behavior from any A/B Testing that you might have done in advance of announcing this? Thanks.

Jason Robins, CEO

We discussed many ways of doing this. The important thing is how taxes are typically handled in other industries—hotel taxes, sales taxes, taxi fees—it's often line-itemed and passed to the consumer. We're being transparent about it, and in this case we're subsidizing a chunk of it. We thought a transparent approach is consistent with our commitment to be customer friendly. Hiding it in pricing may have short-term benefits but isn't consistent with long-term transparency. We haven't done A/B testing. It's hard to A/B test something like this. We're launching in four states and we should see the impact. We have comparable data from other states and an understanding of expected consumer behavior. The fee is nominal; for Illinois, for example, if you made a $10 bet to win $20, it would be roughly a 30-something cent charge. Some people might react negatively, but it's fairly nominal and makes a significant difference in our ability to have reasonable margins and compete with the illegal market, which pays no taxes and can invest all revenue into product and other things. To be competitive in a high-tax state, we feel this is an important step; consumers will ultimately understand. If they feel the product and experience is better here, they'd rather pay for that than go to somewhere with a weaker product.

Operator, Operator

Our next question comes from Robin Farley with UBS. Your line is open.

Robin Farley, Analyst

Thanks. When you think about strategy in Latin America, is that something you would pursue organically or something you might look to use M&A to get a stake in that market? And then a quick follow-up on the increased customer acquisition: your market share looked pretty consistent year-over-year. How should we think about the time lag between higher customer acquisition and that showing up in market share numbers? Thank you.

Jason Robins, CEO

If we pursued Latin America, it would likely be through M&A rather than organically. That said, we don't currently have plans to do that. We're very focused on winning the U.S. online gaming opportunity. In recent months we divested VSiN and shuttered Reignmakers to focus on our core. Regarding market share, if our customer acquisition were unique to us you would see share show up pretty quickly, within a quarter or two. But my guess is the entire market is experiencing strong customer acquisition right now, so much of what we're seeing is broader industry momentum. There are pockets, like the Golden Nugget migration, where we get an extra boost, but for the most part it's an industry-wide trend.

Operator, Operator

Our next question comes from Dan Politzer with Wells Fargo. Your line is open.

Dan Politzer, Analyst

Hey, good morning, everyone. In terms of the stronger customer acquisition retention engagement, if I look at your slide deck, it's a positive revenue of about $177 million, but a drag in terms of EBITDA. That compares with your first quarter where both of those figures were positive. Is there any way to break out this $23 million EBITDA loss as part of your bridge as it relates to better monetization of existing customers versus the drag of acquiring new customers?

Jason Robins, CEO

It's a great question. I think the best way to think about it is if you assume that incremental revenue from existing customers flows through somewhere in the 50% range, maybe a little higher, then you can back into what comes from each. Also note that even if we didn't spend more on marketing, new customer promos increase with more customers coming in. So if we underforecast the number of new customers, even with zero additional marketing spend we would still see a headwind from new customer promos, because more people signing up means more new customer promotions. That's a positive long-term thing, but it creates a short-term profit impact that's largely outside our control unless we removed new customer offers, which we would not do.

Dan Politzer, Analyst

Got it. And then just quickly on the surcharge: in those states that you're going to implement it, are there additional steps you'll implement as well, such as marketing reductions or any other levers you can pull in Illinois, New York, Pennsylvania, to maybe offset some of the higher taxes?

Jason Robins, CEO

Part of the idea is to do this in place of pulling back. We can continue to invest in the state. New York is a great example where everyone—DraftKings included—had pulled back heavily on promotions and in-state marketing. That's one way to handle it. Another way is to adjust so effectively we're at a 20% tax rate, which is in line with many other states, and then invest at the level you would in a lower-tax state. We'll see which works better, but I believe investing will work better over the long term because it allows us to make the product and marketing investments that drive long-term growth.

Operator, Operator

Our next question comes from Joe Stauff with SIG. Your line is open.

Joe Stauff, Analyst

Thanks. Good morning, Jason and Alan. Two questions, please. I wanted to see if you could describe the iCasino-first opportunity. You have GNOG fully ramped up and launched; was it a material contributor to your MUP growth? Second, wanted to ask about the economics of customer acquisition in existing states. We're aware of that initial golden cohort, but what have you seen in terms of the LTVs for cohorts in year two versus year three and so forth? Are the economics very different between them?

Jason Robins, CEO

We're seeing customer acquisition outperform across the board, but GNOG has been a bright spot since migrating onto the DraftKings platform and product, which improved conversion flows. GNOG was a material contributor to outperformance in customer acquisition. It's still relatively small compared to DraftKings, but we see strong potential. Regarding cohorts, over time you see some decline in cohort quality, which we monitor daily. Time is one factor, but also the sport you acquire a player on or whether they are acquired into iGaming versus sportsbook affects LTV. State taxes and product availability also matter. Typically you get your strongest players in the first year or two of a state launch and then it flattens out; it doesn't perpetually decline. So yes, there are differences, but they asymptote after a period of time.

Operator, Operator

Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Carlo Santarelli, Analyst

Hey, everybody. Good morning. First, I wanted to clarify something as it pertains to the 80% growth in customers. Does that include the Jackpocket customer base?

Jason Robins, CEO

No, that's just new customers onto the DraftKings brand. Oh, and GNOG as well.

Carlo Santarelli, Analyst

In GNOG and DraftKings, okay, that's helpful. And then secondly, just to follow up on your response to Dan around the $177 million bridge, I know you said 50% flow-through on existing customers. Is it fair to estimate that the existing customers are likely generating more than $177 million of incremental net revenue as the new customers would carry negative net revenue through the rest of this year through the payback period? Hence the math is kind of like 200 to 300 from new customers, and then looked at the other way, take 50% flow-through for EBITDA and look at what the delta is on the acquired customers. Is that accurate?

Jason Robins, CEO

That's close. New customers acquired in Q2 will generate positive revenue by the end of the year, but their new customer promo will also be a significant chunk of the play. Depending on timing, many of them would be negative this year, but some would get positive. So it's a little complicated. A simpler way is to think in dollars: we're spending X more promo dollars because of new customers. Those promo dollars flow through somewhere around 90% to the bottom line. The rest of the revenue—the positive revenue—flows through in the 50s, and that's how you can back into it.

Operator, Operator

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

Bernie McTernan, Analyst

Great. Good morning. Maybe to start, sticking on the EBITDA bridge for 2025, how much of the stronger customer acquisition, retention, engagement line that's offsetting Illinois is truly existing customers versus customers you've acquired this year?

Jason Robins, CEO

Say it one more time, please.

Bernie McTernan, Analyst

In the EBITDA bridge, Illinois is a big negative and the big offset is the customer retention engagement line. How much of that is driven by truly existing customers that you acquired before this year versus customers that you have acquired this year?

Alan Ellingson, CFO

We won't break it out for this call, but a disproportionate amount of it is the existing customers. New customers tend to ramp up over time, so assume it's a bit heavier on the existing customers and the performance on retention and engagement of our existing customers and less on the new customers, which are still ramping.

Jason Robins, CEO

Pre-instituting the fee, contribution margin is different across states. For example, New York's 51% tax on gross revenue is just very hard to overcome to get margins in line with other states. Some states closer to 20% we can claw back most of it through promo and reduced advertising, but in very high-tax states the economics are challenging without a surcharge or other changes.

Operator, Operator

Our next question comes from Jed Kelly with Oppenheimer. Your line is open.

Jed Kelly, Analyst

Hey, great. Thanks for taking my question. Circling back on the surcharge, maybe a different way to ask it, what would cause you not to implement it? And then on hold, have you seen any change in structural hold or parlay mix? Are you prioritizing engagement over maximizing hold?

Jason Robins, CEO

As of now, I don't see a reason not to implement it, but we'll pay close attention to customer feedback and the data and change course if warranted. On hold, we continue to focus there. It is still largely a bet-mix thing. We see room to increase our parlay mix and average leg count. The team is focused on that and also on other parts of the betting platform like live betting. It's a bit more balanced than last year when it was primarily about hold rate and bet mix, but we're still focused on bet mix.

Jed Kelly, Analyst

And anything to call out on shutting down Reignmakers in terms of EBITDA drag or headwind?

Jason Robins, CEO

Reignmakers is fairly immaterial, so I wouldn't factor it in. For us it's about eliminating a distraction and potential risk. The mantra across the company is focus—let's win the U.S. online gaming opportunity and maximize profit in that space.

Operator, Operator

Our next question comes from Barry Jonas with Truist Securities. Your line is open.

Barry Jonas, Analyst

Hey, guys. We've seen a number of states starting to react to the offshore market by banning offshore operators. Do you see these actions as meaningful to combat the illegal market?

Jason Robins, CEO

I think so. The illegal market, particularly in iGaming, is bigger than ever. Consumers often don't know what is legal, and there are zero controls to ensure companies aren't marketing to minors. It's a big issue; it's good to see regulators focus on it. There is so much pent-up demand for legal options. Growth is happening despite the illegal market, but for the long-term health of the industry and to protect consumers, regulators need to continue focusing on this. It's essential.

Operator, Operator

Our next question comes from Ben Chaiken with Mizuho. Your line is open.

Ben Chaiken, Analyst

Thanks for taking the question. Two quick product questions. Integrating Jackpocket into the DraftKings app seems like another significant customer acquisition opportunity. Do you agree, and any color on timing? And on the bet-and-watch integration, will that require users to have access to the games themselves, or will you have an opportunity to tactically subsidize that in any way?

Jason Robins, CEO

Bet-and-watch will be included as a feature; there is no additional charge for it. On Jackpocket, we do plan to integrate those products into DraftKings, and to integrate DraftKings Casino and OSB products into Jackpocket. Timing hasn't been finalized. Long term we want all products available through all brands, and the timing of direct integration versus brand-to-brand cross-sell depends on priorities and the product roadmap. We plan to do it at some point.

Ben Chaiken, Analyst

Would you agree that integrating it would be a significant customer acquisition catalyst for other portions of the business, or do you think you've already acquired those customers?

Jason Robins, CEO

No, we haven't acquired all those customers. Integrating Jackpocket would be a catalyst, and that's why we plan to do it. In the interim, Jackpocket is a great vehicle for acquiring customers and cross-selling into DraftKings, but a fully integrated product yields stronger conversion and cross-sell.

Operator, Operator

Our next question comes from Brandt Montour with Barclays. Your line is open.

Brandt Montour, Analyst

Hi. Good morning, everybody. One more on the surcharge. Thinking through potential outcomes, especially if nobody follows suit, would it affect larger players, the VIPs, more, and at the same time you're accelerating customer acquisition and penetrating more customers in existing states. Is there a thought that this would potentially move you more to a recreational mix and could that actually help hold longer term?

Jason Robins, CEO

Certainly players betting multi-leg parlays and similar wagers may be less sensitive because payouts are already large. We're hopeful our product and investments are strong enough that players across the spectrum view us as worth paying a few extra cents on a bet. We'll monitor the data and decide accordingly. Running the math, it would take quite a bit of top-line deterioration to make this not worthwhile from a bottom-line perspective, so I'm optimistic, but we'll follow the data.

Brandt Montour, Analyst

Thanks. And on Jackpocket, you mentioned you're investing more in marketing this year. The integration sounds longer term. What gives you confidence you'll inflect positive in 2025 as laid out in your deck?

Jason Robins, CEO

The revenue growth we're seeing at Jackpocket gives us confidence they'll achieve positive adjusted EBITDA in 2025. They've been doing well, have an extremely low CAC, and while we are investing more, they acquire customers efficiently. All signs point to them being a positive contributor to adjusted EBITDA in 2025, but we'll update more in November.

Operator, Operator

Our next question comes from Jordan Bender with Citizens JMP. Your line is open.

Jordan Bender, Analyst

Hey, it's Jordan. Thanks for taking my questions. On market access agreements, there's obviously not much room to move in some states like New York and Oregon, but is the supply/demand dynamic changed such that states with unused skins can act as a renegotiation tool and be a serious lever to drive cost savings over the long term?

Jason Robins, CEO

There is probably some room there. Most states we feel we have pretty good deals already, so I don't think there's a ton to optimize, but there will be some. Most of the deals are long-term—seven to ten years—so optimization will be a longer-term play. As deals come up, states with open skins will be supply/demand dynamics, and earlier deals were struck before we established our current market position, so that could help as well.

Operator, Operator

Our next question comes from Ryan Sigdhal with Craig-Hallum Capital Group. Your line is open.

Ryan Sigdhal, Analyst

Hey, good morning, guys. Looking at Slide 10, the MUP increase sequentially—normally flattish quarter given seasonality—up almost 1 million. Are you able to break out how much that was Jackpocket versus just organic DraftKings and Golden Nugget acquisition?

Jason Robins, CEO

It was mostly Jackpocket. Obviously, the new customer acquisition boosted it too, but given the substantial size of their database, it was mostly Jackpocket. No?

Alan Ellingson, CFO

No.

Jason Robins, CEO

Oh, I'm sorry. That was incorrect. It was not mostly Jackpocket. I got that wrong. It was about half and half.

Ryan Sigdhal, Analyst

Thank you. Good luck, guys.

Operator, Operator

Our next question comes from Michael Graham with Canaccord. Your line is open.

Michael Graham, Analyst

Thank you. Jason, any thoughts on the product and platform as we head into the NFL season? You don't have the same upside from introducing same game parlays that you had, but you have the bet-and-watch feature. Any comments on how the product will perform in this important seasonal period?

Jason Robins, CEO

I'm really excited about the product going into NFL. Much work recently has been on backend performance—pages load faster, fewer crashes, markets up for longer, new bet types, bringing in-house pricing and trading for many sports, and launching things like cash out for same-game parlay. We've expanded progressive parlays to include new bet types and more features are planned. A lot of what we do revolves around the fall calendar, and the team is shipping product over the next three to six weeks. You'll see a lot of new features as the season approaches.

Operator, Operator

Our next question comes from Chad Beynon with Macquarie. Your line is open.

Chad Beynon, Analyst

Good morning. Jason, I wanted to ask about tribal news. Does recent tribal momentum change the landscape of other tribal states in terms of what they could offer and your ability to partner? Could that accelerate some of the TAM if they move forward on digital?

Jason Robins, CEO

I do think there's momentum in tribal communities. DraftKings already partners with many tribes—Foxwoods, the Pequot Tribe in Connecticut, Passamaquoddy in Maine, Bay Mills in Michigan, and others. We believe we're the partner of choice and have a strong track record. Each state is unique; California has over 70 tribes so alignment rather than openness is the issue. There is momentum and tribes are coming to us to ask questions. Minnesota nearly passed a bill recently and I'm hopeful for next session. Sometimes it's about getting stakeholders within the state to align.

Operator, Operator

Our next question comes from Jeff Stantial with Stifel. Your line is open.

Jeff Stantial, Analyst

Great, thanks. Good morning. On iCasino player acquisition, Jason, you talked about sequential uplift to conversion rates from the Golden Nugget platform transition, but strategically, has your philosophy on investing toward that iCasino-led player cohort changed now that Golden Nugget is fully integrated? Historically the strategy focused on cross-sell of sports users versus acquiring higher CAC, higher LTV iCasino-led players. Has that thinking shifted based on returns you're seeing?

Jason Robins, CEO

I wouldn't call it a philosophical change; it's consistent with following data and analytics and putting dollars where we see the best returns. When GNOG performance improved after migration, more dollars flowed there because it's performing better, resulting in a shift toward iGaming-first customer acquisition. Cross-sell remains the most efficient way to acquire iGaming customers, but where we see direct opportunity to acquire iGaming-first customers with attractive returns, we invest there as well.

Operator, Operator

Our next question comes from Lance Vitanza with TD Cowen. Your line is open.

Lance Vitanza, Analyst

Thanks, guys. Congratulations on a great quarter. I have one question on the surcharge with three parts focusing on Illinois. Can you talk about what percentage of the EBITDA lost due to the tax rate increase is the surcharge designed to recapture? I'm trying to get a sense for potential upside beyond the $900 million to $1 billion guide if the surcharge is successful for fiscal 2025.

Jason Robins, CEO

We set the amount such that we're targeting DraftKings covering 20% of gross revenue in taxes. Essentially, for tax rates higher than 20%, the surcharge offsets the portion above 20%. In a state like New York at 51% tax, that's large. The big question is whether we see deterioration in handle. You'd need a substantial decline in handle for the math to make the surcharge not worthwhile. You can run the numbers from public reports—it's a large amount of tax—but there is cushion before the surcharge would be fully offset by declines in handle. If we saw that, we'd reconsider the plan.

Lance Vitanza, Analyst

My gut tells me customer activity would be highly inelastic around a mid-single-digit surcharge on winnings. You haven't done A/B testing, but do you have any data to back that view other than intuition?

Jason Robins, CEO

The best data we have is from other industries and other regions. There are places—Germany, Australia—where online gaming companies charge customers more given tax regimes. Other industries like hotels and taxis have visible taxes in many places and behavior generally doesn't change drastically. It depends on level, but mid-single digits in our view is reasonable and consistent with other industries. We can't fully A/B test something like this, but we believe it's in a reasonable zone and we'll see the outcome when implemented.

Lance Vitanza, Analyst

Last part: you're making the surcharge visible to consumers. Is part of the calculus to raise awareness so you could generate grassroots support for more rational tax policy—i.e., lower rates?

Jason Robins, CEO

There is an element of that. When illegal operators pay zero tax it makes it tough to compete, especially when rates exceed 20%. In the absence of action, states may not hear from constituents who bear the brunt. This could make some states reconsider. Ultimately states decide policy based on many factors; many states already have tax rates at or below 20%, and we will continue to advocate for taxes that allow us to better compete with the illegal market.

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

Well, thank you all for joining us on today's call. We are really optimistic about the second half of 2024 and are well positioned for success in 2025 and beyond. Thank you for your continued support.

Operator, Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.