DraftKings - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the DraftKings Q2 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during that session, you will need to press star one one on your phone. 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 that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Stanton Dodge, Chief Legal Officer. Sir, please go ahead.

Stanton Dodge (Chief Legal Officer)

Good morning, everyone, and thanks 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 presentation, which can be found on our website and in our quarterly report on Form 10-Q, filed with the SEC.

Hosting the call today, we have Jason Robins, Co-Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business. Jason Park, Chief Financial Officer of DraftKings, will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robins.

Jason Robins (CEO)

Good morning, and thank you all for joining. I'm excited to be with you today to talk about our outstanding Q2 and significantly improved outlook for fiscal year 2023. Revenue and adjusted EBITDA exceeded expectations in the Q2. Importantly, we generated significant positive adjusted EBITDA. Q2 revenue increased 88% year-over-year to $875 million. Our revenue growth trajectory has been very strong due to our continued focus on enhancing our products and improving our customer experience, which is driving excellent retention and rapidly improving monetization. At the same time, we remain relentlessly focused on efficiency. Our mantra of revenue growth and cost efficiency is now a core tenet of the organization. As a result of our strong revenue growth and ongoing efforts to capture efficiencies, we delivered $73 million of positive adjusted EBITDA in the Q2.

We are increasing our full year revenue guidance to a range of $3.46 billion-$3.54 billion, implying growth of 56% year-over-year at the midpoint. Our fiscal year 2023 revenue guidance includes our expectation of nearly $1.2 billion of revenue in the Q4 of 2023. We are also improving our full year adjusted EBITDA guidance to a range of -$190 million to -$220 million, an improvement of 35% at the midpoint versus our May full year guidance. Our fiscal year 2023 adjusted EBITDA guidance includes our expectation of $150 million-$175 million in adjusted EBITDA in the Q4 of this year.

Turning to our OSB product, we have continued to focus on powering our own Same-Game Parlays and differentiating our live betting content. We now have live Same-Game Parlays built in-house for most of the major sports, including NFL, NBA, MLB, college football, and college basketball, and added to our live markets for golf, tennis, and MLB. We are improving our product at a very fast velocity with very high quality. In iGaming, we're executing our two-brand strategy while focusing on differentiating through more in-house content, including live dealer and jackpot offerings. Our persistent focus on product differentiation is already apparent in share trends. In the states where we are currently live, we achieved OSB handle share of 35% and OSB GGR share of 32% in the quarter, which were the highest they have been since the COVID-impacted Q2 of 2020.

We also maintained number one iGaming GGR position and set an all-time record for our iGaming GGR share at 27%. Looking ahead, we are very excited for football season. Our entire organization is dialed in and ready for the start of NFL and NCAA football. I am proud of the team and the culture we have put in place. In particular, I am proud of our team for their relentless focus on efficiency and expense management over the past 12 months. Our work of achieving and is not done. We feel great about the trajectory of the business. With that, I will turn it over to Jason Park.

Jason Park (CFO)

Thank you, Jason. I'll hit on the highlights, including our Q2 performance and our improved 2023 guidance. Please note that all income statement measures discussed, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, the organization is executing very well, that is showing up in our results. We achieved $875 million of revenue in the quarter, which is 88% higher than our Q2 2022 revenue, our adjusted EBITDA of positive $73 million significantly outperformed our expectations and improved by nearly $200 million on a year-over-year basis. Customer retention and engagement outperformed expectations as we successfully transitioned customers from the NBA season into MLB. We have seen significantly better than expected engagement on MLB due to our enhanced product.

Structural Hold was also above expectations at approximately 9% for the quarter, while promotional intensity improved, together supporting a more than 550 basis points year-over-year improvement in our adjusted gross margin rate to 47%.

Fixed expenses were slightly better than expected as we managed vendor-related costs and exerted discipline on our compensation expenses. We were particularly pleased with the results in our more mature Online Sportsbook and iGaming states. In our states that launched from 2018 through 2021, combined handle growth accelerated quarter-over-quarter and increased more than 35% compared to the same period in 2022. In these states, revenue increased more than 70% year-over-year. Adjusted gross margin rate increased more than 800 basis points, and external marketing declined more than 10%, while total unique customers increased approximately 25%.

These strong results and our visibility into continued improvement have enabled us to raise our full year 2023 revenue guidance range to $3.46 billion-$3.54 billion, from $3.135 billion-$3.235 billion, or by $315 million at the midpoint. We are also improving our full year 2023 adjusted EBITDA guidance range to -$190 million to -$220 million, from -$290 million to -$340 million, or by $110 million at the midpoint. The bridge from our May full year 2023 guidance to our current full year 2023 guidance includes increases due to stronger customer retention, acquisition, and engagement, structural sportsbook hold improvement, and favorable sport outcomes in the Q2.

These items are partially offset by Kentucky now launching this year and being included in our forecast, and Ohio's tax rate increasing effective July first. Customer retention, acquisition, and engagement are exceeding expectations and account for $225 million of the revenue improvement and $100 million of the adjusted EBITDA improvement. Our structural sportsbook hold percentage forecast is also higher, supported by our introduction of in-house same-game parlay capabilities and new live betting markets. This trend accounts for $40 million of the revenue improvement and $30 million of the adjusted EBITDA improvement. Favorable sport outcomes in the Q2 contribute $30 million to the revenue improvement and $20 million to the adjusted EBITDA improvement. We are very excited that Kentucky Horse Racing Commission recently set a target launch date of September 28, 2023, for online sports betting, which is sooner than we previously anticipated.

As a result, we expect $20 million of additional revenue in 2023 and a headwind of $30 million to 2023 adjusted EBITDA. We expect Ohio's increased tax rate from 10% to 20%, which went into effect July first, to result in $10 million of additional costs this year. In terms of our full year 2023 adjusted gross margin percentage, we now expect to be in the 43%-45% range, an improvement from our previous guidance of 42%-45%. We expect Contribution Profit, which we define as adjusted gross profit less external marketing, to grow to approximately $700 million in fiscal year 2023, which includes our investment into Kentucky.

With regard to our balance sheet, we ended the Q2 with $1.1 billion of cash and now plan to end the year with more than $1 billion. As a reminder, we expect approximately $120 million of capital expenditures and capitalized software development costs for fiscal year 2023, and change in net working capital to be slightly positive for the year. In sum, we had a strong Q2 and are very excited for the upcoming football season. That concludes our remarks, and we will now open the line for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one, one on your phone and wait for your name to be announced. To withdraw your question, please press star one, one again. Stand by as we compile the Q&A roster. One moment please for our first question. Our first question will come from Shaun Kelley of Bank of America. Your line is open.

Shaun Kelley (Managing Director)

Hi, good morning, everyone, and thank you for taking my questions. Jason or Jason, maybe just to start off, obviously, you know, dramatic market share gains, and I think a lot of this comes back to just truly core product improvement. I was wondering if you could give us just a little bit of color on what you think the big success stories have been over the last, you know, three, six, nine months on the product side. Maybe to put it in quantification terms, what would it take to narrow the gap between your OSB handle share that you outlined at 35% and the OSB GGR share at 32%? Is that a realistic goal?

Jason Robins (CEO)

Thank you, Shaun. You know, first on the question around product, it's been a lot of things. You know, I think it's a very complicated product, and there's a lot of things that can create customer friction if you're not careful. I think really a big focus for us over the last year and a half has been removing customer friction throughout the journeys. That's been a big deal. We've obviously greatly enhanced our same-game parlay offering. That's been a huge part of the story over the last six to eight months. I think our live betting options have gotten better as well. I can objectively say I think, you know, in H2, we feel we're gonna have the best product in the market.

Really excited about that, and I think that's the big difference maker, as you noted. As far as hold rate goes, you know, we're continually working to improve that. We've obviously closed the gap quite a bit between handle share and GGR share, I have no reason to believe that we can't continue to do that.

Shaun Kelley (Managing Director)

Thank you very much.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Stephen Grambling of Morgan Stanley. Your line is open.

Stephen Grambling (Managing Director)

Hey, thanks for taking the questions. I'm gonna change over to, to marketing and, and cost. It looks like in the back half, the assumption is for, you know, effectively, I think, you know, very much lower growth. It seems like you're, you're continuing to be focused on reducing costs. Are there still big contracts out that could be up for renegotiation or that we could be considering as we look into the second half or into next year, as we look at the guidance or beyond?

Jason Robins (CEO)

Yeah, it's a good question. I mean, we, we always are reevaluating every time we have a deal come up, whether it makes sense to continue and at what price, and that's a continual thing. You know, we're, we're gonna continue just over the course of our lifetime to see optimization there. I think same thing across the board with marketing, with promotion. I do think there's, you know, opportunity also, if we can gain more market share, to generate better top line as well. Those are really the core areas of focus for the company. I think on the corporate cost side, we really, you know, there, there's probably little bits here and there. We've really spent so much effort on that for the last year and a half or so that, you know, I think the low-hanging fruit there has been picked.

Certainly, the intent is to have significantly slower fixed cost growth next year, and I do think there's some room to optimize some of the levers that I mentioned.

Stephen Grambling (Managing Director)

As, as a quick clarification, are any of the, the bigger kind of national marketing contracts, embedded in the guidance in terms of cost reductions, or are those still kind of outstanding?

Jason Robins (CEO)

No, we don't have any cost reductions embedded in the guidance from any of that.

Stephen Grambling (Managing Director)

Great. Thank you so much.

Jason Robins (CEO)

We certainly, as I mentioned, always look at when things come up, but we're, at this point, not building any favorable renegotiations into the guidance.

Stephen Grambling (Managing Director)

Makes sense. Thank you.

Jason Robins (CEO)

Thanks. You know, Steven, as you know, our approach to guidance in general has been, we're gonna bake what we know. If we have, you know, lots of things that we're working on, you know, some of them may come through, some of them may not, so we don't kind of forecast like a probability-adjusted number. We, we really bake what we know, and then we look at anything like you're describing, as well as potentially, you know, any additional market share gains or anything else that might drive top line. We look at that as upside.

Jason Park (CFO)

I would add, Stephen, that, you know, these types of team and league deals are a much smaller % of our total marketing expense than some of the other operators in the industry. You know, as a general philosophy, we, we have implemented more short-duration deals to give us the chance to evaluate actual performance, more frequently.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from David Katz of Jefferies. Your line is open.

David Katz (Managing Director and Senior Equity Analyst)

Hi, good morning. Thanks for taking my question. In the comments, you talked about backward-looking friction removal as a product focus. Can you just talk a bit more about how that focus looks going forward and what the to-do list is, you know, to sort of keep your product in, in, on a winning track?

Jason Robins (CEO)

It's a great question. I mean, I think that this is an area that there's still a lot left to do. You know, I- it's true of any product in, in, in the digital space, that there's always gonna be room to optimize your funnels and improve the experience, but particularly in regulated gaming, where there's a lot of requirements that you have to follow, and there's a lot of states that launch very quickly. You know, the focus for us has been on how do we get live and make sure that we're complying with all relevant laws and regulations. I think as you then kind of say, "Okay, let's take a look at, along the way, what, what has that done that might have created, you know, bad experiences for customers?

Flags that go off that were misfires or things that were actually, you know, correct, but don't really properly give the customer a path to resolving them, even just better explanation, I think there's so much there. You know, for us, it's really about the customer experience. We look at the product and we say: If you're a customer, what elements of it would be frustrating? What elements of it would make you, you know, feel like I'm just gonna go try somewhere else? We try to improve that the best we can, obviously, making sure that we continue to follow all compliant, stay compliant with all regulations and laws in every jurisdiction that we operate. I think there's a lot there and just will continually be because of this sort of, you know, nature of the regulated gaming industry.

I think particularly now, given how many states launched and how quickly, there's just a lot of low-hanging fruit still available on that front.

David Katz (Managing Director and Senior Equity Analyst)

Understood. As my follow-up, I do have to ask, you know, periodically there's, there's a lot of discussion, and I think it's been obviously ramping up M&A. You know, what are, what are the boundaries and, you know, what thoughts might you be able to share in terms of what you might want for or need, you know, to keep the momentum going?

Jason Robins (CEO)

You know, I know there's a lot of chatter about M&A. At this point, I mean, we, we had a great quarter. We're really excited about that. But, you know, we're kind of on to this quarter. It's about to be the most important time of year seasonally for us. We have, you know, fall coming up with the, the NFL and college football calendar, NBA. Lots of things happening this fall. This is the most important time of year. This is when we acquire the most customers, when we have the biggest opportunity to gain more market share. It's where we generate the most revenue, and we'll generate the most EBITDA. I think this is so important, you know, a moment for DraftKings, that we have the team laser-focused on executing, and everybody's really dialed in now.

We have a lot of exciting stuff coming for NFL and college football and basketball and hockey and everything else, and we're pretty excited about that. You know, listen, there's always talk of things happening in the background, and we have, you know, small teams that make sure they're aware of what's going on. As a company, we're very, very focused on executing and winning in the US.

David Katz (Managing Director and Senior Equity Analyst)

Perfect. Thank you very much. Good luck.

Jason Robins (CEO)

Thank you.

Operator (participant)

Thank you. once again, one moment for our next question. Our next question will come from Robin Farley of UBS. Your line is open.

Robin Farley (Managing Director and Senior Equity Analyst)

Great, thanks. I wonder if you could talk a little bit about the percent of players that migrate from the OSB side to the iGaming side, and how that's kind of changed from before Golden Nugget till now?

Jason Robins (CEO)

Hi, Robin. Thank you. You know, it's been pretty consistent, actually, around 50% in states that have both products tend to cross over. You know, that hasn't really changed with Golden Nugget because Golden Nugget is such a smaller piece of the pie. It's, you know, less than 5% of our revenue. It hasn't really moved the overall needle. We do see, you know, Golden Nugget is certainly a more dominant casino brand, so the crossover is a little bit less there. You know, it doesn't really move the needle on the overall business. The overall business has stayed pretty consistent in the 50%-ish range.

Robin Farley (Managing Director and Senior Equity Analyst)

Okay, and do you expect that to change when you, you talk about migrating in the next couple months to, the DraftKings tech stack, or, or not necessarily, it sounds like?

Jason Robins (CEO)

I don't think so, at least not in the short term, because it's such a small piece of the revenue. You know, certainly we hope that that's a brand that grows and becomes, you know, bigger and bigger, and it could potentially impact long term. I don't think we expect an immediate change when we migrate. I think, if anything, you know, the focus will be on continuing to build out the casino audience and the, you know, CRM and cross-sell multi-brand strategy within casino. You know, as time goes on, I think that, you know, we'll, we'll have to see how the brand's growing and developing and if it can become more of a, you know, sports brand than it is today. I think as of now, we think of it as more of a casino brand.

Robin Farley (Managing Director and Senior Equity Analyst)

Okay, great. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Joe Stauff of SIG. Your line is open.

Joe Stauff (Senior Equity Research Analyst)

Thank you. Good morning, guys. I was curious, I guess, in, just in terms of understanding maybe the speed of adoption. You know, if... Especially looking at newer states, you know, you've reached about 7% adult penetration of the adults in the newest states. I'm wondering how you think about maybe that continuum in terms of the level of penetration that you have in some of your oldest states, you know, call it in New Jersey or whatever. The second question I had was, you know, whether it be the number or the percentage of jurisdictions you operate in that are now contribution positive? Hello?

Operator (participant)

Pardon me?

Jason Robins (CEO)

Hi. Yes, we are back.

Joe Stauff (Senior Equity Research Analyst)

All right. I'll, I'll ask the questions, I guess. Again, I, I was curious of the speed of adoption, especially as we think about maybe the newest states. You've, you've reached about 7% penetration there, and just wondering how quickly now, do we think about that continuum, reaching penetration of some of the some of your oldest states, whether it be New Jersey or so? Then the second question was really about, you know, the percentage or the number of jurisdictions that you operate in, where you're contribution positive now.

Jason Robins (CEO)

Hello? We're back.

Joe Stauff (Senior Equity Research Analyst)

Back again.

Jason Robins (CEO)

Yeah, this should be hopefully better. You're asking about the penetration of new states being fast? I apologize, I missed the last part of the question.

Joe Stauff (Senior Equity Research Analyst)

Yeah, no problem. You know, just trying to understand the newest states, right? You, you've reached about 7% penetration or so, in the newest states, and wondering how quickly you think, you know, that, that adoption rate, will get to levels in those newer states that, that you have in New Jersey or so.

Jason Robins (CEO)

You know, it's hard to say. I mean, it's still very new. I think we're continuing to see good acquisition in, in those new states. Then we're gonna know a lot more in a couple months after NFL starts that, that, you know, this will be the first time, for example, in Massachusetts, that, that there's NFL betting available online. You know, one would expect you'll see another wave of customer acquisition, but we'll know more how things are tracking in the next couple of months, and we'll certainly be able to update you on the next earnings call.

Jason Park (CFO)

I'd add, and add, Joe, you know, in our old, older vintage states, we continue to see really healthy acquisition. We're obviously bringing marketing spend down in those older states to match the level of acquisition and, and achieve appropriate tax. We haven't really found a ceiling in even our most mature states.

Joe Stauff (Senior Equity Research Analyst)

Huh, interesting. One follow-up, if I could, you know, are, are you willing to maybe share with us maybe the percentage of jurisdictions or, or the number, where you're contribution positive?

Jason Robins (CEO)

Yeah, we'll, we'll definitely be talking more about that, this fall on our Q4 earnings call and at the, excuse me, Q3 earnings call in November and on our, in our investor day. I don't want to front run the team on that one, but we have lots of

Joe Stauff (Senior Equity Research Analyst)

Okay. Thank you, guys.

Jason Robins (CEO)

Thank you.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Dan Politzer of Wells Fargo. Your line is open.

Dan Politzer (Managing Director and Senior Equity Research Analyst)

Hey, good morning, everyone. The first one, one specific question, then maybe one more high level. Just in terms of the quarter hold, you said was 10%. I think adjusting for the favorable sport outcomes, around 9%. Can you maybe give us just some more detail there in terms of parlay mix and leg count? In terms of how you're thinking about this over time, I think your largest competitor has called out, you know, a goal of 12%. It, it feels like you're closing that gap pretty quickly. How do you think about this evolving over time and, and maybe any, you know, guideposts for how you think about this year versus next year?

Jason Robins (CEO)

Yeah, it's a great question on ceiling. I think we're still trying to figure out what we think the right level and appropriate level to get to is and we'll continue to follow the data. I don't feel like we have enough yet to say that we have a long-term target there, other than I think there's still room to increase, and we, thus far have seen, you know, really no material impact to handle. Definitely room to go up. You know, parlay mix was actually right on expectation for us this quarter. You know, there's definitely some upside. I think an average leg count with the rollout of our new bet slips, that'll be powered by our in-house SGP models.

I think that will improve the leg adding experience in, in the UI, and that should hopefully increase the average leg count this fall. You know, as far as Q2 goes, we were, we were really at where we

Operator (participant)

One moment, please. Speakers, are you able to hear us?

Jason Robins (CEO)

Yep. Yep. Could I just squeeze in 1 more for my follow-up?

Operator (participant)

Actually, one moment please, sir. Okay. Mr. Robins, Mr. Park, are you able to hear us? Just one moment. We're just having a technical difficulty. Please stay on your lines. Pardon me, Mr. Robins, Mr. Park, are you able to hear us? Okay. Mr. Park, Mr. Robins?

Jason Robins (CEO)

Yeah, here. Sorry.

Operator (participant)

Okay. Thank you.

Dan Politzer (Managing Director and Senior Equity Research Analyst)

Can I just squeeze in one, one quick follow-up?

Jason Robins (CEO)

Yeah, sure.

Dan Politzer (Managing Director and Senior Equity Research Analyst)

Okay. Okay. Yeah, just looking out the, the, the next, the next few years, maybe more long term, as you think about seasonality involving, do you envision a scenario where you could be EBITDA positive in all four quarters? Are you going to always kind of have this, you know, big jump just given, you know, the start of sports season and then maybe the shoulder season?

Jason Robins (CEO)

Oh, no, we definitely expect it as the business influx towards more, permanent profitability.

Operator (participant)

One moment, please. Speakers will be back on in a moment. Everyone, we ask you to please stand by. Speakers will be back on momentarily.

Dan Politzer (Managing Director and Senior Equity Research Analyst)

Hello?

Operator (participant)

Yes, speakers, we are able to hear you.

Jason Robins (CEO)

Line service. I apologize. I don't know if there's a technical issue on the service provider's end, but we've tried several different phones here. I apologize to those listening to the call. Go ahead, please.

Dan Politzer (Managing Director and Senior Equity Research Analyst)

Thanks. That's all for me.

Jason Robins (CEO)

Okay. Thank you.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Carlo Santarelli of Deutsche Bank. Your line is open.

Carlo Santarelli (Managing Director)

Hey, guys. Good morning. You guys previously, I, I believe it was back in March of 2022, more or less articulated a longer term goal with sales and marketing representing about 10% of revenue and promotions, sorry, 10% of net revenue and promotions, about 22% of gross revenue. Given the experience over kind of the last several quarters of reducing promotions, seeing how the customer reacted, as well as, you know, the experience you've had in your vintage states, taking out, you know, some of the external marketing, are those targets still kind of where you're thinking? Do you believe, you know, Do you have any sense around the timeline of when you think you can get to those levels?

Operator (participant)

Speakers, are you there? Mr. Santarelli-

Carlo Santarelli (Managing Director)

Hello.

Operator (participant)

Mr. Santarelli-

Carlo Santarelli (Managing Director)

Yeah.

Operator (participant)

Could you please repeat your question?

Carlo Santarelli (Managing Director)

Yeah. Is there a way to fix this issue? It doesn't seem to be on our end.

Operator (participant)

One moment, please.

Jason Robins (CEO)

Should we join as a participant?

Operator (participant)

Ashley, is it possible that you can, if you can call in on a different line? Let me give you one moment. I'm going to pause the call, and we'll work something out. Everyone, we ask you to please stay on your lines. We'll be resuming the conference shortly. Pardon me. We do apologize. I'm afraid that we do have the intent that what has happened, we do have the speakers back. One moment, Mr. Carlo Santarelli, I'm going to place you back in, so you may ask your questions. One moment, please. Carlo Santarelli, are you able to hear us?

Carlo Santarelli (Managing Director)

I, I can hear you. Yep, thanks.

Operator (participant)

Welcome. If you could please repeat your question.

Carlo Santarelli (Managing Director)

Is the management team there?

Jason Robins (CEO)

Yes, we're here.

Carlo Santarelli (Managing Director)

Oh, hey, guys. While you guys were gone, I just gave guidance for 2024 to the rest of the folks on the call.

Jason Robins (CEO)

Perfect.

Carlo Santarelli (Managing Director)

I hope that's all right.

Jason Robins (CEO)

Our work is done. Thank you.

Carlo Santarelli (Managing Director)

My question, related to, with some of the experiences that you've had now, reducing promotions, reducing sales and marketing. I, I believe back in March of 2022, you guided sales and marketing kind of as a longer-term target to be about 10% of revenue, with promotions about 22% of, of GGR. Based on kind of your experience in, in working those expenses lower, do, do you guys feel there's an appropriate timeline, or do you feel those targets have shifted at all?

Jason Robins (CEO)

We'll definitely talk more about this at our upcoming Investor Day in Q4. I, I don't think that there's going to be a material change to either of those targets from what we're seeing today. Obviously, over the next few months, we'll continue to, to do the work to prepare, and, and we'll have more to say on that in the, in the fall.

Carlo Santarelli (Managing Director)

All right. Thank you, Jason.

Jason Robins (CEO)

Thanks, Carlo.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Bernie McTernan of Needham and Company. Your line is open.

Bernie McTernan (Senior Research Analyst)

Great. Thanks. Good morning. Thanks for taking the questions. Jason, can you just expand on some of the comments in the letter on AI? Should we think about them more as revenue-generating opportunities or cost efficiencies, and just any specific initiatives or products to point to that are in the works?

Jason Robins (CEO)

I think it's definitely both. You know, when you can do more for less, that drives both revenue and cost efficiency, and so I think that's really the, the thematic. Obviously, depending on what it is and where, in the stage of development it is, that'll affect the relative ways that we use it. I think, for example, right now, with our developer efficiency initiatives, we're focused on how do we get more done with our development team. You know, I think that what that probably means is, over time, we don't need to add as many engineers to get the work done that we originally want to do as we continue to scale the business and build out the product and serve the customer.

I do think it's a combination, if you think about it from a P&L standpoint, of both cost opportunity and revenue opportunity. None of that is baked into any of our guidance or any of the things we've shared in the past at Investor Day. This is something that we really view as, as, as upside and, you know, it's in the category of, you know, the long list of things that we're working on that we think could create even better long-term economics for our shareholders.

Bernie McTernan (Senior Research Analyst)

Is it helping some of the product roadmap that's coming out for this current NFL season, or is that too early, and it's more of a 2024, 2025 event?

Jason Robins (CEO)

You know, I, I think that the... There will be some impacts. We've been working on machine learning for a long time and, you know, base level AI. I think some of the advances in what third-party tools are out there and available have really hit an inflection point in the last months. I think that's where really the opportunity lies to take it to the next level. There's things we've been working on in and, in and around this space for, for years. There, there will be some impacts of the machine learning and AI work in this coming season. I think some of the, you know, really big, more like, you know, things that can kind of fundamentally change the outlook of the business, those are still on the come.

Bernie McTernan (Senior Research Analyst)

Great. Thanks for taking the question.

Operator (participant)

Thank you. One moment please, for our next question. Our next question will come from the line of Jed Kelly of Oppenheimer. Your line is open.

Jed Kelly (Managing Director and Senior Equity Research Analyst)

Hey, great. Thanks for taking my question. Two, if I may: Are you now just seeing structurally lower CACs just on getting better amortization from your brand spend? Can you speak to, I know that the product enhancements, but, you know, what is keeping players more engaged outside of football? Is it some of the, the merchandising you're doing on the front page or products? Just, can you talk about the engagement trends you're seeing? Thank you.

Jason Robins (CEO)

Yes, great question. I think on the CAC side, it's a combination of several things. One, certainly what you're mentioning, this national, you know, scale, the brand that we've built and the leverage we're getting out of that. It's also, you know, this is another area of the business that's constantly being analyzed and optimized. We have a team of analytics people, we have machine learning, and now we're actually starting to implement AI as a means of helping with things like bidding on PPC platforms or creation of, you know, multiple, you know, many multiples, more of different types of creative that you can test and optimize in the market.

You know, that's just a continual thing that we've been doing, and I think is, is gonna continue and potentially could be even, with some of the AI work that we're exploring, you know, in for another sort of, step function improvement. It is what you're saying, too. Absolutely. I think that there's sort of an underlying advantage that we have in that we have a brand, we have national scale, but then we also have a team that's really been honing and optimizing the marketing engine. It, it's a complicated thing, right? I mean, this is very, you know, not straightforward analysis. We're, we're at any given point in time during our peak season, spending in so many different places with so many different partners, so many different creatives in market.

It's really, you know, just the opportunity to just continually optimize an engine like that, I think, should be a continual tailwind for us for many years to come.

Jed Kelly (Managing Director and Senior Equity Research Analyst)

Then on player engagement, like-

Jason Robins (CEO)

Oh, right, right.

Jed Kelly (Managing Director and Senior Equity Research Analyst)

Outside of football.

Jason Robins (CEO)

You know, I think the big difference this year was the way that we were able to continue to retain NFL players into NBA season, and that's continued into baseball season as well. Those have both exceeded our expectations. We also have seen excellent cross-sell into iGaming. I know Robyn was asking about that earlier. That's continued as we've You know, it, it's kind of like this halo effect of when you retain better and cross more people into NBA on the sports side, that then has some spillover effect on iGaming, because more active players on the OSB platform cross-sell more into more active players on the iGaming product. That's really, I think what I would attribute Q2. If you look at past years, we've typically seen revenue decline Q2 to Q1. We weren't expecting this.

I mean, this was the result of a huge market share gain year-over-year. Lots of really just, you know, metrics that for the last year and a half we've been testing and really just hit a, a great point where the optimization is, is really kicking in. You know, just the culmination of a ton of great product work. I mean, the product is so much better year-over-year from where it was last year, and as I said earlier, I feel like in the back half of the year, we're going to have the best product in the market.

Jason Park (CFO)

Yeah, I think that's right, Jed. Look, I think all the work we do in that sport to sport retention or sport to sport cross-sell, however you want to think about it, you got to cross-sell them, but most importantly, the product's got to be great when you're bringing an NFL player into NBA or an NBA player into MLB. We're just super proud of how strong both our NBA product and MLB product improved on a year-over-year basis.

Brandt Montour (Managing Director and Senior Equity Research Analyst)

Thank you. Good quarter.

Jason Park (CFO)

Thank you.

Operator (participant)

Thank you. One moment please, for our next question. Our next question will come from Michael Graham of Canaccord. Your line is open.

Michael Graham (Director and Senior Equity Research Analyst)

Thanks a lot. Yeah, awesome quarter, guys. I wanted to ask on the on the growth outlook for the rest of the year, can you maybe deconstruct that from the perspective of the vintages of your states? Like, how much of the growth you think is going to come from some of your newer states versus more established ones? Related to that, just maybe a layer of depth into how you layered the launch of Kentucky into your outlook for Q3?

Jason Robins (CEO)

Absolutely. Definitely, you know, the bulk of the growth is going to come from the states that we launched from 2018 through 21. We are starting to get, you know, some real good contribution from some of the 22 states as well. I think, you know, the, the, the degree to which we are still seeing growth in our older states, you know, it's just very significant and they're, they're obviously a bigger piece of the pie. When you can get that kind of growth in, in your older states, it makes it very, you know, very big impact on the overall business. I'm sorry, what was the second part of the question?

Michael Graham (Director and Senior Equity Research Analyst)

Kentucky.

Jason Robins (CEO)

Kentucky. Kentucky. Kentucky, I think we had a slide on this, but we're projecting roughly, We're expecting, I should say, $20 million of revenue and $30 million EBITDA loss from Kentucky in fiscal year 2023. You know, I think that that assumes a September 28 launch date. Last time when we, we guided, we did not actually have a clear launch date for Kentucky, and now that we do, we've put it into the guidance.

Michael Graham (Director and Senior Equity Research Analyst)

Okay, awesome.

Jason Robins (CEO)

I'll note that, you know, despite that not being in our prior guide and now being in our current guide, we still had a massive improvement in the guide. You know, that shows that not only can we fund new state launches through the results that we're generating in old states and the cost efficiencies we're finding, but we can do that and continue to see upside on top of that. Which is a great story, I think, from, you know, years past, where we've always had to kind of increase the loss outlook every time that we've had a new state launch.

Michael Graham (Director and Senior Equity Research Analyst)

Excellent. Thank you.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Brandt Montour of Barclays. Your line is open.

Brandt Montour (Managing Director and Senior Equity Research Analyst)

Hey, good morning, everybody. Just one from me. Back to the same-game parlay enhancements for the upcoming NFL season, sounds like you're pretty confident, Jason, that the product's going to be the best as you call it. I guess, you know, it sounds like you baked in higher holds for this. It sounds like you baked in higher retention and no share gains, if I'm reading your comments correctly. I guess the question is, you know, are the product enhancements differentiated enough that it could be a driver of market share? Or, you know, is it the kind of thing where, you know, you would have to go out and get people to flip from your main competitor to try it?

How does the mechanics work, of gaining share off something like that?

Jason Robins (CEO)

No, I mean, you're right. It's a combination of two things. It could be, you know, actual wallet that was going to your competitors, customers that were using your competitors before, or it could simply be just better engagement and monetization of customers on your platform. I think what we felt like in Q2 is it was a combination of both. Definitely being able to increase hold rate year-over-year made a big difference in share. It was a combination of both. We think we got handle share from, you know, people that were playing NBA with competitors last year as well. I think that's really a result of just the product improvement year-over-year. To answer your question, absolutely. Could there be upside? Yes.

I mean, you know, the goal for the team is to go out and beat anything that we, we put out there. I think that we feel like we have quite a few initiatives that could help us gain share and could help us further retain, engage, and monetize our users in, in the back half of the year. We've just consistently taken an approach of not putting things that we don't feel we have full line of sight to, you know, to in the guide. Our guide, we consider to be what we commit to, and then we go out and we try to deliver above that by executing better and, you know, hopefully some of the things that you hope come through, come through. We don't put hope in the guide. We put what we know in the guide.

Brandt Montour (Managing Director and Senior Equity Research Analyst)

Great. Thanks for the comments. Congrats on the quarter.

Jason Park (CFO)

Thank you.

Operator (participant)

Thank you. Again, one moment please, for our next question. Our next question will come from Steven Grambling of Morgan Stanley. Your line is open.

Stephen Grambling (Managing Director)

Hi, thanks for the question. On the updated implied second half guidance and quarterly cadence versus your prior guide, could you just walk us through your assumptions for the greater implied EBITDA upside to Q3 versus Q4? You know, particularly in light of the Kentucky launch and favorable sport outcomes in Q3 last year. Then also, just what are the hold % rates you're assuming for Q3 and Q4? Thanks.

Jason Robins (CEO)

Thank you. So we're assuming a similar hold rate to what we had in the back half of last year. I think for, you know, the Q3, Q4 question, Kentucky definitely made a little bit of a difference, you know, but the, the, the fact that we were able to increase the guide for the back half of the year, increase the Q4 guide, I think, really had to do with just the overall performance of the existing states that we're in and of the overall business on the cost efficiency side. I think that that's more than enough to offset the Kentucky EBITDA, or negative EBITDA that we're expecting to generate in the back half of the year.

We're pretty optimistic about a really great second half, and, you know, I think we'll have to see exactly what ends up happening with states like North Carolina and Vermont. Right now, we feel like Kentucky is, you know, gonna provide a great opportunity for us to go and invest in acquiring customers and then our existing states. There's also several new states that, you know, haven't had a full NFL season. Massachusetts hasn't had any NFL season. Ohio didn't launch till January last year, so there should be a lot of upside in, I think, the customer acquisition numbers in H2 this year.

Stephen Grambling (Managing Director)

Hey, Jason, just one more, if I can. In light of the Ohio move to double its tax rate, could you maybe just discuss the long-term risk to your business that state governments would look to you know, take increasing taxes on Gross Gaming Revenue? Sort of what are the incentives that would keep state governments maintaining lower tax rates? Thank you.

Jason Robins (CEO)

Yeah, you know, I think it's a great question. Obviously disappointing to see, you know, I think most state governments understand that if you start taxing this too high, you kind of defeat the purpose because it makes it really impossible for the legal, regulated operators to compete with the illegal offshore operators that are not paying, or some of them onshore now, that are not paying taxes, that are not following regulations. You know, there, there, there's, I think, great awareness of that in state legislatures. You know, I'm optimistic that states are gonna keep taxes at a reasonable level. I think that they understand that they're, they're ultimately gonna drive volume back into the illegal market if they try to tax the, the industry too heavily.

Stephen Grambling (Managing Director)

Thanks, Jason.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Robert Fishman of MoffettNathanson. Your line is open.

Robert Fishman (Managing Director and Senior Equity Research Analyst)

Hi, good morning, guys. 2 questions on partnerships. First, ahead of the NFL kickoff, can you help us understand how the Amazon Thursday Night Football partnership helped your business last year, and whether there are more opportunities to build upon that success this year? Then, anything you can share on how the ESPN partnership has been a driver of your strong MOM growth or overall business? Would you be willing to expand your ESPN partnership, depending on which direction Disney ends up going with its strategic review?

Jason Robins (CEO)

Yeah. Amazon has been a great partner. Last year, we were really happy with Thursday Night Football results. It was a big driver of customer acquisition for us. Those games are also really well built for same-game parlay offerings, so really helped drive a lot of parlay mix through better, you know, promotion of Same-Game Parlays on a Thursday night. We have a few extra things that we're gonna be doing with Amazon this year that I'm pretty excited about, that will be, I think, coming, you know, coming to everybody in the, in, in due order, once the season launches. Really should be a great year with Amazon, and we're really just thrilled with that partnership. As far as ESPN goes, same story. We've been really happy with them as a partner. They've been great.

We continue to, you know, get great value out of that relationship. You know, we'll have to see. I think, obviously, we saw the same comments everybody else did from Bob Iger, and, you know, I think it's still fairly early days for them. You know, I don't want to speak for them. They'll know better than I am, than I will, what their plans are. We're always happy with, you know, great partners like ESPN. If there's a way to have a deeper relationship that makes sense for both companies, then, you know, that's something we would certainly consider. If it doesn't make sense, then there's, there's something that, you know, doesn't really work for us or for them, then we won't. We're perfectly happy with the relationship as it is now.

I think that's how we're thinking about it.

Robert Fishman (Managing Director and Senior Equity Research Analyst)

Great. Thank you, Jason.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from the line of Ryan Sigdahl of Craig-Hallum Capital Group. Your line is open.

Ryan Sigdahl (Senior Research Analyst)

Good morning, guys. Just one for us. You mentioned MLB has been a positive surprise. There's a specific product that's resonating better with the player, whether it be live, same-game parlay, et cetera?

Jason Robins (CEO)

Yeah. I think first of all, MLB itself has made some great changes that have helped increase engagement with the sport, so I give them credit for that. You know, I, I think betting has helped a lot, too. MLB, first of all, is very well built for live betting. You know, that's been a real product that works very well with that sport, and we're excited about the offering we have there this year. The same-game parlay product has been significantly enhanced this year. We've brought our own models into the fold, and I think, you know, really just improved both the UI and the overall offering of Same-Game Parlays for MLB. There's been a number of other things we've done. We've done some work on the cash out feature.

I mean, there's a lot of different areas that we've worked on that I think have really helped improve the MLB offering year-over-year. You know, that combined with really strong engagement from a viewership perspective, I think, has driven a, you know, unexpectedly positive to the upside results for MLB's season so far.

Joe Stauff (Senior Equity Research Analyst)

Thanks, Jason. Nice job, guys.

Jason Robins (CEO)

Thank you.

Operator (participant)

Thank you. One moment please, for our next question. Our next question will come from Barry Jonas of Truist. Your line is open.

Barry Jonas (Managing Director and Senior Equity Research Analyst)

Hey, guys. You've really previously given some advice on how to think about NFL results and corresponding holds. Last year, it correlated maybe a little less as the season went on. Just curious, as we head into football season, if there's anything you can give us to help think about sort of that week-to-week success?

Jason Robins (CEO)

Yeah, I think it's very similar to what we had shared last year, that, you know, the results can definitely range between, you know, -10% and probably +20%, depending on, you know, if you're really taking, like, that 95% confidence interval, it can get that wide in any given week. Obviously, over the course of several weeks, over the course of the season, that band tightens. That's how I would think about kind of a week-to-week thing. You know, really, it's a result generally in NFL of two things. One, you know, do the favorites win or lose? Second is how the player props do.

That second part has become increasingly important, as, you know, the industry's evolved because so much betting is now happening on player props and so much same-game parlay depends on player props, so that's really made a big difference. You know, I think given Q3 is always one that, for, for our business planning group, it's their least favorite quarter because so much, you know, volume comes in the last three weeks of the quarter. You know, not that it's, it's, you know, it's the only thing going on, but, like, relatively speaking, July and August are slower months. It's really, you know, the last few weeks, you get all this NFL volume, and a few good or bad weeks can definitely swing the results a little bit.

I think that as we've gotten bigger and our customer base has become more diversified, the effects of that are lower as we've gotten more of a mix of player parlays, so it's not just straight game outcomes. You know, I think we'll have to look at this season. I think this year we might see a little bit tighter bands. Certainly, over three weeks we will, I think still fair, given what we know today, to think week to week about, you know, that -10% to +20% possibility on hold, depending on the game outcomes and player parlay outcomes.

Barry Jonas (Managing Director and Senior Equity Research Analyst)

Oh, that's helpful. Just a quick follow-up. Wanted to get your thoughts on Florida, given the recent court decision. Do you see a pathway for DraftKings to compete in the state?

Jason Robins (CEO)

You know, I think it's too early to tell what the path is, but I'm, and I'm optimistic there'll be a pathway there because I think people in Florida want great products. I do think that it'll get figured out. Right now, I think it's really, you know, hard to say. There's still going to be a few steps to play out and a few, you know, things with court rulings and other, other things. You know, it's really, at this point, a little bit murky and, you know, I think we'll know a lot more in the coming months.

Barry Jonas (Managing Director and Senior Equity Research Analyst)

Great. Congrats on the quarter.

Jason Robins (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Jordan Bender of JMP Securities. Your line is open.

Jordan Bender (Director and Senior Equity Research Analyst)

Great, thanks for taking my question. You gave comments on where your GGR margin could potentially go over time, more of a wait and see. I'll maybe ask this on the NGR margin side, you know, that still lags international markets. You know, just given the parlay mix, can we maybe exceed 10%-12% NGR margins that we see in the, in the international markets?

Jason Robins (CEO)

You know, I, I think that at this point, we have no reason to believe that we can't get to the same sort of NGR margins that we see internationally. Obviously, there's, there's still early it's still early days here, so, let's see how it plays out. Given the fact that we've over the last couple of years continued to optimize the hold rate, continued to optimize the promo mix, and we've actually seen better customer engagement, better retention, you know, I'm pretty optimistic and have no reason to believe that we can't reach similar type of numbers that you're talking about, that more mature markets across the globe have been able to get to.

Jordan Bender (Director and Senior Equity Research Analyst)

Great. Then just on the follow-up, you called out some states that have legalized but not launched yet. You know, a market that we don't talk about is Nevada. Is there any interest from DraftKings to go into that state, at any point in time?

Jason Robins (CEO)

Yeah, we're definitely interested. I mean, you know, Nevada is obviously an important state for gaming. There's a robust sports betting market there. It is in-person registration, so, you know, I would temper any expectations for, you know, the possible contribution there. I do think it's an important state because, you know, people go there who are our customers, and they want to be able to make bets. So I think being able to give them that option, as well as to be able to access the Nevadans that are now betting with, you know, others, and I think would like to try DraftKings' product, is definitely something that we're exploring.

Jordan Bender (Director and Senior Equity Research Analyst)

Great. Nice quarter.

Jason Robins (CEO)

Thank you.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from Joe Stauff of SIG. Your line is open.

Joe Stauff (Senior Equity Research Analyst)

Hey, good morning, everyone. Thanks for taking our question, and nice quarter.

Jason Robins (CEO)

Thank you.

Joe Stauff (Senior Equity Research Analyst)

My question is, is on the continued Structural Hold rate expansion. You know, it seems that a lot of time is spent talking about the parlays and the impact on mix, but maybe not as much on, on the optimized trading and risk management improvements you guys have made. Can you just unpack this a bit more for us? I guess, are there specific bet types or sports where you've been, you know, getting better at minimizing these trading inefficiencies? And how do you think about further upside here? Are there any comps you would point to or, you know, perhaps you're tracking an even better spread between, call it, the, you know, the underlying vig and the, and the real edge hold rates? Thanks.

Jason Robins (CEO)

Yeah, it's a very good question. I, I think you're absolutely right, that we've talked and everybody's talked a lot about parlay mix and average leg count, and those are certainly very important drivers of, of hold rate improvement. There is also, you know, there are also the other levers that you mentioned. I would say that really across the board, we feel we've improved. In fact, you know, the Q2 outperformance is really more a function of those other things that you mentioned, because parlay mix, even though it was way up year-over-year, was kind of on track with our expectations. It was really the customer risk management, the trading improvements.

You know, we've spent a lot of dev effort on tooling for our traders to make it easier for them to adjust lines, to spot soft lines, to move them faster and to better optimize them. We've also really significantly invested in our modeling and approach for customer risk management. I think those are things that are really paying off as well, as you look at the hold rate improvement and the outperformance in Q2.

Joe Stauff (Senior Equity Research Analyst)

Wonderful. Thanks, Jason.

Jason Robins (CEO)

Thank you.

Operator (participant)

Thank you. One moment, please, for our next question. Our next question will come from the line of John DeCree of CBRE Securities. Your line is open.

John DeCree (Managing Director and Senior Equity Research Analyst)

Good morning, Jason and Jason. Thanks for taking all the questions. Maybe one back to the roots on DFS. I know, much smaller piece of the business now, but I was wondering if you could, you know, give us a little insight as to how that business is trending in the context of customer acquisition. As you enter new states, are you still getting a similar kind of initial cross-sell out of DFS that you did maybe 2 to 3 years ago in your, in your older vintage states? Is DFS still kind of an ongoing tool in those older vintage states, or are you still acquiring customers via DFS first?

Jason Robins (CEO)

Absolutely. I mean, DFS actually has had a great year so far. You know, that's been driven by a, a lot of improvements we've made across the product. Baseball has seen a big jump year-over-year, and that's something that you can sort of use as a, a little bit of a litmus test for, or maybe an advanced test for how NFL season's gonna go, because a lot of those drafts happen in the July-August timeframe. Very exciting year for DFS. We have some really good stuff planned for the back half of the year on that product, and it is continually adding new customers.

We have seen really strong crossover, continue from DFS when we launch new states. Everything seems to be working on that front, and it continues to be a big source of engagement for customers in states that don't have sports betting, as well as a great funnel, for new states that launch.

John DeCree (Managing Director and Senior Equity Research Analyst)

Thanks, Jason. I think, I think you answered my follow-up in there, but just to ask it explicitly: Customers that, that cross over from DFS to, to sports and/or iGaming, are they still retained as, as DFS? So you're seeing customers play, you know, going back and forth still, or, you know, what happens when they cross over to OSB? Do they, do they kind of reduce their time on DFS, or are you still seeing, you know, multi-product use across the customer base?

Jason Robins (CEO)

Oh, definitely seeing multi-product use. I mean, there's some cannibalization, of course, but it's not very significant. The products are pretty different and, you know, people like them for different reasons. People also are not spending a ton of money on DFS, so it's really not like a big wallet thing to... You know, it's more of an engagement thing. And they are different products, and I think that they, they provide different types of experiences for people. We are seeing, a great deal of crossover, but we're also seeing great retention across all of those products as well. It appears that the cannibalization is fairly minimal. A lot of it also happens in the initial launch stages. People are very excited about sports betting, and they, you know, maybe forget about DFS for a little bit.

What we're seeing in some of our older state vintages is, as time goes on, they, they come back, and some of the cannibalization, even though it wasn't that significant to begin with, even that, you know, small bits of cannibalization we're seeing reverse in some of our older states.

John DeCree (Managing Director and Senior Equity Research Analyst)

Great. I appreciate that, Jason, and congratulations on a fantastic quarter.

Jason Robins (CEO)

Thank you so much.

Operator (participant)

Thank you. This will end the Q&A session. I would now like to turn the conference back to Jason Robins for closing remarks.

Jason Robins (CEO)

Thank you all for joining us on today's call. We had an excellent first half of 2023. We are laser-focused on the back half and on the fall, and we're very excited about the rest of the year and beyond. I look forward to speaking with you over the next few weeks, and hope you all stay safe and well. Thank you.

Operator (participant)

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your week.