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DraftKings Inc
Earnings Call Analysis
Q2-2024 Analysis
DraftKings Inc
DraftKings has achieved significant growth in new customers for online sports betting (OSB) and iGaming, with an increase of nearly 80% year-over-year. Importantly, the customer acquisition cost (CAC) has declined more than 40% over the same period. Despite no new state launches, the company has successfully expanded its user base efficiently. The management is optimistic that this strong trend in customer acquisition will continue through the latter half of the year and beyond, especially as the U.S. online gaming market potentially grows larger than previously anticipated.
To address the high tax rates in certain states such as Illinois, DraftKings plans to implement a gaming tax surcharge in four states where multiple operators are subject to tax rates above 20%. This initiative will start on January 1, 2025, and is expected to provide additional revenue, boosting adjusted EBITDA in 2025 and subsequent years. Illinois' sports betting tax rate increase will, therefore, be counterbalanced by this surcharge strategy.
The integration of Jackpocket, a recent acquisition, is progressing well. DraftKings expects this move to yield positive adjusted EBITDA by the fiscal year 2025, aligning with their multiyear guidance provided during the acquisition announcement.
DraftKings has revised its revenue guidance for fiscal year 2024 to be between $5.05 billion and $5.25 billion, representing a year-over-year growth rate of 38% to 43%. This is due to strong customer acquisition, retention, and engagement trends, and the addition of Jackpocket and the recent launch in Washington, D.C. Adjusted EBITDA guidance has been updated to a range of $340 million to $420 million, a downward revision influenced by the Illinois tax rise and robust new customer acquisition. For 2025, the company anticipates adjusted EBITDA in the range of $900 million to $1 billion.
The DraftKings Board has authorized a share repurchase program for up to $1 billion of Class A common stock. This reflects the company's confidence in its growth trajectory and its ability to generate significant free cash flow in the coming years.
DraftKings has recently launched in-house player prop wagers for major sports leagues including the NFL, NBA, and MLB, enhancing their Sportsbook product. They have also expanded progressive parlays and plan to integrate a bet-and-watch experience with NFL streaming. For iGaming, DraftKings and Golden Nugget Online gaming apps have achieved top rankings in recent surveys. The company is set to double the number of new game releases this year compared to last year and has improved its app interface to enhance game discoverability.
DraftKings reported $1.104 billion in revenue for the second quarter of 2024, marking a 26% year-over-year increase and achieved $128 million in adjusted EBITDA. Adjusted gross margin for the second quarter stood at 43%, driven by the efficiency in customer acquisition and reinvestment in promotions. The company is maintaining a balance between revenue growth and operational efficiency, ensuring sales and marketing, product, technology, and general administrative expenses remain aligned with expectations.
Addressing questions on the state-by-state market access agreements, DraftKings considers most of their long-term deals favorable, but acknowledges some room for optimization. As high-tax states implement surcharges, DraftKings aims to continue its investment in these markets, avoiding a pullback on promotions and state-specific marketing.
DraftKings is focused on leveraging their data-driven approach to adjust customer acquisition spending based on market conditions. Despite potential headwinds from taxes and competitive pressures, they are optimistic about sustaining their growth trajectory. By dynamically adjusting marketing investments, the company aims to retain and engage customers effectively.
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Good day, and thank you for standing by. Welcome to DraftKings First Quarter 2024 Earnings Call. [Operator Instructions] Please be is advised that this conference is being recorded. I would like to turn the call over to your speaker today, Alan Ellingson, DraftKings Chief Financial Officer. Please proceed.
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 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 DraftKing's financial results prepared in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release and presentation which can be found on our website and in our quarterly report on Form 10-Q filed with the SEC.
Hosting the call today, we have Jason Robins, Co-Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on the business. Following Jason's remarks, I will provide a review of our financials. We will then open the line to questions.
I will now turn the call over to Jason Robins.
Good morning, and thank you all for joining. There are 5 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 4 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 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 in 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 #1 and #2 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.
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 [indiscernible] 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 continue 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 $5.05 billion to $5.25 billion from a range of $4.80 billion to $5 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, D.C.
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 in our recent Sportsbook launch in Washington, D.C. For 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 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 represent 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 Instructions] Our first question comes from David Katz with Jefferies.
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 fleshing out the strategy a bit more would be really helpful.
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 to the other ideas for how to implement something like this that might be better than what we came up. We thought through this quite a bit, but you never know. So we do have some time between now and June 1 and we'll see what happens.
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.
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, D.C., 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 see still $900 million to $1 billion in adjusted EBITDA next year.
Our next question comes from Sean Kelley with BofA.
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 guidance right now implies some reacceleration. You haven't -- you've only given explicit revenue guidance that seems to be kind of the undertone here. So would 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.
Yes, 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 of marketing, new customers get new customer promotions. 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 hit the bottom line a little bit or will for the remainder of the year. It didn't actually -- we're still seeing improved revenue.
So that just kind of 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, that's needed 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 4 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. 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 EBITDA -- in adjusted EBITDA next year.
Our next question comes from Stephen Grambling with Morgan Stanley.
Just want to maybe follow up on Sean'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? Or are you still seeing even greater uptick from existing states?
So we are not seeing an increase in the existing player cost. It's all new player-driven and mix-driven so 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 2 big states, Ohio and Massachusetts launch in Q1. So this year, there were less new state launches around this time frame and none in Q2.
We did have DC launched 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 on to the DraftKings platform and product. We definitely saw a boost in conversion and got some lift on there. But really, it's been across states, across products.
Our next question comes from Joe Greff with JPMorgan.
Jason, I 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's healthy. What if that environment changes to the downside? How do you react? How do you pivot?
Yes, great questions. I mean, we, I think, have been very consistent in that we don't react competitively. We make decisions based on our 3-year payback rule and what our data says our customer acquisition spend is returning. So as we noted, we had an over 80% increase -- an almost -- excuse me, 80% increase in new players in Q2 year-over-year and an over 40% CAP decline.
I mean those are just massive numbers, right? So when you're me looking at those numbers and your marketing team is coming to you and saying, "We can deliver more productive spend with the same type of results," it's hard to say no to that, right? And we've been monitoring cohort quality closely. I mean everything looks really, really solid.
So I think it's just a particularly strong environment right now. The market is growing quickly. I think it's just really -- you got to fish when the fish are biting, so to speak. So I think that's the way to think about it. It's absolutely offensive and really more so just kind of following the data. And by the same token, to your second question, if it goes the other way, we'll follow it back the other way.
So the good news for us is the vast majority of our marketing spend is flexible. We can move in and out of it very quickly. A lot of it is digital, even the TV, we can move out of in a matter of days usually. So really, it's quite easy for us to make adjustments as we see what's working and at what levels. And same way that when the data is telling us we should be investing deeper because the paybacks are really strong. If we start to see the opposite or if we start to see a decline in cohort quality, we can easily adjust there.
And Alan, when do you start becoming a cash taxpayer with the gaming -- what's the corporate -- cash corporate tax rate?
We'll probably start paying a minimum amount of cash taxes in '25 and '26, but we don't expect to run through all of our NOLs until '27 or '28 at the soonest.
Our next question comes from Clark Lampen with BTIG.
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, I guess in absence of obvious changes, I guess, from last quarter to this one, from like a launch dynamic standpoint, what's creating, I guess, the sort of more favorable environment that you're leaning into?
Is it sort of more of a push factor where tax 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 has something sort of picked up in terms of interest that suggests the TAM maybe really is expanding at a faster pace than we expected right now?
Yes, it's a great question and hard to exactly pinpoint, but I think it's a combination of both the things that you said primarily. So one, as we've increased our state footprint, we've talked about this for years now, how this is kind of 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.
So as we've grown our state footprint, you're absolutely right. It just continues to improve our efficiency, which allows us to unlock the ability to reach a little bit deeper and spend a little bit more in pockets that weren't meeting our payback thresholds previously.
Secondly, I do think that there's just a ton of momentum in the industry right now, lots of buzz with NFL season. It's only going to get bigger because this is the most busy time of year for us, typically from a customer acquisition perspective, I guess, the Super Bowl, but the whole NFL kind of NBA, that whole fall time frame is usually the biggest overall period.
And really, I see no reason to think that, that's going to slow down. Obviously, as noted earlier, we're going to be very closely monitoring the data. And if we see any changes, we'll adjust our spend and adjust our approach. But right now, I think, if anything, you'd expect it to build because we're in really the least busy time of year, and we're still seeing very strong customer acquisition. So I don't know why that would slow down going into the busiest time of the year.
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 tech for Jackpocket. There have been some rumors of other sort of smaller scale deals. Football season last year was a pretty good reminder of result swings and the potential for sort of intra-quarter outflows. Is it fair to think that, I guess, utilization of that buyback authorization might be more of a '25 event? And if so, is this something that's going to be more formulaic in nature? Or would you hope to be a little bit more tactical and take advantage of the bigger dislocations, I guess, in the stock price?
I think we anticipate being able to buy back the $1 billion of Class A shares over the next 2 or 3 years. We would like to be ideally be formulaic with it, create some consistency. But I do expect it to take more than just the next little while to get fully finalized.
Yes. And it will be a mix. I mean, we'll have certainly some flexibility, as you noted, to take advantage of any dislocations in the share price. But as Alan noted, I think the bulk of it will be formulaic.
Our next question comes from Robert Fishman with MoffettNathanson.
Curious, are you guys seeing any signs of consumer weakness in your -- some of your older states maybe? And how would you think about the impact on OSB and iGaming, if we see any more of 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, curious, did you see anything last year? Some of your competitors did, I think, have this functionality. So 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.
Yes. I think on your first question, we're seeing absolutely no signs of any weakness in the consumer whatsoever. Hard to know how much of that is unique to our industry versus macro. But really, on our end, we're seeing super strong healthy cohort behavior across the board. And as noted, customer acquisition is really at an all-time high as well.
So everything looks really good on that front for us. On the bet and watch side, it wasn't really that we saw anything last year and anything our competitors did. It was more that we wanted to do this all along. It's a great thing that we think will add a lot of value to our customers. Doing live betting just didn't make the cut. We had so many other great things that we were trying to get done last year.
And I think to do it in a sort of haphazard way was in our style, we want to do it right. So we really want to make sure it wasn't just some kind of hack together, integration of a video fee, but it was a true experience that we are creating because if somebody tries it, we want them to say this is great and come back and you only get one shot at a first impression.
So I think we felt like between -- the other things that we [ add ] on our road map and our desire to make sure we did this in the right way, we decided it would be better off for this coming season.
Our next question comes from Ben Miller with Goldman Sachs.
I guess just back on the gaming tax surcharge. Can you just talk about the thought process behind using a surcharge as the mitigation measure as opposed to a more discrete 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?
Sure. So definitely discussed and thought there are a lot of different ways of doing it. And as I said, some better idea comes along, we're open to it. I think the important thing is that if you look at sort of the way it's typically done in other industries, whether it be hotel taxes or even the sales tax that you pay when you buy something at the store, taxis, you name it.
It's typically line itemed out separately and usually 100% passed along to the consumer. In this case, we're obviously subsidizing a chunk of it. So we just thought that was most sort of in line with how it's typically done versus trying to obfuscate it, which also isn't consistent with our commitment to be transparent to our customers and be very customer-friendly in everything we do.
So I know there's maybe benefit to hiding it because maybe people don't notice, but I think over the long term, customers appreciate transparency. And even if they don't love their state implemented a high tax and some of that is being passed along, I think they prefer that to not knowing if it were buried in the pricing or something else.
Was there any A/B testing that you guys done that you could share any customer behavior from that?
No, we haven't. We actually -- still, there's work to do to implement it. And I think it's hard to A/B test something like that. What we are doing is we're launching in 4 states. So we'll certainly see the impact there. And obviously, it won't be a perfect AB test, but I think that we have enough comparable data from other states and enough of an understanding of what we would expect from consumer behavior that I think, will have a pretty clean read on the impact but it is a nominal amount.
If you look at the materials we provided in the investor presentation, for Illinois, for example, if you meet a $10 bet to win $20, it would be a 37-ish -- 30-something, I forget the exact number charge. So obviously, some people might just react negatively to the idea of being charged at all. But it's really fairly nominal, and it makes a huge difference in our ability to make a reasonable margin. And also, more importantly, to compete with the illegal market, which pays no taxes and has the ability to invest 100% of their revenue into product and other things.
So for us to be able to be competitive with the illegal market and invest properly in products and customer experience in a state that has a very high tax rate. We feel it's an important step that consumers will ultimately understand. And if they feel the product and experience is better, then they'd rather pay for that than somewhere else that maybe doesn't have as strong a product.
Our next question comes from Robin Farley with UBS.
I wanted to ask, when you think about strategy in Latin America, is that something you would pursue sort of organically or something that you might look to use M&A to get a stake in that market? And then just quick follow-up question on the earlier commentary about the increased acquisition -- customer acquisition. Your market share looked pretty consistent year-over-year. I guess, how should we think about what's the time lag between the higher customer acquisition and that showing up in the market share numbers?
So a couple of things. One, to answer your question on Latin America. We would probably not do it organically if we were to pursue. It would be through M&A. That said, we don't currently have any plans to do that either. I think we're really focused, as we've noted in the past, on winning the U.S. online gaming opportunity.
In fact, just in the last couple of months, we divested VSiN, we shuttered Reignmakers. So I mean we're more focused than ever on our core. And I think that's just been a mantra and a theme throughout the company is focus, focus, focus. So definitely want to make that point. But were we to do something, I think it would likely be through M&A for that very reason.
We don't want to take a big chunk of our brain [ thrust ] here and distract them with something like that. And then -- I'm sorry, second question on share. So hard to know exactly because I would assume that if we're seeing robust customer acquisition and our competitors are as well. So I don't know if that's unique to us. If it were unique to us, it should show up pretty quickly within a quarter or 2 of acquiring the customers.
But I think the caveat is my guess is that the entire market, the entire industry is experiencing very strong customer acquisition right now because -- well, I guess there could be some things like in the case of the Golden Nugget migration that we're getting a little bit of an extra boost from. But for the most part, we're seeing it across states, across products. So I think it's more of a macro industry trend as much as anything else.
Our next question comes from Dan Politzer with Wells Fargo.
First one, in terms of that stronger customer acquisition, retention and engagement. If I just look at your slide deck, it's a positive revenue of about $177 million, but a drag in terms of EBITDA. But that compares with your first quarter where both of those figures were positive, right? They would add the incremental adjusted EBITDA. So I guess the question is, is there any way to kind of break out this $23 million EBITDA loss as part of your bridge, as it relates to better monetization of existing customers versus maybe the drag of acquiring new customers?
Yes. It's a great question. I mean I think that the best way to think about it is if you assume that the incremental revenue from existing customers flows through somewhere in the 50-ish percent range. Maybe a little bit higher, but somewhere around there, then you can kind of back into what comes from each.
And the other thing I'd note, too, and I just want to make sure people understand this as well because I think it's an important point. When we talk about revising EBITDA guidance and incremental customer acquisition cost, even if we didn't spend any more money on marketing, new customer promos come from just more customers coming in. So if we under forecasted, which in this case we did the number of new customers that were we expect to acquire this year.
And even if we spent zero more dollars on advertising on marketing, we would still see a headwind, which is in that line you're mentioning from new customer promos because just more people signing up means more new customer promos. So that's a good thing. It's not a bad thing.
Obviously, it creates more profit over the long term. But it's something that really is not within our control. And I think a good long-term element of what we believe is a large and growing TAM. But in the end, unless we took away new customer offers, which we would never do, that's something that we can't really control.
Got it. And then just quickly for my follow-up on the surcharge. In those states, that you're going to implement that. Are there additional steps that you're going to 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?
Yes. I think part of the idea is to do this in place of that, so we can continue to invest in the state. I think New York is a great example where everyone -- all companies have -- including DraftKings have pulled back heavily on promotions and in-state marketing investment. And I think that's fine. That's one way of doing it. But another way is to say, "Look, I'm going to adjust so that we're effectively at a 20% tax rate, which is in line with a lot of other states, and I'm going to invest at the level that I would invest in a 20% tax rate state."
We'll have to see which one works better, but my guess is that, that's going to work better because it allows us to make the investments in product and promotions and marketing and all the other things that should continue to create long-term growth.
Our next question comes from Joe Stauff with SIG.
Jason and Alan, 2 questions, please. I wanted to see if you could, Jason, sort of describe, say, the iCasino. First opportunity at this point. You have GNOG fully ramped up and launched. And in particular, was it a material contributor to your MUP growth? And then the second piece is just wanted to ask about, say, the economics of customer acquisition in existing states. We're aware, obviously, of that initial golden cohort.
But just wondering how and what you've seen in terms of the economics and the LTVs for all the cohorts after that? Whether it be year 2 versus year 3 and so forth. I guess the main question is like in year 2 and year 3, based on what you can observe, are the economics very different between them? One would think, over time, it'd be lower, but I was just wondering what you're observing.
Yes, it's a great question. So starting off, as we noted, we're seeing customer acquisition outperform really across board, really states and products alike. That said, GNOG has been a bright spot ever since we migrated on to the DraftKings products and platform, which is a much more positive customer experience, better conversion flows, all those sorts of things. We have definitely seen GNOG spike.
So that was a material contributor for sure. It's still relatively small compared to DraftKings, but we're very excited about the potential for that brand and the growth that we're going to see there. So more to come there, but definitely an important contributor to the outperformance on customer acquisition.
And then the cohort question. We've noted this in the past as well, for sure as time goes on, you see some decline in cohort quality. It's a thing that we look at every single day. And it's not just a matter of time. Obviously, time is one factor, but you also see different LTVs based on what sport you acquire a player on or whether a player gets acquired on to iGaming versus onto OSB first.
There's a number of different factors that we have noted that definitely drive differential LTVs. Obviously, the state that they're acquired and played in, based on tax rates and other elements like whether there's iGaming. So lots of complex variables that go into how we look at LTV. But certainly, one of them is that there is an underlying quality of the player that declines as time goes on because, of course, you're going to get your strongest players in the first year or 2 of a state launch.
So that is something that we factor in. We closely monitor it. It tends to asymptote out after a little bit of time. So it's not like it just perpetually declines. Usually, you kind of get that first year or 2 depending on the state where you get the strongest players and then it kind of flattens out. But no doubt, players are getting a few years in or weaker than the players you get day 1.
Our next question comes from Carlo Santarelli with DB.
First off, I just wanted to clarify some -- as it pertains to the 80%. The 80% growth in customers, does that include the Draft -- the Jackpocket customer base?
No. That's just new customers on to the DraftKings brand and GNOG as well.
And GNOG, okay. That's helpful. And then secondly, just to follow up, Jason, on your response to, I believe it was Dan's question around the $177 million of net revenue and the [indiscernible] I know you said 50% flow-through on the existing customers. Is it fair to -- that more or less, estimate that the existing customers are likely generating, call it, more than $177 million of incremental net revenue, as the new customers would carry kind of negative net revenue through the rest of this year through the payback period? And hence the math is kind of like 200 to 300 from new customers. And then looked at the other way, you take 50% flow-through for the EBITDA. And look at what the delta is on the acquired customers. Is that accurate?
That's close. So new customers that we acquired, say in Q2, will definitely generate positive revenue by the end of the year. But their new customer promo will also be a significant chunk of the play. What is it about? 3 or 4 months after customers acquired that they -- so depending on the timing, many of them would be negative this year, but some would get positive. So it's a little bit complicated to think about.
But the best way that I would think about it is separate out. Instead of thinking of it at a customer level, think of it as we're spending X more promo dollars because of new customers. And those promo dollars are going to flow through somewhere around 90% on to the bottom line, and that's how you can bet. And then the rest of the revenue, the positive revenue flows through in the 50s, and that's how you can back into it.
Our next question comes from Bernie McTernan with Needham & Company.
Maybe just to start, sticking on the EBITDA bridge for '25 or moving over to '25. How much of the stronger customer acquisition retention engagement, that line that's offsetting the Illinois, how much of that is really truly existing customers versus customers that you've acquired this year?
Sorry. Say it one more time?
Yes. In the EBITDA bridge, so Illinois is a big negative and then the big offset is the customer retention engagement line. So want to know how much of that is driven by truly existing customers that you acquired before this year and better outperformance there versus the customers that you have been and expect to acquire this year?
2025, right? Is that -- I don't know proportionately how it breaks out. Do you know the answer to that?
We won't break it out for this call, but disproportionate amount of it is the existing customers. New customers tend to ramp up over time. So you can assume that it's a little bit heavier on the existing customers, and the performance on the retention and the engagement of our existing customers. And less on the new customers, which we're still exploring the value of.
Okay. Perfect. And then just given the focus on higher tax rate states, is the contribution profit margin significantly different in those high tax rate states versus the lower ones?
Well, pre-reinstituting the fee, definitely the contribution margin is different because even with reduced promo and marketing, you still can't like -- I mean it depends on the state, right? I guess New York is probably the one I'm thinking of when I'm answering your question. 51% tax on gross revenue is just -- you can't overcome it to a point where it's going to be in line with the other states margin-wise. But obviously, it depends on the state and some states that are closer to that 20%, we can call back most of it through promo and reduced advertising.
Our next question comes from Jed Kelly with Oppenheimer.
Just circling back on the surcharge, maybe a different way to ask it. What would cause you not to potentially implement it? And then just real quickly on hold, some of the hold trends are obviously different. But have you seen any change in how you view your structural hold? Or your parlay mix? Or are you changing like, hey, it's more important to drive engagement and to maximize hold?
Yes. Great question. So as of now, I don't think there would be any reason that we wouldn't implement it. But obviously, we're paying close attention to customer feedback. And if we hear anything that makes us change our mind, we'll certainly let you know. I think on the hold side, we continue to focus very much there. I think it's largely still a bet mix thing.
Certainly, we feel like there's a ton of room to increase our parlay mix and increase our average leg count still. So team is very focused on that. I think we're also focusing though on other parts of the betting platform as well, such as live betting. So it's a little bit more balanced probably than I think maybe last year where it was just all about whole rate and bet mix, but we're still very focused on that mix.
And then just real quick, anything to call out on shutting down Reignmakers in terms of EBITDA drag or headwind?
Yes. Reignmakers is fairly immaterial. So I wouldn't factor it in, in any way. I think for us, it's really just about eliminating a distraction and then potential risk. And as I said earlier, I think the mantra around the company has been focus, focus, focus. Let's go win the U.S. online gaming opportunity and maximize the amount of profit we're driving in that space. And I think that's what we're focusing on right now.
[Operator Instructions] Our next question comes from Barry Jonas with Truist Securities.
We've seen a number of states starting to react to the offshore market by banning [indiscernible]. Do you see these actions as meaningful to combat the illegal market?
I think so. I mean right now, the illegal market, particularly in the iGaming space ironically, is bigger than ever. I think consumers don't know oftentimes what's legal and what's not. They don't know if it's legal in their state. And there's just zero controls put on these companies that make sure that they're not marketing to minors and other sorts of things. So I do think it's a big issue and it's good to see the regulators starting to focus on it.
And the thing is that there's so much pent-up demand and there's so many people that would prefer to bet in the legal market that I think you're seeing growth despite the fact that there's still a ramp into legal market. But for sure, a lot of the current TAM is still tied up there and both for the long-term health of the industry, as well as for making sure that states are maximizing their revenues and their purpose for doing this, which is to regulate and protect consumers. I think it's absolutely essential that, that continues to be a focus. So I'm happy to see it, and hopefully, we'll see more of it.
Our next question comes from Ben Chaiken with Mizuho.
Two very quick product questions. I guess on integrating -- I'd imagine integrating Jackpocket into the DraftKings' app will be another significant customer acquisition opportunity. I guess, one, do you agree? And two, if so, any color on timing? And then on the bet and watch integration, will that require users to have access to the games themselves? Or will you have an opportunity to kind of tactically subsidize that anyway?
I think the bet and watch is just included. So is that correct? It's not -- yes, there's no additional charge for it. So it's a feature that customers will have, just by being a part of the DraftKings user base. And then -- sorry, what was the first question? Jackpocket. Yes. So we do plan on integrating those products into DraftKings as well as integrating Draft Kings, casino and OSB products into Jackpocket. Timing, we haven't quite determined yet. I think in the past, what we said and I kind of echo is we, long term, want to have all of our products available through all of our brands. And exactly when we implement those things directly versus when we have more linkage through brand-to-brand, cross-sell will depend on other priorities and how that slots into our product road map. But we definitely do plan to do that at some point.
I guess just as a very quick follow-up. Would you agree that integrating it would be a significant kind of customer acquisition catalyst for other portions of the business? Or do you think you've already acquired those customers? Does that make sense?
No. We definitely haven't acquired all those customers. So I agree it would be and that's the reason we're planning to do it. I also think that in the interim, we continue to see Jackpocket as a great vehicle for acquiring those customers and cross-selling them into DraftKings. But we know from experience that having a fully integrated product is always going to yield stronger conversion, stronger cross-sell. So no doubt, you're correct that, that will be a boost.
Our next question comes from Brandt Montour with Barclays
So one more on the surcharge. Just thinking through the potential outcomes of that plan, especially if nobody follows suit. We would think that, that would affect the larger players, the VIPs more. And at the same time, you're accelerating your customer acquisition and penetrating more customers in your 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?
Yes, it's a great question. Certainly, I think the players betting multi-leg parlays and things like that are going to be less sensitive because the payout is already very large. So I get that. I hadn't really thought about how it might affect -- I mean we're hopeful that our product and the investment we're making in our customer experience is strong enough that we get players across the spectrum. And they view us as being worth maybe paying a few extra cents on a bet.
But certainly, we'll have to see how that plays out and it will be something just like everything where we look at the data, and we decide what we do accordingly. I do think that if you run the math, it would take quite a bit of top line deterioration to make it not worthwhile from a bottom line perspective. So I'm optimistic, but we'll have to see and we'll have to follow whatever the data and analytics tell us to do.
Great. Jason, and then just a follow-up on Jackpocket, just piecing together some of your comments, you're investing more in marketing this year in Jackpocket. The integration sounds like a little bit more longer term. So what gives you confidence that you're going to inflect positive in your '25 guide in your -- in that you laid out in your deck? I'm just trying to understand some of the drivers there.
Well, really, it's the revenue growth we're seeing right now on Jackpocket that gives us confidence we'll be able to achieve adjusted positive EBITDA in 2025. So they've been really doing well from that standpoint. Also as a reminder, they have an extremely low CAC. So while we are investing more in, we get a lot of customers for that.
So it definitely makes a big difference in their revenue ramp as well. So I think all signs point towards them being a positive contributor to adjusted EBITDA in 2025 and beyond. But obviously, we'll have to see how the back half of the year plays out, and we'll have more of an update on that in November.
Our next question comes from Jason Bender with Citizens JMP.
I want to talk on your market access agreements. There's obviously not much room to move in some states like in New York and Oregon. But has the supply-demand dynamic changed to the point that states with unused skins can maybe act as a renegotiation tool and be a serious lever to drive cost savings over the long term?
I think there's probably some room there. Most states, we feel we have pretty good deals in already. So I don't think there's a ton where we feel there's a lot of optimization, but I think there's probably some optimization. And it will be a little bit longer term because most of the deals we struck are very long-term deals. So like 7- to 10-year deals.
But I do think as they start to come up, there will be states that have a lot of open skins. And just like anything, it's a supply-demand thing. And I think also even though we got great rates, many of the early states were before -- I think we really established the level of place in the industry that we have. So I think that will hopefully help a little bit, too.
Our next question comes from Ryan Sigdahl with Craig Hallum Capital Group.
Looking at Slide 10, the MUP increased sequentially. Normally, kind of a flattish quarter given seasonality. Up almost $1 million. Are you able to break out how much of that was Jackpocket versus just organic DraftKings and Golden Nugget acquisition?
It was most of the Jackpocket. Obviously, the new customer acquisition boosted it, too, but given the substantial size of their database, it was mostly Jackpocket. No?
No.
I'm sorry. It was not. I got that wrong. Half and half. Okay. I stand corrected. Thanks for people with better data than I have in my brain apparently next to me. So it's about half and half.
Our next question comes from Michael Graham with Canaccord.
Jason, I just wanted to ask about your thoughts on the product and the platform as we head into the NFL season. Obviously, you don't have the tremendous, like upside from introducing same game parlays that you had, but you have the bet and watch feature. But just wanted to kind of hear any comments you're willing to share on how you think the products will perform in this important seasonal period here coming up.
I feel really excited about the product we have going into NFL. A lot of the work we've been doing over the last several months has been more back-end performance stuff. So things that maybe aren't as immediately obvious because they don't show up like front-end features. But things like making sure that pages load faster, making sure that the app crash is less, making sure markets are up for longer and we have less time where markets are locked or unavailable. Adding new bet types, bringing in-house our pricing and trading for many new sports. And also, launching things like cash out for same game parlay.
So we have a lot of really exciting new stuff. We expanded progressive parlays to include new types of bets as well, And more to come. Obviously, bet and watch hasn't launched debt, and we have a number of other features that we haven't announced that we have planned for the coming months. A lot of what we do, really all of what we do revolves around a calendar starting in the fall. So the team thinks about it as what do we want to ship in the August, September time frame?
And how do we then -- starting at the beginning of the year, orient our entire product road map and calendar around that. So a lot of the product that we ship is going to be done over the next 3 to 6 weeks. And I think you'll see a lot of new stuff pop up as the season approaches.
Our next question comes from Chad Beynon from Macquarie.
Jason, I wanted to ask about, I guess, the temperature of some of the tribal news that's been out there. Obviously, a big decision that we learned a few months ago in Florida. Does this change the landscape of other tribal states in terms of what you believe they could offer? And then more importantly, your ability to partner with these companies. Could that accelerate some of the TAM, if they decide to move forward on digital?
Yes. I do think that there is some momentum in travel communities now and obviously, Draft Kings already has a number of partners that are tribes in various states, including Foxwoods, the Pequot tribe in Connecticut, Passamaquoddy in Maine, Bay Mills in Michigan, several others. I don't want to leave any out, but it probably left a few out.
But we continue to believe that we are the partner of choice and also that we've had a great track record, if you talk to any of our tribal partners of being great partners. And I think just like anything, it takes time and education sometimes in some states like California, where there's over 70 tribes. I think that there, it's obviously about getting alignment as much as it is about openness. And so each one -- each state is a bit unique, just like all states in all regards politically and otherwise are unique in their own way.
So we kind of have to look at it that way. But I do think there's some momentum now more than ever. I think you're seeing -- we're seeing tribes come to us and ask about what we can do. Minnesota is one that I think is another tribal state that got very close to passing a bill this past session. And I'm hopeful that it gets done next session, and that was all about the tribes and the tribes agreeing to a deal. So sometimes, it's not even about openness. It's about getting different stakeholders within the state to align.
Our next question comes from Jeff Stantial with Stifel.
Maybe digging a bit further into some of the commentary on iCasino player acquisition. Jason, you talked about some sequential uplift to conversion rates from the Golden Nugget platform transition. But looking at this more strategically, I guess, has your philosophy on investing towards that iCasino-led player cohort changed at all, now that Golden Nugget is fully integrated.
Historically, I believe the strategy has been more to focus on cross-sell sports users versus acquiring that higher CAC, higher LTV iCasino-led player. But just curious if you're thinking here shifted around at all based on the returns that you're seeing with this recent user acquisition offset?
Yes, I think so. I mean I wouldn't really describe it as a philosophical change as much as us continuing with the philosophy of following the data and the analytics. And putting our dollars where we feel -- where we see the best returns. So naturally, as you noted, when you see an increase in performance on GNOG, then that would mean that more dollars should flow there because it's performing better. And therefore, should get a higher proportion of our acquisition spend.
So we definitely are moving dollars around based on performance and what we're seeing, and that's always been consistent with what we've done. But the result, as you noted, has been some shift towards that iGaming first customer acquisition investment, which I think -- again, it's all just kind of where do we get the best return, right? It's not that we think cross-sell is inherently a better way of doing it.
It was just and still is, by the way, that that's where we get the bulk of our iGaming customers, and that's the most efficient means of doing it. But certainly, where we see opportunity to invest directly in acquiring an iGaming first customer, we're also taking advantage of that.
Our next question comes from Lance Vitanza with TD Cowen.
Congratulations on a great quarter. I just have one question regarding the surcharge, but it does have 3 parts. And maybe just to focus 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 just trying to get a sense for the potential upside beyond the $900 million to $1 billion guide to the extent that the surcharge is successful. Obviously, I'm talking about fiscal '25.
Yes. So the way we calculated it is we set the amount such that -- we are targeting DraftKings covering 20% of gross revenue and taxes. And so basically, the way to think of it is any tax rate that's higher than 20%, we would be paying up to the 20%. And then the remaining would be the fee is designed to offset.
So in a state like New York, where the tax rate is 51%, that's a large number. Obviously, the big question is, do we see any deterioration in handle and top line as a result? But you can do the math and see it would take quite a bit because if you think about 51% versus 20%, that's 60% of the taxes that we're paying in New York. And you could do the math on that from all the public reports, it's a big number. So you need to see a substantial decline in handle to get to a point where you were fully cannibalizing that. And obviously, if we saw that, we would reconsider our plan, but I think there's quite a bit of cushion there.
Well, and my gut tells me that customer activity would actually be highly inelastic, at least, around mid-single-digit surcharge on winnings. But -- and I know you haven't done A/B testing, but do you have any data that you've seen that would bear this out, I mean, other than just our guts?
Yes. I think you're right, by the way. The best data we have is really from either other industries or from our industry and other parts of the world. There are other places where online gaming companies charge customers more because of the tax regime in countries like Germany or Australia as an example.
It's not done exactly in this way, but it's conceptually very similar. Also, we noted this earlier on the call, but a number of industries from hotels to taxis, all have taxes in various states that get charged to the customer. And people may gripe about it, but I don't really see behavior change because of it. So you're right, it depends on the level.
I think in the mid-single digits, our belief is that when you compare it to sort of other industries as well as sort of what we just got checked [indiscernible] seems fair and seems reasonable to a customer. It seems like this is a good zone for us, but we'll only find out when we do it. It's hard -- you can't really A/B test something like that.
Right, right. And last part of my question, I'm glad that you're making the surcharge visible to consumers. As you point out, black market operators pay 0 tax, a 40% tax and obviously, referring to Illinois here. That seems shortsighted, unfair and ultimately counterproductive. And I'm wondering, if part of the calculus in making the visible -- making the surcharge visible, is that intended to raise awareness around this issue? Do you think you could possibly generate grassroot support for more rational tax policy, i.e., lower rates?
Well, there's certainly an element there that entered into our thinking. Obviously, you're right. When you have illegal operators paying zero tax, that's pretty tough to compete with at any level. But when it starts getting higher than 20%, it just becomes untenable. So I do think that in absence of us doing something like this, why wouldn't more states consider it?
It's not getting passed to their customers. They're not hearing from their constituents, and we haven't -- in New York, done anything differently or nobody in the industry has. So I do think that this is something that may make some states to reconsider because, now they may be hearing more from their citizens that they don't like it. Obviously, they wouldn't be hearing anything if we -- from people that weren't being charged.
It's not like -- I guess, maybe they hear from like local teams that aren't getting as much sponsorship spend, but not from the massive voters that bet on sports. But in the end, I think states are going to decide based on a number of [indiscernible]. I mean, if you look at some of the comparisons I mentioned like taxis and hotels. It's not like you don't pay for that when you go to in New York. So I think some states feel like because of where they are and because of the value proposition they bring that they can have higher costs in certain things.
And that's not up to us. That's a policy decision that they're going to have to make. And as a business, we have to make the business decision that we have to make accordingly. But certainly, we will continue to advocate for taxes that allow us to compete more with the illegal market. And I am hopeful and I believe most states do see that. If you look, the vast majority of states around the country have tax rates of 20% or under. It's just a handful that don't.
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.
Well, thank you all for joining us on today's call. We are really optimistic about the second half of 2024 and are excited and well-positioned for success in the future, 2025 and beyond. Thank you for your continued support.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.