DraftKings - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue grew 20% year-over-year to $1.409B, but modestly missed S&P Global consensus; Adjusted EPS of $0.12 was a significant beat vs Street expectations.
• Management lowered FY2025 guidance to $6.2–$6.4B revenue and $800–$900M Adjusted EBITDA, citing customer‑friendly March outcomes and tax/regulatory headwinds (Maryland rate increase; Jackpocket exits in TX/NM), while emphasizing stronger structural hold and promotional efficiency.
• Core metrics improved: structural Sportsbook hold rose to 10.4%; adjusted gross margin reached ~45% amid rising parlay/live adoption; MUPs grew 28% to 4.3M (ex‑Jackpocket +11%), ARPMUP $108 (ex‑Jackpocket +7%).
• Stock reaction catalyst: Large EPS beat and Q2 guide (> $200M Adjusted EBITDA) juxtaposed with lowered FY guide; narrative centers on random outcome volatility vs. strengthening fundamentals (structural hold, promo efficiency, live betting).

What Went Well and What Went Wrong

What Went Well

• Rising structural hold and promo efficiency lifted adjusted gross margin to ~45%, despite unfavorable sports outcomes.
• Strong customer acquisition and engagement; MUPs +28% YoY to 4.3M; ex‑Jackpocket +11% YoY; ARPMUP steady ex‑Jackpocket (+7%).
• Management confidence in randomness of outcome volatility; quote: “We are 100% confident that these are random outcomes... structural hold and hold should converge over time.” — Jason Robins.

What Went Wrong

• Customer‑friendly March outcomes (NCAA tournament favorites historic win rates) pressured revenue/EBITDA and led to lowered FY25 guide.
• ARPMUP −5% YoY to $108 due to lower Jackpocket ARPMUP vs core DK customers.
• Tax/regulatory headwinds (Maryland tax increase; Jackpocket exiting TX/NM) cited as ~$30M revenue and ~$26M Adjusted EBITDA drags on FY25.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the DraftKings First Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael DeLalio, Senior Director of Investor Relations. Please go ahead.

Michael DeLalio (Senior Director of Investor Relations)

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 10Q filed with the SEC.

Hosting the call today, we have Jason Robins, Co-founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business. Following Jason's remarks, our Chief Financial Officer, Alan Ellingson, 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 (Co-founder and CEO)

Thank you, Mike. Good morning, everyone, and thank you all for joining. We are off to a strong start to the year. If not for customer-friendly sport outcomes in March, we would be raising our fiscal year 2025 revenue and adjusted EBITDA guidance. There are four important takeaways that we are sharing today. First, our core value drivers are outperforming our expectations. Our product enhancements are driving higher structural Sportsbook hold percentage and more efficient deployment of promotions, while Sportsbook handle is strong and consistent with our expectations. We now expect revenue to grow 32% year over year in fiscal year 2025 and 36% year over year spanning the second through fourth quarters. Second, sport outcomes were once again customer-friendly in the first quarter. A favorable Super Bowl was more than offset by favorites dominating the men's NCAA basketball tournament.

For the first time in tournament history, all four number-one seeds reached the Final Four, and three number-two seeds and one number-three seed reached the Elite Eight. Across the entire tournament, higher seeds won at an 82% rate, which was the highest rate in history. We acknowledge that customer-friendly sport outcomes have impacted recent quarters, and are continuously analyzing our data, including historical performance by bet type, to fully understand the gap between our structural and actual hold percentage. Our analyses provide us strong confidence that the recent volatility we've experienced is random in nature. Third, we are well-positioned for the evolving macroeconomic environment. Online gaming was resilient in more mature jurisdictions globally during the global financial crisis, and today our customer metrics continue to be strong and consistent with forecasted trends. We are also beginning to realize efficiency as broader corporate demand softens in areas such as advertising.

Fourth, we have a healthy balance sheet. We completed the first quarter with $1.1 billion of cash after repurchasing $3.7 million of our shares. Looking ahead, we expect our balance sheet to strengthen further as free cash flow accumulates. With that, I will turn it over to our Chief Financial Officer, Alan Ellingson.

Alan Ellingson (CFO)

Thank you, Jason. I'll hit the highlights, including our first quarter 2025 performance, as well as our fiscal year guidance. Please note that all income statement measures discussed, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, our core value drivers are outperforming our expectations. In the first quarter, we generated $1,409,000,000 of revenue, representing 20% year-over-year growth and $103,000,000 of adjusted EBITDA. New customer acquisition was consistent with our expectations and highly efficient, as we continue to leverage our brand and scale while optimizing our marketing channel mix. Sportsbook handle increased 16% year-over-year to $13.9 billion and was consistent with our expectations, as the NCAA men's and women's college basketball tournaments attracted strong customer activity. For the jurisdictions where we were live in Sportsbook before 2024, handle increased 11% year-over-year.

Structural Sportsbook hold percentage of 10.4% outperformed our expectations and was an increase of 60 basis points year-over-year, driven by partly handle mix increase of 370 basis points year-over-year. Actual Sportsbook hold percentage was 9.5%, as a favorable Super Bowl was more than offset by customer-friendly NCAA basketball tournament outcomes. Promotional reinvestment, as a percentage of gross gaming revenues, was more efficient year-over-year, even with the previously mentioned customer-friendly sport outcomes at the end of the quarter. Our adjusted gross margin increased more than 100 basis points year-over-year to 45%, as a result of both the higher structural Sportsbook hold percentage and the improved promotional efficiency. Adjusted operating expenses slightly outperformed our expectations as we worked to integrate recent acquisitions while maintaining cost discipline across the organization. Now I'll touch on our fiscal year 2025 guidance.

In February, we guided fiscal year 2025 revenue of $6.3 billion-$6.6 billion and adjusted EBITDA of $900 million-$1 billion. Today, in light of Q1 results, we are revising our fiscal year 2025 revenue guidance to $6.2 billion-$6.4 billion and adjusted EBITDA of $800 million-$900 million. Importantly, if not for customer-friendly outcomes in March, we would be raising our fiscal year 2025 revenue and adjusted EBITDA guidance ranges at this time. Core value drivers continue to improve, reflected in our higher structural Sportsbook hold percentage and the optimization of the deployment of promotions. Sportsbook handle has been strong and consistent with our expectations. These trends account for $50 million higher revenue and $37 million higher adjusted EBITDA across the full year. Customer-friendly sport outcomes year-to-date were a headwind of $170 million to revenue and $111 million to adjusted EBITDA.

Maryland increasing its tax rate on sports betting and Jackpocket shutting down digital lottery courier operations in Texas and New Mexico are a combined headwind of $39 to revenue and $26 million to adjusted EBITDA. We are also providing additional fiscal year 2025 guidance detail. We continue to expect Sportsbook net revenue margin of 7%-7.5%, as we anticipate higher structural Sportsbook hold percentage and increased promotional efficiency to offset the impacts from customer-friendly sport outcomes year-to-date. We now expect our adjusted gross margin to be 46%, an improvement of more than 300 basis points year-over-year compared to fiscal year 2024. We continue to expect stock-based compensation expense to represent 6% of revenue in fiscal year 2025.

We expect the bridge between adjusted EBITDA and free cash flow to be approximately $100 million and therefore expect to generate free cash flow of about $750 million in fiscal year 2025. For the second quarter, we expect revenues to increase approximately 25% year-over-year and for adjusted EBITDA to exceed $200 million. That concludes our remarks. We will now open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from David Katz with Jefferies. Your line is open.

David Katz (Managing Director)

Good morning. Thanks for taking my question. I wanted to just raise the issue of M&A, not from a perspective of will you or won't you, but rather what are the boundaries as you see them today? Use of equity, tolerance for leverage, trajectory to accretion, anything that you can give us some perspective on. Thanks.

Jason Robins (Co-founder and CEO)

Thank you, David. I think the best way to think about it is M&A, like anything, is just part of an overall evaluation of what's the best way to create value for our shareholders. I think including the questions you asked around how, if you did do M&A, you would ultimately think about equity versus debt versus cash on the balance sheet. A good example of that would be some of the acquisitions we made last year, like Simplebet, SportsIQ, and Mustard Golf, which really we're now seeing pay dividends in our increase in live handle, as well as the cost reductions we've seen by bringing those costs in-house, which alone were enough to pay for the deal.

That we thought was a great use of shareholder capital because even with no revenue upside, which we do believe is there, we were easily paying back at our thresholds of cost of capital. Things like that, I think, may make sense, but they're really part, as I said, of an overall evaluation, including buybacks and other organic investments that we can be making as well.

David Katz (Managing Director)

Quickly, as my follow-up, I wonder if you all share some of the stress that we have over the conversation of hold and structural hold versus actual hold. Are we sure we have the right structural hold, and do we get there, and when? I suppose there is a bunch of discussions in there. Yeah, thanks.

Jason Robins (Co-founder and CEO)

No, I mean, listen, I'd be asking the same thing because we've had a couple of really bad quarters in a row in terms of outcomes. This quarter, as past quarter, was looking great until March Madness. That does happen. We have analyzed, as we always do, everything thoroughly, and we are 100% confident that these are random outcomes. I think another way to think about it, too, is that even if there were something that fundamentally changed, like I've heard theories like NIL is driving more winning amongst the top-ranked teams in college sports. First of all, we didn't see that in college football. Certainly this year, there were a lot of favorites that won in the college basketball tournament, 82%, which was an all-time high. One year does not a trend make, but it is something, of course, that has a legitimate theory behind it.

In that case, it wouldn't change who the favorites are. It wouldn't change that customers are betting on favorites. It would just optimize the lines a little bit. To your question, if that is something that's going on, the models will pick that up, and it will converge. Unless there's fundamental changes that are happening on a frequent basis in sport, structural hold and hold should converge over time. Part of sport is that there are randomness to outcomes, and things happen. That's why people watch sports and want to bet on sports. It's part of what makes the customer experience great. There are periods where you're going to have quarters, two, three in a row sometimes with bad outcomes, maybe even more, but obviously there could be the opposite, too. We'll just have to kind of wait and see if things normalize.

I expect they will because they always seem to.

David Katz (Managing Director)

Thank you very much.

Operator (participant)

One moment for our next question. Our next question comes from Shaun Kelley with Bank of America. Your line is open.

Shaun Kelley (Managing Director and Senior Research Analyst)

Hi, good morning, everyone, and thank you for taking my questions. Jason, maybe we could just start with the big question we received across the board is around handle growth and sort of what we've seen broadly across the market. A lot of your commentary in the letter was really positive around that. Just to put a fine point on it, have we seen a deceleration as you kind of move through Q1 and into April as we lap North Carolina? Two, do you expect trends to pick up from here, and what would drive that if you do?

Jason Robins (Co-founder and CEO)

Yeah, it's a great question. I mean, we've seen pretty strong hold growth this year. Definitely a little bit of a slowdown in April relative to Q1, but still seeing strong growth in April. It's only down a bit. I think that is much of a sports seasonality type thing. NBA was a little bit weaker this year than some, but the playoffs have actually been picking up. I don't expect Q2 to be too bad. I think it's probably going to end up being high single digits to low double digits growth would be my guess in terms of overall handle. As a perspective, March was 14% up year-over-year for us. The quarter, as you know, was up 16%. Baseball year-to-date is up about 16%. Those are some data points that might be helpful in thinking about where things are headed.

Shaun Kelley (Managing Director and Senior Research Analyst)

That's great. Just for a quick follow-up, iGaming was an area that sort of tracked a little bit behind what we were thinking and a little bit behind state-reported GGR figures if we did the math right. Your comments there, was there something going on as it relates to promotion or bonusing? What are you doing to kind of get that product on an NGR basis back up to the growth rates we might expect, which might be a little closer to high teens than the 14% that was in the quarter? Thanks.

Jason Robins (Co-founder and CEO)

I mean, we believe it should be even higher. April, we were in the mid-20s percentage growth year-over-year, 26%. So really feel like that's where we should be trending. We made some significant changes and improvements, I think, in both the product as well as the marketing and operations and promotion deployment. I think the combination of those things have led to accelerated growth in April, and we expect that to continue.

Shaun Kelley (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

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

Stephen Grambling (Managing Director)

Hey, thank you. Maybe following up on both David and Shaun's questions, but tying in promotions, looks like they were down as a percentage of handle year-over-year. How should we be thinking about where promotions as a percentage of handle should shake out in the year and/or longer term? Any impact you think about that having on handle as well?

Jason Robins (Co-founder and CEO)

Yeah, I think it's going to be a balance as structural hold rises to think about it in terms of handle. I think thinking about it as a percentage of hold of GGR or even structural hold, I think, is a good way to think about it as well. I do, we've said this for a time, and it will continue to go down even if nothing else changes in terms of other optimizations because of the mix of new users becoming less and less of the total user pool over time, total customer pool. That, I think, is part of what happened in Q1. I think the other point I made is that GGR, we expect, sorry, hold rate, we expect to continue to rise as the product continues to develop and as more and more customers shift into parlays and things like that.

If that happens, then I think you could potentially see a flattening or even slight rise in terms of promo as a percentage of hold, but it should definitely continue to decline as a percentage of GGR.

Stephen Grambling (Managing Director)

That's helpful. Maybe an unrelated follow-up, in the release and in the letter, you talked about an AI kind of first strategy with the business. Where are the biggest opportunities to leverage and/or deploy AI, or where is it currently being used?

Jason Robins (Co-founder and CEO)

I think this has been a real big win for us over the last quarter or so, maybe two. It's gone from something where pockets of the company were utilizing it to becoming a company-wide movement. It's really great to see. I mean, one example I point to is that all the time we would see people thinking about, "What can I do if I had more headcount?" and now people are totally shifting that mindset to, "What could I do with AI?" It's just an amazing thing. As far as where opportunities are, it's really across the board on both the revenue and cost side. There's not a place that you can't see efficiency gain throughout the company.

Everything from documents being created and summarized and customer service not having to spend 45 minutes to an hour tracking down dozens and dozens of emails or other communications a customer sent because an AI tool can summarize everything that's been happening in a case to date in two seconds, actually less. It's just really a remarkable thing to see how much people have really started to understand how this can be life-changing and business-changing, and we're leaning in really hard.

Stephen Grambling (Managing Director)

Sounds great. Thank you.

Operator (participant)

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

Robin Farley (Managing Director and Leisure Analyst)

Great. Thanks. I wonder if you could talk a little bit about your market share in basketball. It seemed like, given the strength or the acceleration of your handle growth overall in the quarter, some others talked about softness in handle in basketball. I wonder if you could tell us a little bit about maybe if there was some share shift there. Thanks.

Jason Robins (Co-founder and CEO)

Yeah, I do think we believe we gained some share. I think a big part of the story here has been live betting. Live betting is up significantly for us year-over-year. Really, I think some of the investments we alluded to earlier, like Simplebet and some of the others, I think have really helped us accelerate our live betting options. I think also those are coming with better hold and stronger adoption at the same time, which is the perfect combination. That has been a big part of the story of what's driving our handle up, and I do think we've gained some share.

Robin Farley (Managing Director and Leisure Analyst)

Great. Just as my follow-up, I wonder if you could help us think about how growth rates should look. You talked about handle being up 16% in the quarter and for the pre-2024 states up 11%. Not a surprise, right, that maybe some of those initial growth rates slow, that we should expect that and all. Can you help us also think about even more what that rate of growth looks like sort of over a period of two or three years, right? If we looked at the 20 states that started in 2021 versus states in 2022 versus 2023, sort of what that rate of sort of maybe maturing handle would look like?

Jason Robins (Co-founder and CEO)

Yeah, it's hard to look at handle in isolation because remember, one of the things as a state matures, there's a number of metrics that move together to drive increasing contribution profit. Handle growth is obviously one of them, but also our hold rate is going up. Promotions continue to decline as states mature, and marketing spend continues to go down as states mature. Those things all combine to create significant inflection of contribution profit. Obviously, we'd like our handle growth to be as strong as possible, but we don't really look at it in isolation. We look at it as one of multiple things that we're monitoring. Sometimes when you're doing things like reducing promo and increasing hold rate, that's not going to always maximize the handle growth, but it still might be the optimal cocktail. That's always how we look at it.

Robin Farley (Managing Director and Leisure Analyst)

Okay. Very helpful. Thank you.

Operator (participant)

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

Ben Miller (VP)

Great. Thanks so much for taking the questions. Can you just talk about the underlying dynamics around the handle accelerationd versus the MUPS deceleration when you exclude Jackpocket? Any color you can provide on what you're seeing in the cohort data by vintage around handle versus users would be helpful. Thanks.

Jason Robins (Co-founder and CEO)

Yeah, I think the Q1 MUPS were actually consistent with our expectations, but we did see that handle acceleration you mentioned. As I said, a big part of that is live betting. Live betting in Q1 was actually up to greater than 50% of our total handle, the first time that's ever happened. We think there's even more upside from there. As we've said, we've seen stats that it's as high as 70-80% of GGR in some cases for operators in more mature markets. We think there's a ton of opportunity there, really happy to see that. MLB live handle, it's early in the season, but it's up 36% year-over-year for April. Really great to see. We think there's a ton of upside there. As we noted in the last couple of quarters, that's where we've been leaning in.

Certainly also continue to focus on driving pre-match handle and bet mix, and also been a great story on the bet mix side. We've had tremendous year-over-year gains in terms of both SGP and parlay mix and overall average leg count.

Ben Miller (VP)

Great. Just on the prediction markets, obviously a lot of moving pieces there, but I'm curious how your conversations with state legislators and tribes have evolved in the context of prediction markets and whether that's catalyzing states that are not legal to refocus efforts in some way.

Jason Robins (Co-founder and CEO)

It's definitely something that they're talking about, and it's early days, so it's hard to say at this point that it's really catalyzed anything because we haven't seen any states that are like, "Yeah, we're going to do this now." I think step one, which, as you noted, is getting their attention and making them start having those conversations. We are seeing that happen. I think as it continues to grow, that's just going to continue to be a powerful lever that this is happening kind of whether you want to or not. Do you want to do it in a way that makes sense if you're a California tribe or if you're a state that hasn't legalized it yet that allows you to prosper? Or do you want to watch it happen somewhere else? I think that's something that everybody's talking about right now.

Ben Miller (VP)

Great. Thanks so much.

Operator (participant)

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

Brandt Montour (Director and Equity Research Analyst)

Good morning, everybody. Thanks for taking my question. First one on OSB, could you remind us what is implied for structural hold in the second half of 2025 guidance, particularly NFL? Maybe talk through the lens of parlay mix. What are you looking for in terms of parlay mix lift year-over-year in the second half versus the trajectory that you were on as of the first quarter year-over-year?

Jason Robins (Co-founder and CEO)

Yeah. In terms of the back half, structural hold should be a little north of 11%. It's going to be a bit lower, like just below 11% in Q3 and then over 11% in Q4. I think that's the best way to think about it. Really, the driver of that, as you kind of alluded to, is NFL, but also NBA, which are the two best sports in terms of structural hold as far as the major sports go because of the heavy SGP and parlay mix.

Brandt Montour (Director and Equity Research Analyst)

That's really helpful, Jason. Then just more of a near-term modeling question. The release says adjusted EBITDA on the Q2 should exceed $200 million. That's a reasonable ways off from what's currently implied in the consensus numbers. Maybe you could just talk about the way that you split up the hold impact between the first quarter and April, and then anything else we should think about in terms of comparisons for the next couple of quarters.

Jason Robins (Co-founder and CEO)

Yeah. I mean, that's part of why we said it, because we haven't always provided color on a quarter-by-quarter basis at the beginning of the year. We typically don't, but wanted to obviously help since we saw that the Q2 numbers and consensus were a little bit off. As far as outcomes go, about $50 million or sorry, excuse me, $30 million of outcome headwinds were in April. So not a huge number. And sorry, that's on the revenue side. So obviously less impact on the EBITDA side, about probably $20 million, $21 million of that flows through. Yeah, it's definitely somewhat of the impact, but it's not really. It was more just the allocation across quarters was a little bit different in our model than what the street had.

Brandt Montour (Director and Equity Research Analyst)

Great. Thanks, everybody.

Operator (participant)

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

Jordan Bender (Senior Equity Research Analyst)

Yeah. Good morning, everyone. You gave parameters around M&A and how you think about potentially getting that done, but curious to get your thoughts around becoming larger on a global scale through M&A and just more broadly, maybe your updated thoughts around your ambitions for international expansion. Thank you.

Jason Robins (Co-founder and CEO)

Yeah. I mean, I think we continue to feel the same way. We've been sort of articulating over the past years when it comes to international. It's something that we don't need, but we do believe that if the right opportunity emerges, it's something that fits well and could create synergies. We don't feel like we need it right now. We think we have a ton of growth in the U.S., and so that's our focus. If the right opportunity came about internationally, we think it's something we should look at because we do have global ambitions one day. Obviously, we'll be very selective there, and the bar is very high given our focus on the U.S. and our opportunity in the U.S.

We understand that, and we know that anything we might do elsewhere, we have to do with a very high bar because the opportunity here and any distraction from that is costly too.

Jordan Bender (Senior Equity Research Analyst)

Great. Just to follow up, you just gave the back half of the year expected hold. From what I can tell, below 11% in the third quarter, above 11% in the fourth quarter implies a potential slowdown in that growth year-over-year. Just curious if that's correct and what could be driving that.

Jason Robins (Co-founder and CEO)

No, I don't think it's a slowdown. We're seeing structural hold increases and expect to see that in the back half of the year as well.

Jordan Bender (Senior Equity Research Analyst)

Okay. Thank you very much.

Operator (participant)

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

Joe Stauff (Senior Equity Research Analyst)

Thanks. Good morning, Jason. Alan. Jason, your comment on live betting and the improvement in the product, a lot of those acquisitions, tuck-in acquisitions that you have made have largely occurred within the last year. Just wondering kind of when you felt as though you've got the live product at a point now where you can really start to accelerate and see growth from that. I have a follow-up after.

Jason Robins (Co-founder and CEO)

Yeah. I really think this past quarter was the first time I felt like, "Wow, I'm actually really seeing impact on the live side start to materialize in the way that we had planned." It was exciting to see it, and it has continued and actually accelerated into Q2 with MLB being up 36% year-over-year in live. I am really excited to see that and still think there's a ton of upside, as I noted. I think it's really just this last quarter we started to see those impacts. We knew the work that was being done before, but the actual impact in the numbers.

Joe Stauff (Senior Equity Research Analyst)

Gotcha. Thank you. And then a follow-up on Jackpocket. In terms of the database, can you give us a rough split of the percentage of users in non-OSB states? And do you think you have a path in Texas for them to reconsider your offering there?

Jason Robins (Co-founder and CEO)

I don't have an exact stat for you on percent of customers in non-OSB states, but they are certainly in quite a few states that have OSB in them. Texas, obviously, was not one of them. As far as that question, I don't know. We'll have to see. There was certainly some momentum around legislation at one point, but I don't know if that's going to go through given the Senate in Texas will probably oppose it. I'm not sure what's going to happen there. If it ends up that there is a stalemate in the legislature, then it would have to be through the courts. Right now, we're not pursuing that. One of Jackpocket, one of the competitors, I believe Lotto.com, is doing so and recently won an injunction. That certainly signals there might be something.

I think early days and hard to know. Obviously, we're watching closely and we'll make any decisions accordingly.

Joe Stauff (Senior Equity Research Analyst)

Thanks a lot.

Operator (participant)

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

Robert Fishman (Senior Equity Research Analyst)

Good morning. In the letter, you guys talk about beginning to realize efficiency as demand softens in areas such as advertising. Just curious if you can share any levels of the ad efficiencies you've seen to date and talk more about how you can benefit or how that's going to impact your planned advertising spend for the rest of the year.

Jason Robins (Co-founder and CEO)

Sure. So really, where we're starting to see some is on the digital side. Haven't really seen anything on the offline side in terms of softening yet. I think a lot of the places that are premium sport property are going to continue to command prices because of the scarcity of inventory. On the digital side, we are definitely seeing some softening.

Robert Fishman (Senior Equity Research Analyst)

Thank you. Maybe on taxes, clearly, we saw Illinois increase and with Maryland set to increase. Can you just take a step back and share what you've learned about the right strategy to help mitigate future tax increases and how investors should think about the risk for additional states increasing taxes in the year ahead?

Jason Robins (Co-founder and CEO)

Yeah. I mean, I think what's unfortunately happening as states increase taxes is alternate options are gaining share. That is something that we're making sure people understand. The illegal market is bigger than ever in terms of iGaming. Obviously, that's mostly in states that do not have legal iGaming, but those companies are going to create competitive offerings and push them in states that do have legal iGaming if taxes are too high. That is something that we think certainly is resonating. I think that there's an element of just making sure that they do understand that there is ultimately a cost to the consumer, whether it's weaker product, less promotions, things like that. It is something that we're certainly cognizant is out there. We're operating in quite a few states now.

At any point in time, there's probably going to be some positive developments going on in any given states and some challenges. We're just going to have to stay on top of everything.

Robert Fishman (Senior Equity Research Analyst)

Thank you.

Operator (participant)

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

Jed Kelly (Managing Director and Equity Research)

Hey, Greg. Thanks for taking my question. Just getting to live betting, if that becomes a larger percentage of your handle, would we expect that to handle or re-accelerate, but it'd be at a lower hold because you do not want to maximize your hold on live betting? Just looking at your R&D, it's up quite a bit. Is that being more deployed to product and development, or is that from acquisitions? Because we've noticed a huge product improvement in your NBA product. Any color there would be great. Thanks.

Jason Robins (Co-founder and CEO)

Yeah. On the latter question, some of the recent acquisitions that I noted are what that is being driven by. I think definitely appreciate the comments on the NBA. It's a product that we worked hard on. I'm really excited about our baseball product as well as our golf product. We have a lot of great updates that are coming through this summer as well. I'm pretty pumped about where we're at from a product perspective. As far as the first question, I think it depends on the kind of live betting. If you're talking about microbets, next basket, next pitch, I do think you're correct that you don't want to hold too high on those.

If you're talking about customers that are at halftime betting on what the end outcome of the game is, that's fine to have them making parlays and having higher hold products. I think it really depends, but that's how we think about it.

Jed Kelly (Managing Director and Equity Research)

Thank you.

Operator (participant)

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

Clark Lampen (Managing Director and Digital Gaming Analyst)

Thanks very much. Jason, I wanted to go back to the structural hold topic. Maybe you could help us understand or unpack, I guess, what sort of contributes or drives this quarter. I think you guys saw a 300 basis points makeshift towards parlays. Is that largely a function of new cohorts that you're onboarding that are significantly more parlay inclined, or is it coming largely from your existing player cohorts where you're able to gradually shift them over towards higher margin bets via retention promo, or does one of those, I guess, sort of offer you a bigger opportunity or a bigger value driver down the road?

Jason Robins (Co-founder and CEO)

It's really both. We're seeing progress on both new customers coming in and immediately exhibiting behavior of higher parlay mix, but also existing customers increasing their parlay mix and parlay betting. Definitely both. As far as going forward, I think same story. Both are going to be levers for us. There's still a lot of room there, I believe. The great thing is that customers love the product. It's very sticky. Even if you have to utilize promo to try to get people to try it and here and there continue to promote just for pure engagement, we're seeing a lot of the customers that initially adopted parlay betting through promo continue to make parlays even when they're not getting promo. That's really a great sign for us.

Clark Lampen (Managing Director and Digital Gaming Analyst)

That's helpful. If I could ask a separate follow-up around AI, I'm curious how much, I guess, you've sort of integrated that tech into the pricing and risk management framework at this stage. Are you using that as a means of sort of better understanding elasticity or capturing inferences from sort of ticket flow on the fly that might be, I guess, a little bit less obvious to a human that was looking at the same data? Thanks.

Jason Robins (Co-founder and CEO)

A little bit, but it is pretty early. I think that's actually a huge opportunity for us. I'm glad you mentioned it. We are still very early days in terms of implementing, but it's an area we've identified that we think there's a lot of opportunity for sure.

Clark Lampen (Managing Director and Digital Gaming Analyst)

Thanks, again.

Operator (participant)

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

Steven Katz (VP and Communication Productions Lead)

Hi. Thanks for taking my question. Now that we're a few months into the launch of DraftKings Plus in New York, I was hoping you could comment on your initial learnings from that offering and if you anticipate maybe expanding that product into other states down the line.

Jason Robins (Co-founder and CEO)

Thanks. Yeah. We had a very limited launch because we were not sure if we were going to make changes to the product and did not want to have a bunch of people sign up and have to do that. As a result, it has taken a little longer to get the, excuse me, statistically significant results on some of the things that we were looking at. That said, so far, we have been very encouraged by what we have seen. It has been a very small user cohort, as I mentioned, by design, but it has been really a success amongst those customers. We have had really high satisfaction ratings from people. People are not canceling the subscription, and they are seeing value in it. It is also generating value for us. We are cautiously optimistic. It is something that we can do on a more broad basis.

We also, like I said, do not want to roll it out more broadly until we have done quite a bit of testing because we do not want to have to make changes to the program after we have gotten hundreds of thousands or even millions of customers to sign up for it.

Steven Katz (VP and Communication Productions Lead)

Great. Thank you.

Operator (participant)

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

Barry Jonas (Managing Director)

Hey, guys. Good morning. I appreciate the chart you made showing the historical resiliency of digital gaming amidst the Great Recession. I guess as you look at the database today, are there certain segments or cohorts doing better than others worth highlighting? Thanks.

Jason Robins (Co-founder and CEO)

No, not really. We've actually looked at that quite a bit. We haven't seen anything to suggest that there's different cohorts, no matter how you slice it, that are performing differently. We've looked at it by state. We've looked at it by higher versus lower spend customers. We've looked at it by tenure, quite a few different ways. We looked at it by sport preference. We really aren't seeing a big change in anything. Everything looks pretty much as we expect. So far, we're seeing no signs that there's any macroeconomic effects happening on our customer base. As you noted, I think based on other data we've seen from third parties, it really has been a trend in gaming that you don't see actually much impact, if any at all, from any sort of recession or economic downturn.

Barry Jonas (Managing Director)

Great. And then just how are you thinking about capital allocation here, specifically share repurchases? Thanks.

Jason Robins (Co-founder and CEO)

As we noted, we did repurchase, what was it, $140 million of shares in Q1. Definitely pleased that we were able to do that. We have, as you also know, committed to $1 billion as a buyback that's been authorized by the board. That continues to be something that we're planning. Obviously, if anything changes in terms of either that or additional buybacks, we'll certainly let you know.

Barry Jonas (Managing Director)

Thank you.

Operator (participant)

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

Ben Chaiken (Equity Analyst)

Hey, good morning. Thanks for taking my questions. My first is on external marketing spend. How are you thinking about the magnitude of this spend this year relative to maybe the start of the year? Has it changed at all? I guess I would preface it with two dynamics as I see it. Number one, Jackpocket exiting Texas. Number two, the softer digital ad spend environment that you referenced earlier. I guess, does the combination of those two change anything for you? Not sure if there's any other dynamics that you would flag or if I captured it all. Thanks.

Jason Robins (Co-founder and CEO)

Yeah. It's a good question. At this point, it's pretty much where we expected it to be. There's been, as you noted, a little bit of softening on the digital side. We're certainly looking at opportunities to maybe spend a little bit more there. That is offset by the reduction that we see in Texas from Jackpocket exiting. It's kind of a wash. We're sort of right on track with where we thought we'd be.

Ben Chaiken (Equity Analyst)

Sorry, maybe just a follow-up there. I guess if it's softer digital ad spend, wouldn't that be less expensive for you? Wouldn't Jackpocket exiting Texas?

Jason Robins (Co-founder and CEO)

Yes.

Ben Chaiken (Equity Analyst)

Go ahead.

Jason Robins (Co-founder and CEO)

Sorry. No, no. If it's softer, sometimes it's an opportunity to lean in a little bit more, right, because you have spend that wasn't efficient before that now is efficient.

Ben Chaiken (Equity Analyst)

Understood. Makes sense. And then related.

Jason Robins (Co-founder and CEO)

If you were buying literally the same volume of ads, though, you're correct. When the market softens, sometimes that's an opportunity to spend a little bit deeper. Like I said, these are low double-digit flexes either way. It's kind of a rounding error, even if you didn't include either of them. We're pretty much right where we expected to be and expect that will be the trend for the rest of the year.

Ben Chaiken (Equity Analyst)

Understood. That's helpful. Just one more on Jackpocket. I guess, what's the desire to integrate this into the DraftKings app? Any updated thoughts on profitability? I think in the past, there were some medium-term kind of bogeys out there you had provided. Should we expect an update here at some point, just given the changes in a few markets?

Jason Robins (Co-founder and CEO)

On the first question, we're actually actively working on that. I do expect that it will be integrated sometime, I believe, in the back half of the year. We'll have it fully on our platform, on our PAM. That'll also hopefully help with conversion and other metrics on the wallet. As far as profitability goes, we said that it would be profitable this year. We do expect that it'll be probably about break-even, maybe slightly up or down from profitability level, largely due to the Texas exit. It's something that obviously we hope to get over the profit line. Also, it's a growth asset, and we want to make sure we're properly investing in it too. It's still growing very quickly, even with Texas. I think a lot of opportunity on that front.

Ben Chaiken (Equity Analyst)

Thanks. Appreciate it.

Operator (participant)

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I would like to turn the call back over to Jason for any further remarks.

Jason Robins (Co-founder and CEO)

Thank you all for joining us on today's call. We are really optimistic about the rest of 2025 and are well-positioned for continued success in the future. Thank you for your continued support.

Operator (participant)

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