Good morning, everyone, and thank you for joining us for our 2023 Investor Day. We want to build off of our third quarter earnings call that we just hosted 11 days ago and take a step back to provide an exciting, bigger picture perspective on a number of topics with you, including TAM, the drivers of our competitive differentiation, our very strong unit economics, and our financial outlook. I'll begin the presentation, and then you'll hear from our CFO, Jason Park. We encourage you to submit your questions during today's event, and we will address them during the Q&A session after our prepared remarks. I'd also like to remind you that this presentation is subject to the legal disclaimers at the beginning of the deck, including those related to forward-looking statements and non-GAAP financial measures.
Unless otherwise stated, all references to gross profit and gross margin are on an adjusted basis, with such adjustments detailed in the Investor Day presentation posted on our website. As many of you know, it's been almost two years since we hosted our last Investor Day, and so much has happened. We remain laser-focused on executing and winning in the U.S. online gaming industry. We're improving our discipline and muscle around efficiency and achieving scale on our fixed cost structure, while also continuing to drive outstanding revenue growth. We're establishing ourselves as the industry leader due to a variety of factors, but most importantly, by developing a leading product.
In fact, we're now number one in terms of OSB and iGaming gross revenue share in the U.S., which is an outstanding achievement that would not have been possible without so much hard work by our employees over the last two years. That said, we're not satisfied just because we reached number one. We believe we have a lot more room to grow, both our share and the overall market, and we're very excited about continuing to do the things that got us here and also will continue to maintain and extend our lead. As I think about why we do these Investor Days, it really comes down to sharing with you the conviction that we have in DraftKings' future and our path to generating amazing returns for our shareholders. With that, let's flip to the first page, where you can see our five main topics for today.
I will start with the strong TAM trends that we are seeing. States are growing faster than anticipated, and we expect TAM to ramp from $20 billion this year to approximately $30 billion in 2028, including only our existing states, which more specifically means the states already embedded in our 2024 guidance that we provided on the third quarter earnings call. This is an important concept for today. Any additional state legalization would add significant revenue growth and additional long-term adjusted EBITDA and improve our long-term adjusted EBITDA margins. Second, we are proud of our consistent share gains. Our product is extremely strong, and we believe our competitive differentiation is real and sustainable. And most importantly, we're not slowing down. We plan to continue to innovate at a rapid velocity. Third, when looking at our state vintages and customer cohorts, the economics are fantastic.
All of our state vintages are turning contribution profit positive within the 2-3-year timeframe that we talked about in the past, and more recent states are turning contribution profit positive faster, while customer payback periods are also improving dramatically. Fourth, as a result of states turning contribution profit positive faster and our payback periods improving, we are now expecting to generate $1.4 billion of adjusted EBITDA in 2026 and $2.1 billion in 2028 from only our existing states alone. Very importantly, our 2026 and 2028 financial guidance only factors in OSB and iGaming states consistent with the 2024 guidance we provided on our third quarter earnings call. Future legalization beyond these states would provide long-term upside.
We are confident in our 2026 and 2028 adjusted EBITDA guidance based on the bottoms-up customer cohort and state vintage data that we're empirically seeing. In addition, a TAM and share methodology also triangulates in on the same outlook just by maintaining our combined U.S. OSB and iGaming share, which is approximately 30% spanning the last twelve months. Share above 30% in 2026 and 2028 would provide additional revenue upside. The final point on this page is that additional legalization would offer significant upside. In fact, there is potential for up to an additional $6.2 billion of annual adjusted EBITDA from further OSB and iGaming legalization in the U.S.
Just to reiterate, we now believe that we can generate the same $2.1 billion in adjusted EBITDA that we previously thought we would require 65% of the U.S. population to have sports betting in order to achieve, as well as 30% of the population to have iGaming. We now believe that only in the existing states we're in today, as defined by our Q3 guidance, will actually result in the same amount of previously anticipated adjusted EBITDA, with any further legalization providing enormous upside beyond that. Now, let's start with a closer look at TAM in our existing states. Put simply, online gaming in the U.S. is growing very rapidly. In the states where we are live, and also including Ontario, gross gaming revenue is expected to grow more than 50% year-over-year in 2023 and reach $20 billion.
Looking ahead, we expect that existing states will continue to grow from here, not just because our oldest state vintages are growing, but also because so many states only launched in the last year or 2. As an example, you can see on the next page that New Jersey, which launched OSB more than 5 years ago and iGaming about 10 years ago, is still achieving very strong growth on a year-over-year basis. This year, we expect New Jersey gross gaming revenue to increase about 25%. The percentage of adults who are participating in the online gaming category is increasing as well, and existing participants are engaging at a higher level over time.
As you can see on this page, based on the strong TAM trends that we are seeing, we believe U.S. online gaming will reach approximately $30 billion in 2028 in existing states alone, which implies only a 9% compound annual growth rate between 2023 and 2028. Importantly, our estimate of $30 billion includes only the states we include in our 2024 guidance, so we're not including any states beyond those that we have line of sight to. Of course, if you believe that the TAM will grow even faster, even at our current share, we will generate even more long-term opportunity. Now, let's move on to share. You can see in this chart that our combined OSB and iGaming share has improved rapidly over the last year.
Our share has increased by more than 1,000 basis points over the last 5 quarters alone, and as I mentioned earlier, we are thrilled to now be leading the U.S. in online gaming. We reached our leadership position with success across both OSB and iGaming. In OSB, we are currently at 39% Handle share and 37% gross revenue share on a trailing three-month basis, which is well above the 20%-30% long-term target we had discussed at our last Investor Day. In iGaming, we are number one in the U.S., and our share on a trailing three-month basis is 27%, which again is above the 20%-25% long-term target we discussed in the past. The main question I'm sure many of you are asking is why? Why has DraftKings been able to win so markedly over the last 12-15 months?
To win in this space, you need a combination of factors that collectively create a strong competitive advantage. There is no question that having the best product and technology is critical. As you all know, we are vertically integrated and have operated our own sports betting engine since the third quarter of 2021, which allows us to control our own destiny and offer products that are highly differentiated, with the only limit being our own imaginations. In addition, we can also be nimble and do more tactical things, like offer a single wallet across DraftKings-branded products and across state lines, and enter new states more rapidly due to our scalable regulatory platform. We're also able to innovate in extremely high velocity. We have approximately 1,500 product engineers who will deliver 13,000 independent product updates this year, with each update aimed at driving a better customer experience.
We're delivering a personalized betting experience through automation and user-level analytics and rolling out new products quickly by always putting our customers first. We are also the beneficiary of significant scale. Our economic model results in high flow-through of incremental revenue and creates a virtuous cycle of high EBITDA generation from incremental investments. Finally, we have a very powerful brand. As the only pure-play U.S.-centric online gaming operator in the U.S., American consumers trust and recognize the DraftKings brand. We have an enormous customer database that is much more than a list and contains actionable information about player preferences, such as favorite sports, favorite teams, favorite games, and favorite players. More than a decade of experience acquiring this target demographic has given us significant pattern recognition on how to optimize our overall marketing machine.
To provide a more specific example on our product and technology strength and our ability to control our own destiny, you can see how we have enhanced our Same Game Parlay offering over the last two years. Initially, when we vertically integrated in 2021, we launched a Same Game Parlay offering, but we knew it was not everything we wanted it to be. We improved the offering significantly in 2022, and now in 2023, we can confidently say we have the best Same Game Parlay offering in the industry. On the iGaming side, we have leading technology. From day one in December of 2018, our iGaming product has been vertically integrated, and now it is clear that our homegrown game offerings, including our jackpot technology and our recently launched in-house live dealer offering, are differentiated in the eyes of our customers and very difficult to replicate.
Last, today, we are announcing our newest offering, Progressive Parlays. This offering will sit within the DraftKings Sportsbook and allow customers to place parlay wagers that can win even if one or more legs miss. We prepared a video to explain.
Introducing DraftKings Progressive Parlay. Progressive Parlay is the newest product from DraftKings Sportsbook, coming soon. With DraftKings Progressive Parlay, you can win even if every leg of your parlay doesn't hit. Like a traditional parlay, Progressive Parlay creates the excitement of a chance at big payouts but with even more ways to win. Making your bets is simple. You can choose anywhere from 3-12 legs for your Progressive Parlay. As you make selections, the bet builder will dynamically inform you how many more picks you need to make a Progressive Parlay, how your odds will change with each pick, and how many legs of the parlay must hit for your bet to start paying out. For example, in this bet, the customer builds a 7-leg parlay. If 5 or 6 of the legs hit, the customer is still a winner.
The more picks you make, the more ways there are to win and the bigger your potential payout. Stay tuned for the launch of Progressive Parlay on DraftKings Sportsbook, coming soon.
Hope you all enjoyed that short video. As you can see, we're excited about our Progressive Parlay offering and its potential to generate higher parlay mix and leg count, and thus higher hold percentage, as well as being a great win with customers who will be able to win money on their parlays even if they don't hit every leg of their bet. In summary, our product is highly differentiated, and customers are recognizing that we have the best app in U.S. online gaming, as demonstrated by the dramatic share gains that we've achieved over the last 12-15 months. Thank you to JPMorgan for performing this survey on this page, which is consistent with our own internal surveys, as well as other third-party surveys that show that customers know that DraftKings has the best products....
I leave you with this: we are not taking our foot off the gas. We believe that our velocity and pace of product innovation will continue to be faster than any other operator in the U.S. online gaming space, which could result in further share gains over the coming years. With that, I'll turn it over to Jason Park, who will discuss our unit economics.
Thank you, Jason. Over the next two sections, I want to discuss the more foundational economics of DraftKings. First, from a state vintage perspective, and then from a customer perspective. I'll start with our state economics, which, as many of you know, is at the core of our inflection to strong, positive, adjusted EBITDA at the enterprise level. We invest into a state launch for a period of time before it begins to generate strong, consistent, and growing positive cash flow for the company. Once the positive cash flow in states generate more than we are investing into newer states and our fixed costs, the company generates positive adjusted EBITDA on an enterprise basis. Contribution profit is defined as gross profit from that state, minus the external marketing that we deploy into that state, which includes an allocation of national marketing spend.
From 2018 through 2022, we were in a net investment mode across our states, but starting in 2023, our older states began to generate significant contribution profit. So much that the contribution profit covered the investment in newer states, and starting in Q2 of 2023, our contribution profit from older and newer states exceeded our fixed cost, such that we generated a positive adjusted EBITDA in Q2 and anticipate positive adjusted EBITDA for the entirety of the second half of 2023. If you look left to right on this page, you can see that our 2018 to 2019 state vintage, which represents five states and 10% of the U.S. population, is on track to generate $365 million of contribution profit or cash flow in 2023, and has been growing very quickly.
In a moment, I'll take you through the income statement from top to bottom, from Handle down to gross profit and down to contribution profit for each of these vintages. In the middle of the page, the 2020-2021 state vintage is certainly already generating significant positive contribution profit after flipping positive overall in 2022, so about two years after launching. While the 2022-2023 state vintage is on a similar trajectory to be contribution profit positive in its second or third year after launch. Importantly, our playbook is getting better and better.
The average number of quarters before a state turns contribution profit positive is lessening rapidly compared to the earliest states that we launched, which is a function of us improving and always optimizing our state entry launch playbook over the years, as well as the readiness of the states that are legalizing and launching more recently. Put simply, more recent states have citizens who are geared up and ready to go when their state finally launches online sports betting. Another way to see the speed at which we are acquiring customers is to look at the customers acquired as a percentage of adult population over time. The x-axis here is the number of months since we've launched, and the y-axis is the percentage of the adult population that we've acquired. The green is our oldest state vintage, orange, our medium-aged state vintage, and light blue, our most recent state vintage.
You can see that on a population-normalized basis, we have acquired 4.5 times as many customers in our 2022-2023 state vintage as we did in our 2018-2019 state vintage at the same point in time. The key question that we debate is whether we have simply pulled forward customer acquisition of a terminal population penetration or if we have pulled forward that acquisition and increased terminal population penetration. We are seeing more and more evidence that the latter is more likely. So now that we've talked about the empirical results of states turning contribution profit positive in the timeline we've outlined for the past several years, and that the time to positive contribution profit is getting even shorter, I want to invest a few pages into the economics down the income statement. Staying with the same 3 state vintages, let's start with Handle.
Handle growth has been outstanding, and very importantly, even years after states launch, Handle growth continues to be very strong. As you can see, Handle is growing nearly 30%, even in our oldest state vintage. So, four or five years after launch, Handle growth is still at a very healthy double-digit rate. The strong growth is a function of continued customer acquisition in states, our excellent customer retention, and growing Handle per retained customer as we drive higher levels of engagement. In terms of sources of Handle growth for 2023, it is intuitive that growth in our 18-19 state vintage is more from growing Handle per customer than it is from new customers. Growth in our 2020-2021 state vintage is balanced between strong Handle per customer growth and new customer growth.
While in our newest state vintage, our growth comes mostly from new customers. Next, promotional reinvestment lessens as our states mature. Promotional reinvestment within a state is a function of the mix of new and existing customers, so there is a natural decline as we move away from new customers and towards existing customers. As you can see, we are bringing down promotional reinvestment within states over time. In addition to the natural improvement in promotional reinvestment, we have been deploying multiple initiatives to surgically reduce promotional reinvestment. Specifically, we are consistently improving our customer-specific lifetime value calculations and customer-specific scores pertaining to engagement with past promotions. This data allows us to optimize reinvestment levels on a customer-specific basis and therefore maximize long-term gross profit generation.
So Handle continues to go up, promotional reinvestment is on a downward glide path, and as a result, strong net revenue growth continues for multiple years after a state's launch. As you can see on this next page, in our older state vintage, 3-4 years after launch and 4-5 years after launch, net revenue is still growing in the 50% range on a year-over-year basis. Similarly, in the 2020-2021 state vintage, 2-3 years after launch, we are growing more than 50% year-over-year. Continuing to work down the income statement, gross margin improves over time for a variety of reasons, including high flow-through of incremental Handle, lower promotional reinvestment, and higher hold rate. We are also continuing to benefit from our increase in scale.
We expect 12 states to have a gross margin of 55% or higher in full year 2023, which gives us a lot of confidence that our overall gross margin will continue to glide upwards for years as newer states continue to mature. We're very confident in a long runway of continuous improvement. Finally, as we work from Handle to gross revenue, to net revenue, to gross profit, to contribution profit, you can see that our external marketing declines in absolute dollars, and therefore, certainly as a percentage of revenue as a state matures. As a reminder, we invest to acquire customers, and as the number of potential new customers to acquire decreases naturally as a state matures, we deploy fewer marketing dollars into that state. So in summary, our foundational state economics are fantastic.
All of our state vintages are turning contribution profit positive within the 2-3-year timeframe that we've outlined historically, and increasingly at a faster rate with more recent state launches. Our older states are now generating stable and increasing free cash flow as Handle continues to grow, promotional reinvestment naturally and purposefully declines, gross margin rate improves correspondingly, and we decrease external marketing within those states. We have provided an Excel spreadsheet that aggregates all of this information into an easy-to-consume format, and by making conservative assumptions, you can see that the 2024, 2026, and 2028 guidance that we are providing is very achievable. Now, let's move on to customer economics.
We have utilized a simple heuristic internally for the past 4-5 years of allowing ourselves to acquire customers at a cost where we were confident that the 3-year cumulative gross profit of that customer exceeded what we invested to acquire them, and that heuristic has held true for the cohorts we have acquired. Illustratively, you can see that we have a permitted cost to acquire a customer at a dollar amount that is at or below the expected cumulative gross profit generation of that customer. More specifically, on this page, our customer acquisition costs have become even more efficient over the last few years. In 2022, our customer acquisition costs fell 21% year-over-year, and this year we expect that it will decline 20% again, while we, at the same time, rapidly increase the number of new customers we are acquiring.
As our customer acquisition costs continue to fall, our monetization of customers is improving. Specifically, our OSB hold percentage is rising as customers increase their engagement with newer, more entertaining, and more sophisticated bets, such as our live Same Game Parlays. Since 2021, we've added approximately 200 basis points to our OSB hold rate due to our customers' Handle mixing into parlay bets that are driving higher average leg count and therefore a higher average hold percentage. And as a result, we expect to achieve an OSB hold rate of approximately 9.5% this year. In sum, as a result of these trends, you can see that payback periods continue to improve across our cohorts. With that, I'll pass the mic back to Jason to discuss our new financial outlook.
Thank you, Jason. As a result of our strong and improving unit economics, we are providing adjusted EBITDA guidance for 2026 and 2028, only including the states already embedded in our 2024 guidance. To be clear, we absolutely expect additional states to legalize and launch OSB and iGaming over the next few years. In order to provide a view of what our existing states alone will generate in terms of revenue and earnings power, we are providing this guidance with the state composition that is consistent with our 2024 guidance and with no additional states included. As you can see, on this basis, we expect 2026 revenue of $6.2 billion and adjusted EBITDA of $1.4 billion, representing a 23% adjusted EBITDA margin.
For 2028, we expect revenue of $7.1 billion in adjusted EBITDA of $2.1 billion, representing a 30% adjusted EBITDA margin. We will have higher revenue growth in the earlier years, so you can infer that we project 2025 revenue to be in the mid-$5 billion range, and 2025 adjusted EBITDA between $900 million and $1 billion.... Importantly, we also expect to generate large and growing free cash flow over the next few years. DraftKings is a capital-light technology company that is also generating net interest income. So we expect to convert our adjusted EBITDA to free cash flow before corporate taxes, a percentage above 90% in 2026 and 2028.
As you can see, our sustainable top and bottom line growth outlook, long runway for margin expansion, and rapidly increasing free cash flow generation provide us with the opportunity to drive strong returns for our shareholders for years to come. Now I'll discuss the opportunity from additional legalization. Most importantly, we absolutely expect more U.S. states to legalize OSB and iGaming. On this slide, you can see that we expect to operate OSB in 25 states and Puerto Rico in 2024, with iGaming also in five of these states. Importantly, there is also a very strong bill pipeline, suggesting additional states could legalize various forms of online gaming in the years ahead. Eight additional states have introduced OSB legislation, and eight additional states have also introduced iGaming legislation, representing 19% and 17% of the U.S. population, respectively.
We will be focused on educating lawmakers about the benefits of regulated online gaming to their constituents in the years ahead to get them over the finish line. We have provided a lot of metrics today on existing state basis, but it's important to remember how much opportunity there still is in the U.S. from potential additional legalization. On this slide, you can see that if only the states that have already introduced legislation passed, we would expect long-term adjusted EBITDA to increase by approximately $1.5 billion above and beyond what we're already guiding to on an existing state basis. This $1.5 billion of upside is the adjusted EBITDA once those states are five years old.
There is a potential for up to an additional $6.2 billion of long-term annual adjusted EBITDA for DraftKings from further OSB and iGaming legalization in the U.S. on the same basis. Said differently, if every state not included in our 2024 guidance legalized OSB and iGaming today, we would project an increase in our 2028 adjusted EBITDA outlook from $2.1 billion-$8.3 billion. Last, we will discuss additional growth vectors. I'd like to ensure all of you that while we remain hyper-focused on the U.S. online gaming opportunity ahead of us, we're continuing to think big and think about the long term on behalf of our shareholders.
DraftKings sits in a unique position within the sports and entertainment ecosystem and has the right assets to capitalize on mega trends, including transitioning sports viewership, countries around the world regulating online gaming, and consumers looking to deepen engagement with their favorite apps. We believe we have the right to play in the sports and entertainment ecosystem, given our large and extremely valuable customer database, our well-known and trusted brand, our world-class product and technology, and our expertise navigating various regulatory landscapes. We are a data-oriented company, and we'll continue to think about our cost of capital relative to the projected returns we see from organic growth, as well as the potential inorganic opportunities that may arise. We will always pursue what we believe is in the best interest of our shareholders. We will now take a short 15-minute break before beginning the Q&A portion of the event.
Welcome back, everyone. As you now know, not only do we expect to do $400 million in adjusted EBITDA next year, we expect $900 million-$1 billion in 2025, and over $2 billion in 2028 just from our existing states alone, with additional upside from incremental legalization. We hope that you're as excited as we are about the trajectory of the business, and we will now start the Q&A.
We've received a couple of questions on TAM. Let's address one of these questions first today. How do you arrive at your 2028 TAM estimate?
Well, it's a great question. So, you know, for us, we really looked at it as sort of a tops-down and bottoms-up exercise. From a tops-down perspective, which is probably the easiest way to think of it, we thought a very, you know, reasonable and probably conservative assumption would be 9% CAGR from here till 2028. Now, remember, the average age of a state that is in this, you know, total cohort that we're talking about is only about two- and- a- half years old. New Jersey, which is 5 years into OSB and 10 years into iGaming, grew still at 25% last year, or expected to, excuse me, in 2023.
So knowing that, it feels like 9% CAGR for a cohort of states whose average age is only two- and- a- half years, if anything, is probably on the low end, and really felt like that was a very achievable number for us.
Unit economics is another topic that's receiving a lot of attention this morning, with questions on our core drivers, as well as customer growth and retention. Let's go through a few of these questions now, starting with: what do you expect for your OSB hold percentage in 2026 and 2028, and what do you expect for long-term promotional reinvestment rate? What about your other drivers?
Well, certainly, we have number of different drivers, and those are some of them. Really, we expect continued improvement across the board. We expect to be able to continue to increase hold. We expect to be able to continue to see reduction in promo rate, driven not only by that natural, you know, reduction that's going to occur from new users transitioning to existing users, but also because we continually optimize to make sure that we are investing in the right places and are not wasting spend that we could otherwise either deploy elsewhere or roll to the bottom line. All of that, we think, will contribute to an increased gross margin, as well as other benefits of scale, such as reduced vendor rates and other things that come with volume increases.
We think all of those things combined can lead us to the same general zone we said in our last Investor Day for gross margin in that mid-fifties range for the OSB and iGaming business, with obviously a higher margin coming from DFS and Other.
... Are you continuing to grow the number of customers you have in your oldest states?
Absolutely. We see continual new customer growth, very healthy CACs. Really, you know, that downward trend in marketing is because we're acquiring, you know, more casual users as much as it is, you know, less users. We do still see many, many new customers come, even in states that are in the oldest state vintages.
Continuing with unit economics, can you provide an update on your latest customer and revenue retention metrics?
Yeah. So customer and revenue retention has continued to be fantastic, likely industry-leading customer and revenue retention. Within the disclosures we provided today, you see the customer and revenue retention show up in that fantastic Handle growth that continues even in our oldest vintages, and certainly within the net revenue growth that you see even in the oldest vintages. So customer revenue retention, super important to this business, and this entire business model, and the trends continue to be fantastic, largely consistent with what we disclosed in 2022.
There's a lot of interest in your thoughts on the competitive environment and how DraftKings differentiates itself. Let's go through a couple of those questions, starting with: How does Progressive Parlay work? Is it differentiated versus peer offerings? How much could Progressive Parlay support your average leg count?
As far as we're aware, no sportsbook operator, certainly no major sportsbook operators in the U.S., offer Progressive Parlay, and there's really no product that has as robust an offering out there like it. Really, what this allows customers to do is, you know, if you love parlays, but you don't like the all-or-nothing nature of it, and you'd like to be able to have some other options to win if you don't hit every single leg, this will, this will be the right product for you. And what we believe will happen, where we'll see increased average leg count, because customers maybe that didn't want to add new legs because they thought it was all or nothing, now know if they hit less, they'll still be able to get a payout. We think that will encourage people to build larger parlays with more legs.
And, you know, it's also great for the economy. It's distributing the money a little bit better. So really, this is another example of a product that's a win-win. Customers, we expect to absolutely love it and find it to be another great enhancement to the DraftKings offering. And we also expect it to be a very high-hold product. It'll be really strong gross margin, and those are the types of things we're focused on. Obviously, you know, we have to make sure that it's a great product-market fit. The customer is there, the customer likes it, but also, you know, there's so many of those products that can also be great financial drivers for DraftKings, and progressive parlay really hits it on both.
Staying on this topic, how are you thinking about new competition and your share going forward?
Well, it's a great question. Obviously, we've been gaining share. Obviously, this has been a very competitive industry and has had multiple waves of new competition coming in. And, you know, if I look at sort of where we were two, three years ago, I don't feel... I didn't feel great about our product. We had just migrated about two years ago and onto our own technology and hadn't had time to do the work that we've done since then. Right now, I feel like we have the best product in the market. Our velocity is outstanding. We continue to make more and more strides every single day.
I also think the rest of our operation has so much great data and has so much great experience, so our marketers, our analytics teams, our product operations, our traders, just the more data we get, the better we do. We're a very data-driven company, and one of the hardest things early in this industry was we just didn't have a lot of history. You know, trying to figure out how to optimally acquire in your first few states and with very little data, trying to understand the LTVs of your customers is hard. The more and more data we get, the better we get across the board. And, really, that combined with just a continuously improving product, you know, improving at a really rapid pace. And there's so much stuff left on the roadmap that we think is obvious, to do.
There's not like a, "Hey, what do we do next?" conversation going on at DraftKings right now. It's much more of a, "How do we get all this stuff done as quickly and in as high quality level as possible?" So really feels like an exciting time at the company with so much low-hanging fruit, so much more to go after. So I feel great. You know, obviously, competition is good for the consumer. It creates a better environment, it forces innovation, it forces competition. I think that's really a, you know, a positive thing, especially at this stage of the industry, to see new competitors coming in, because it'll just push everyone to do better. And, you know, listen, we respect all of our competition.
We think that our competition is gonna bring it, and at the same time, we feel very confident that we have the right people and the right makeup to do what we do well and to really beat anybody out there. In the end, I think the customer is gonna gravitate to the best product and the best overall experience, and I believe that's what we're creating.
Turning to enterprise-level questions, our outlook for adjusted EBITDA, free cash flow conversion, and our current guidance versus our prior Investor Day guidance are also the focus of a few questions. To begin, you're forecasting an approximately 30% 2028 adjusted EBITDA margin. Would additional legalization allow you to improve that margin percentage long term?
Well, additional legalization will definitely help our margin. JP, did you wanna walk through it?
No, no, no, go for it.
All right. Additional legalization will help our margin, and it's really because the scale of our fixed cost base. As we add new states, we don't need to add a whole lot of fixed cost. And really, even as we add new states, our gross margins improve too, because of volume-based discounts that we get from some of our vendors. So all of those things contribute to increasing the expanding margins. One of the nice things about the U.S. is that it's expected to be such a large, you know, TAM, and I think if, you know, it ends up even at a fraction of what I believe it can be legally, it has a chance to be the biggest market in the world long, in terms of legalization, has a chance to be the biggest market in the world for a long time.
That means that you can spread a lot of fixed costs, a lot of product improvement, a lot of other things over that revenue base. So I would expect the, you know, U.S. to have ever-increasing margins as long as there's more legalization, and obviously, we need to continue to do our part to optimize, and there's a lot of room on that front, too.
... Yeah, I totally agree with everything you said. The guidance we provided today, again, $900 million-$1 billion in 2025, $1.4 billion in 2026, $2.1 billion in 2028. That is all on an existing state basis only. And that gets you to a 30% EBITDA margin in 2028. Completely agree with everything that Jason just said. Incremental legalization, incremental revenue from new states that are not included with our guidance today, should flow very nicely to the bottom line because of the scale and leverage we have on external marketing and our corporate fixed costs.
Next question is: Can you explain the bridge to greater than 90% free cash flow conversion that you discussed?
Yeah, absolutely. I, I can take that one if you want. Again, within the $900 million-$1 billion in 2025, EBITDA $1.4 billion in 2026, $2.1 billion in 2028. What I'd say is punchline, there's about $100 million that sits between adjusted EBITDA and free cash flow. The way to unpack that is roughly $100 million-$150 million per year in CapEx and capitalized software development costs, and that's gonna be offset positively by neutral to positive net working capital changes year over year, and we are net interest income positive on our cash balance today. So that's how you get to roughly $100 million.
So again, on those three time frames we provided, I'd say roughly $800 million-$900 million of free cash flow in 2025, $1.3 billion in 2026, and $2.0 billion in 2028. The final thing I'd say on this is that eventually we will become a net cash taxpayer. We are, in the interim period, though, going to be able to utilize roughly $1.2 billion of tax shield before we become a net cash taxpayer.
Our next question is, if we reconcile to your prior Investor Day guidance, which was 65% of the population with OSB and 30% of the population with iGaming, what would your long-term outlook for adjusted EBITDA be?
Yeah. So again, the guidance we provided today was based on existing states only, which is 50% legalization for OSB and 10% for iGaming. In the Investor Day we did roughly eighteen months ago, we had provided a long-term EBITDA, assuming that the U.S. gets to 65% OSB and 30% iGaming. So if you assumed that we were at 65% and 30% today, we'd be around $3.6 billion in 2028. So an additional roughly $1.5 billion on top of that. If you wanted to go apples to apples, today's guidance versus how we guided back in 2022. So a meaningful increase.
There are a couple of shorter-term guidance questions in the queue. Let's talk about those now. Can you provide an update on how you see the fourth quarter trending, and has your view on 2024 changed at all since the Q3 call?
Really, you know, it's been about a week- and- a- half, so not too much has changed. We are reaffirming our guidance for both Q4 as well as the rest of the year, and also reaffirming our guidance for 2024, and we'll have more to say about that, of course, on our next earnings call.
We have a few more questions on unit economics, including Handle growth, gross margin, and contribution profit. So let's go through some of those questions now. Starting with, how fast is OSB Handle growing versus iGaming Handle in the oldest vintages?
Let me see that. So iGaming and OSB Handle in the oldest vintages, do we have those data?
Well, I mean, I can take that one, Jason. The Handle growth, even in our oldest vintages, continues to be fantastic. The iGaming growth rate is a bit faster than the OSB Handle growth rate. And I think that's really a function of just, like, how great we are at cross-selling, from OSB to iGaming.
Our next question on this topic is, you said during your presentation that 12 states would have a gross margin of 55% or higher in 2023. Do the OSB and iGaming states tend to have a higher gross margin than OSB-only states?
Really, the gross margins are actually quite similar. You know, iGaming has a slightly lower gross margin, but actually a higher, or sorry, a similar contribution margin because the marketing spend is a bit less on it, and it gets more benefit from cross-sell. So, the contribution profit is almost identical, and the gross margins are very similar.
Yeah, and I just wanna reiterate, we did say 12 states will have a greater than 55% gross margin here in 2023, which should give you all quite a bit of confidence in what our, you know, what medium-term gross margin rate will look like. And I will add that we have 7 OSB-only states that will very likely be north of 60% gross margin here in 2023.
Yeah, I agree. I think it's sort of a misnomer that there's some margin difference.
I agree.
I think the real key way to think about it is, obviously, iGaming adds a lot of TAM. But the margins of the business are quite similar, and, I actually think that that fact that Jason just disclosed, that we have 7 states that are OSB-only states that already have 60%, or we expect to have 60%+ margins in 2023, is good, you know, way of demonstrating that.
... We have another unit economics question, to review: How do you think about revenue flow-through to gross profit in your financial planning?
Well, obviously, we've seen really strong flow-through, and I think the reasons which we've explained in the past have been that increased hold rate as well as declining promotional investment both flow through at a higher rate than Handle increase. Those should continue. Obviously, we expect to continue to see Handle growth. That'll be a core driver. But we also expect to see continuing improving hold rate. We expect to see continually improving promotional rate, and those two things, when they affect revenue, certainly flow through at a higher rate. So we expect the overall net flow-through rate to continue to be consistently higher than the overall gross margins of the business, which of course, will continue to mean gross margins rise.
Let's turn back to competition and shares. We've received a couple of more questions on these topics. You've taken a lot of share over the past several quarters. Which product innovations do you attribute the majority of your success to?
Well, certainly it's not one thing, but I do think the improvements we've made to our Same Game Parlay offering and, you know, that really culminated with bringing in-house our technology for this NFL season. And, you know, those, I think, along with many, many other product enhancements we've made, have now put us in a position where I feel we have the best product in the market, and a real reason why has been our velocity. As you remember, we only migrated a little over two years ago to our own technology, and certainly, while we weren't starting from scratch, we were playing from behind. We did not have a competitive product with our top competitor last year or two years ago, and probably weren't quite there last year.
Now, I do feel like we have the best product in the market, and because that velocity, only 2 years, a little over 2 years, is what it took for us to get here, I feel like we're just going to continue to be able to extend our lead going forward.
I would add, I absolutely think that the product enhancements we've made and the team has made are a big contributor to the share increase and the share gains we've experienced over the last, you know, one to three quarters. I would say it's more than that. It's more than product, too. I think our overall execution, our preparedness for every... the start of every new sports season, especially the NFL season, our relentless focus on the customer and the customer experience and every customer journey, all of these things contribute to why we're winning in the market.
Where does DraftKings stand in terms of its investments in AI and ML, machine learning?
Well, we've been investing in machine learning for years and, really recently started exploring AI. AI, I think, is very similar, but obviously, you know, a newer technology and something that is just now becoming commercialized and, certainly the hype is real. There's a lot of future impact that I think AI will have on the business. DraftKings has been ahead of the curve on this, as well as machine learning and really everything in this category since our inception, and, you know, I expect we'll continue to do so. One thing we've been sure about is we'll never let a new technology that could be transformational for our business creep up on us.
Obviously, we believe AI, just like many businesses, could create enormous efficiency as well as really a lot of benefits for the customer, which will hopefully lead to bigger TAM, better market share, and all those other top-line drivers. So lots of really good upside, I think, and really excited about the roadmap we have. We've concentrated a team on very specific areas. We have a very clear focus on where we want to guide the team to focus their energy on and where we think the most immediate opportunities are, given the current state of the technology. And I expect that, you know, probably 2024 will be mostly a year of investment and experimentation, but starting in 2025 forward, there will be real impacts to the business.
We have additional enterprise-level questions to review. Capital allocation is a topic of interest, as well as how we're thinking about future planning. Our first question is: How are you thinking about capital allocation today in terms of buybacks or M&A?
Absolutely a fair question, and I'll start by saying it, it's a great place to be, and it's a great question for us to have to be addressing. As you all know, we're ending the year with north of $1.2 billion of cash. We'll be adding to that cash balance for the foreseeable future. I'd say two things: one, we have a right to explore other adjacencies outside of OSB and iGaming. It's early days, but if you think about the leverageable assets that DraftKings has, our fantastic brand, our trusted brand, our deep and actionable database, our fantastic regulatory capabilities, I think we'd all agree that DraftKings has the right to play and the right to win in certain adjacencies.
Again, very early, but I think we'll explore those, and it could be a place that we allocate capital. We'll do it very, very responsibly and keep total return to shareholders top of mind as we explore and potentially pursue any of those. The second thing I'd say is we're constantly looking at the optimal capital structure and the role of share repurchases in that equation. Again, though, it's early days on that front. We're leaving this year for the first time with greater than... well, well, not for the first time, but we'll be leaving this year with north of $1.2 billion in cash and growing it. So we'll keep you all in the loop, and I'll just, you know, reiterate, total return to shareholders is top of mind.
Our next question is: All the trends you're presenting today are positive. Where is the risk in your planning looking forward?
Great question. You know, this is an answer that would've been quite different a few years ago. I would've said, you know, two years ago, probably two- and- a- half years ago, and maybe more like three years ago, that our balance sheet capital was a risk. And, you know, I think a year and a year- and -a- half ago, I would've said the state of our product and the things that we needed to improve there were a risk. Right now, I actually think we're in a great spot. It really is, you know, the table is set. I think the largest risk is just execution, and that's something historically we've been very good at. We've been able to focus and execute really well.
But I think outside of that, you know, really a lot of the things that I would've looked at in the last 2, 3 years and said, "Those are significant risks for the business," they don't exist anymore. And the execution piece is entirely within our control, so for the first time, we control our destiny, and certainly it is my job to make sure we don't mess that up.
We have time for one more question today, and it's related to TAM. What do you expect in terms of OSB and iGaming legalization over the next few years?
It's a great question. I mean, you know, still, about half the country, including the three largest states, do not have legal online sports betting. An even larger amount, almost 90% of the country, does not have legal iGaming. Tons of opportunity there. Hard to imagine we're at the current end state. Have to be more states that do it, I would think, but obviously it gets harder to predict as time goes on, you know, exactly what percentage each year, because the sample size where we concentrate is smaller. If you look at some of the states that had action last year and have bills live, as well as iGaming, about 19% of the U.S. population has had OSB legislation introduced.
I think about 17% has had iGaming legislation introduced, so, certainly that would give you an indication that there's continued momentum, and, I expect as time goes on, you're gonna see that, you know, evolve into more states that haven't considered it yet. Obviously, there's a lot of education left. There's a lot of things that we need to do to make sure that the right message is out there, and that the facts are actually understood, and that rumors and things that are not true, are debunked. But, I think that as time goes on, you're going to see continued, you know, understanding, due to that education. And, the fact is that, you know, time is on our side on this one. So, really hard to say exactly what the end state will be.
That's why we've moved away. It was sort of arbitrary in the past that we predicted 65% and 30%. Looking at it today, it feels like you know, you could see a path to getting above that. But you know, that's a lot harder, obviously, to control and to predict than our existing business, our existing states, and how well we execute there. So that was the focus of our presentation today, but it doesn't mean that we think this is the end of legalization. As we noted, there's still a lot of activity going on around many states in the country, and I think you're going to continue to see expansion for many years to come. Thank you for joining us today. Really appreciate your time.
Hopefully, you're as excited as we are about the path to $900 million-$1 billion of EBITDA in 2025 in our existing states alone, as well as the path to $2.1 billion of adjusted EBITDA in 2028 in just our existing states alone. The team has been performing incredibly. We've been executing well. We think there's still a lot more upside left to come. So, hopefully, we'll be able to share more of that with you in our next earnings call, which we look forward to, and thank you again for your time today.