Ladies and gentlemen, thank you for standing by and welcome to the DraftKings Q3 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one on your telephone. If you require any further assistance, please press star then zero. I would now like to introduce DraftKings conference call. Mr. Stanton Dodge, you may begin.
Good morning, everyone, and thanks for joining us today. Statements we make during this call that are not statements of historical fact constitute forward-looking statements that are subject to risks, uncertainties, and other factors that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. For more information, please refer to the risks, uncertainties, and other factors discussed in our SEC filings. During the call, management will also discuss certain non-GAAP measures, which 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.
A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is available in our quarterly report on Form 10-Q filed today with the SEC and in our earnings presentation, which is available on our website at investors.draftkings.com. Hosting the call today, we have Jason Robins, Co-founder, Chief Executive Officer, and Chairman 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 up the line to questions. I will now turn the call over to DraftKings' Co-founder, Chief Executive Officer, and Chairman, Jason Robins.
Good morning, everyone. Before I begin my remarks, in recognition of Veterans Day this week, I would like to thank our country's veterans for their sacrifices and service. In order to more directly support our veterans and their families, DraftKings launched Tech for Heroes in 2018, a company-wide initiative that provides veterans and military spouses with free comprehensive high-tech job skills training and connects veterans to DraftKings employees who provide mentoring. Since launching the Tech for Heroes program, we have invested over $1 million in providing free accredited training to veterans and their spouses across the country. I'm proud to announce that in 2021 we will be expanding the reach of our Tech for Heroes program and are committing to training approximately 250 veterans in 2021, double the number we trained this year.
We want to give veterans and their spouses the tools they need to start a new career in tech or advance in their current position. Everyone at DraftKings is proud to do our part to thank veterans and their families for the sacrifices they make on our behalf. I would also like to thank our investors for their continued support and welcome those investors who joined us with our follow-on equity offering in October. On today's call, we will cover the following topics. First, I want to share some insight into our third quarter accomplishments. Next, I will provide an update on our recent state launches and the pipeline of new states. Third, I will discuss our product and technology investments as well as the migration to our in-house proprietary sports betting technology.
Before turning it over to Jason Park, I will share some insights into our sales and marketing approach and our recent equity offering. DraftKings had a very productive third quarter on a number of different fronts. Our Q3 performance confirms what we foreshadowed on our previous earnings call. The return of major sports has generated tremendous customer engagement. Third quarter revenue of $133 million was at the high end of the range we outlined in our recent S-1 and grew 42% year-over-year. In Q3, we also had more than 1 million monthly unique payers, which means the average for the months of July, August, and September was greater than 1 million. Given the impact COVID had in July, monthly unique payers in August and September were higher than in July.
We expect these positive trends to continue, as shown by the very encouraging outlook for the fourth quarter that our 2020 guidance suggests. As noted last quarter, there have been and may continue to be disruptions in the sports calendar due to COVID. We are optimistic that sport will continue to be played and believe any disruptions will be short-term in nature and not impact the long-term prospects of the sports gaming industry or our competitive positioning. Looking ahead to 2021, we are likely to see another unique sports calendar with the NBA and NHL expected to kick off their seasons either later this year or early next year as compared to their typical start dates in October.
Second, we continue to build smart and effective relationships with media companies, including ESPN and Turner Sports, as well as with professional sports teams, including the Chicago Cubs, the New York Giants, and the Philadelphia Eagles. These commercial and strategic agreements provide us with access to unique and valuable content, intellectual property, and marketing assets, as well as highly relevant target audiences in markets where sports betting has recently been legalized. We evaluate these opportunities with the same data-driven approach we use to guide other areas of our business. We also strengthened our corporate foundation by appointing two new board members, Jocelyn Moore and Valerie Mosley, and we also added Michael Jordan to our team as a special advisor on our board.
I am excited to welcome Jocelyn and Valerie to our board as they each bring unique skills, experiences, and ideas, and they will each play an important role in shaping the future of DraftKings and helping us achieve our long-term goals. Jocelyn's former roles, which include serving as Executive Vice President of Communications and Public Affairs for the National Football League, equip her with valuable insights into our customers, as well as with respect to government and regulatory affairs. Valerie's experience in the investment management industry, which includes 20 years plus at Wellington, provides us with an important voice on the capital markets front. The addition of Michael Jordan to the DraftKings team is also a great fit. Both Michael and DraftKings live and love to compete.
Michael will provide input on a variety of dimensions, including a focus on brand strategy, product development, inclusion, equity and belonging, marketing activities, and other key initiatives. Turning to new U.S. states for DraftKings and legalization trends. In the third quarter, we launched iGaming in West Virginia and sports betting in Illinois. Illinois, given its size and passionate sports fan base, is a large and important market. The state was a focus of our Q3 marketing efforts and a key reason for the increase in third quarter sales and marketing expense. The governor's suspension of the state's in-person registration requirement has enabled us to acquire players directly onto our mobile product. Our investments in technology, regulatory affairs, and compliance put us in a great position to market to customers and launch mobile registration quickly. We are pleased to have launched mobile sports betting in Tennessee on November first.
We are excited about entering another state with passionate sports fans and highly competitive teams at both the collegiate and professional level. With our launch in Tennessee, DraftKings is now live in 10 states for mobile sports betting and live in three states for iGaming. You also know, Virginia has legalized sports betting and Michigan has legalized both sports betting and iGaming. Those two states account for approximately six percent of the U.S. population. We are working together with state officials in Virginia and Michigan on regulations and licensing and are hopeful that we will launch in each state at the earliest practical opportunity. Last week, on election day, Maryland, South Dakota, and the majority of parishes in Louisiana passed referendums in favor of sports betting. These three states in total account for approximately three and a half percent of the U.S. population.
The margins approving the referendums were decisive, showing that public support for sports betting is strong, and we are hopeful that this will help the momentum continue across the U.S. As a reminder, launching in a new state is a multi-step process. Legislatures need to pass bills, regulations need to be written, and licenses need to be granted. Last week's votes were certainly a good first step, though it is probable that these states will not have a material impact on our financials in 2021 and may not even launch until 2022. In addition, Ontario's government recently presented its annual budget, which included language that would modify the long-standing statutory internet gaming framework to allow private operators offering sports betting and iGaming products to operate in the province. This is exciting because Ontario is a large market for us.
If it were a U.S. state, it would rank as fifth largest state by population, and we have offered our DFS product in Canada since 2012. We are now two and a half years in since PASPA was struck down by the U.S. Supreme Court. 21 states representing about 40% of the population have legalized sports betting. 14 states representing 26% of the population have legalized mobile sports betting, 12 of which representing 21% of the population currently have operators live. DraftKings is now live with mobile sports betting in 10 of those states, which is more than any other operator. These 10 states collectively represent about 20% of the U.S. population. We continue to be very excited with the product and technology investments we are making, as well as with our progress on the technology migration and business integration of SBTech.
We anticipate completing the technology migration by the third quarter of 2021. Once we do so, our vertically integrated proprietary sports betting technology will create a sustainable and differentiated advantage for DraftKings. We also expect to benefit from a long-term improvement in our gross margin percent once the migration is complete. As a reminder, with the acquisition of SBTech, we now have almost 1,100 engineers worldwide dedicated to creating best-in-class technology and games and experiences for our users. During the third quarter, we launched our standalone casino app for iGaming in Pennsylvania and West Virginia. We also launched Best Ball, which is our first season-long product for DFS. In addition, we introduced several new DraftKings-created games for online casino, including new versions of blackjack, roulette, and baccarat.
Beyond our customer-facing investments, we continue to prioritize our internal capabilities around data science which drive our cross-sell and LTV to CAC metrics. With our technology talent and resources as well as with our proprietary betting engine, we will be able to clearly differentiate our offering in the U.S. from any other gaming provider and create a sustainable advantage for DraftKings, both as a B2C and B2B company. Regarding B2B, we continue to obtain new business in international markets. In October, we announced the launch of PalaceBet, a mobile and online sportsbook powered by DraftKings B2B technology through our relationship with Peermont in South Africa. We also announced the renewal and extension of our relationship with MansionBet, the Gibraltar-based sports betting brand of Mansion Group, which is a leading provider of online gaming with a portfolio of well-known online casino brands and a sportsbook.
In the third quarter, we saw a significant increase in customer activity, as evidenced by our 64% year-over-year increase in MUPs for the quarter. On average, more than 1 million monthly unique paying customers engage with DraftKings each month during Q3. A number of the factors we have discussed, including the unique Q3 sports calendar, pent-up demand, the earlier than expected mobile registration opportunity in Illinois, and the stay-at-home nature of COVID have made this a unique and valuable time for customer acquisition, and our CAC came in better than our expectations. We have confidence that our CAC levels are appropriate given our insight into our customers and revenue retention, which are the bedrock of our LTV calculations. Our sales and marketing approach is data-driven.
We base our decisions on the return on ad spend we are seeing, not on what our competitors are doing, and leverage our data to optimize customer acquisition spending based on player profiles and preferences. This approach means that we will spend more if the data indicates that we should, as was the case in Q3. We will take the same data-driven approach always to our commercial and strategic agreements. For example, states with sports betting and iGaming generate higher customer LTVs, which informed our agreement with the Philadelphia Eagles. In our agreement with the Chicago Cubs, we considered the value associated with the potential to open a world-class DraftKings Sportsbook at Wrigley Field.
Our agreements with sports media organizations like ESPN and Turner allow us to integrate our content into programming and collaborate on new content, which we believe will improve our overall marketing performance while advancing mainstream adoption of sports betting. Finally, our relationship with Bryson DeChambeau, the world's sixth-ranked golfer and 2020 U.S. Open champion, underscores the significance of golf within the gaming industry. Golf remains DraftKings' fourth most popular daily fantasy sport, while our golf Sportsbook handle has grown over 10 times year-over-year. I would also like to talk about our recent equity offering, which is the second one we have completed since going public, including the rationale behind it and how I see things going forward. We conducted the October offering for two primary reasons.
First, the process we are going through is part of the reality of transitioning from a VC-backed company to a publicly traded company. It is only natural for early private investors to exit their investment and realize a return for their investors. The offering allowed us to smooth this process out by facilitating an organized and orderly process in anticipation of the lockup restrictions on many shareholders that were set to come up on October 20. In fact, now 80% of our common shares are unlocked at this point, and all of our shares will be unlocked at the beginning of January, after January fifth. We have provided more specific information regarding the unlocking of our shares in the earnings presentation, which can be found on our investor website. Secondly, DraftKings has always been proactive with ensuring we are well-financed to pursue our growth objectives.
We see a number of attractive avenues to deploy the capital we raise in ways that will create long-term value for our shareholders. This may include continued investment in customer acquisition, especially while the CAC remains very efficient, as well as positioning the business for the hopeful acceleration of state legalization. In addition, while we have no specific M&A targets at this time, we are always considering companies that may help us fuel our growth and bring more excitement to the skin in the game [plan]. As I look to the future, I am very confident in the continued growth of the online sports betting and iGaming market in the U.S.
Though not a proxy for revenue, the handle growth figures we disclosed in our S-1 support our OSB and iGaming TAM estimates, as do the number of new users we are adding and the data that the states are reporting. DraftKings is well-positioned to capitalize on the U.S. market growth as we extend our leadership position with live operations in more states than any competitor. I will now turn the call over to DraftKings CFO, Jason Park, who will discuss our third quarter results and how we are currently thinking about the rest of 2020 and 2021.
Thank you, Jason, and good morning, everyone. Before I begin, I want to remind everyone that we will be discussing our results on a combined company pro forma basis to improve comparability as if the business combination had closed on January first, 2019. Pro forma means that we are including B2B for the nine months ended September 30th, for both 2019 and 2020, rather than just from April 24th, through September 30 in 2020. In Q3 2020, we delivered $133 million of revenue, a 42% year-over-year increase. These results were fantastic and would have been roughly $15 million stronger were it not for the unusually low hold for NFL games during the first three weeks of the season.
On a year-to-date basis, we have generated $321 million of pro forma revenue, representing 19% year-over-year growth, which obviously includes several months that were deeply impacted by COVID. Our B2C segment, which represents our U.S. product offerings of daily fantasy sports, Sportsbook, and iGaming, generated $104 million of revenue in Q3, up 55% compared to the same period in 2019. We launched iGaming in West Virginia and online sports betting in Illinois during the third quarter, and we were live in seven new states for NFL week one versus Q3 2019. These factors, combined with the packed sports calendar, were the major drivers of our growth. On a year-to-date basis, our B2C segment has grown 29%. B2C monthly unique payers in the quarter increased 64% year-over-year to 1.02 million.
The increase reflects strong unique payer retention and acquisition across DFS, OSB, and iGaming. On a year-to-date basis, MUPs have increased 20%. MUPs also grew at an impressive year-over-year rate in October as we continued to realize the positive impact of our external marketing spend. Average revenue per monthly unique payer, or ARPMUP, was $34 in Q3, representing a six percent decrease versus the same period in 2019. Our ARPMUP was impacted by the aforementioned low NFL hold and promotional activity, offset by increased engagement with our iGaming and online Sportsbook product offerings. On a year-to-date basis, ARPMUP has increased seven percent versus 2019. Turning to our B2B results, our B2B business generated $29 million of revenue in the quarter, a very solid 11% growth rate compared to the same period in 2019.
Adjusted EBITDA for the quarter widened to negative $197 million as we rolled out our new state playbook in multiple jurisdictions and continued to invest in our product technology and G&A functions. Gross margin rate for the business declined as we shifted our business away from higher-margin DFS as well as increased promotional activity. GAAP gross margin rate declined more due to the amortization of acquired intangibles related to the business combination. Our sales and marketing spend was $203 million on a GAAP basis and $191 million after excluding stock-based compensation and depreciation and amortization. The year-over-year increase in marketing investment had a positive impact, as you can see from the increase in our MUPs. The majority of the $191 million in Q3 sales and marketing spend was for external marketing.
The primary driver for our year-over-year increase in external marketing is that we had seven states where we were live for the first time for NFL week one, including Illinois. In addition, the pent-up demand and unique sports calendar combined for strong engagement and return on advertising spend. Product and technology and general and administrative expenses were $54 million and $127 million on a GAAP basis respectively, and $31 million and $36 million respectively after excluding stock-based compensation, transaction expenses, and other non-cash and non-recurring charges. The year-over-year growth in these cost categories was primarily from headcount increases, including the annualization of hires we made in 2019.
Moving on to our balance sheet and liquidity, we are well-capitalized to execute our multi-year plan and address our key priorities of taking advantage of this unique time for customer acquisition, entering new states as they legalize, continuing to lead the market on product innovation, and exploring opportunistic and accretive M&A. We ended the third quarter with $1.1 billion of cash on our balance sheet and no debt. Taking into account our follow-on equity offering in October, as well as a $295 million use of cash to net settle restricted stock units, we expect our cash balance to be approximately $1.7 billion at year-end. Regarding the net share settlement, the RSUs that vested on October 20th resulted in a requirement for the company to withhold taxes.
The company held back shares to satisfy the withholding obligation, delivered only the net shares to the participants, and paid the taxes. As a result, we reduced our diluted share count by about 2%. I wanna reiterate that no shares of Class A common stock were transferred or sold by our officers in connection with the vesting of these RSUs or the October offering, other than the shares withheld by the company, which are reported as a disposition of shares. Having now generated $321 million of pro forma revenue in the first nine months of 2020, we are increasing our guidance from $500 million-$540 million to $540 million-$560 million of pro forma revenue for the full year, which equates to year-over-year growth of 25% to 30%.
This increase reflects strong performance in October and substantial user activation due largely to our Q3 marketing spend. We assume that all sports calendars will continue as announced and that we continue to operate in states in which we are live today. The range also assumes that the Governor of Illinois does not extend the suspension of the in-person registration requirement. Future revenues and marketing spend will be higher for each month Illinois chooses to extend the suspension. In terms of MUPs and ARPMUP, we expect MUP growth for the full year 2020 to exceed 2019's growth rate, while ARPMUP growth for 2020 is expected to be below 2019's growth rate, but slightly higher than our year-to-date growth rate.
Turning to pro forma Adjusted EBITDA, we are continuing to invest in marketing given the strong marketing spend efficacy we are seeing, as well as our investment in the launch of sports betting in Tennessee. As a result, we expect our Adjusted EBITDA loss in Q4 to be a little more than half of the loss recorded in Q3, again, based on the states in which we are live today. As a reminder, our marketing spend is highly flexible and can be reduced or paused altogether if the sport calendar shifts. In the future, we expect to provide full year guidance only once annually on our year-end call.
However, since we provided a 2021 revenue outlook of $700 million during the de-SPAC process, and because we are seeing strong results from recent marketing investments, we want to provide an update on our 2021 revenue outlook on this call. Though we are still in the process of finalizing our 2021 plans, we believe that our 2021 revenues will likely be in the range from $750 million-$850 million.
This range is based on the same assumptions we used for our 2020 guidance, in particular, that all professional and college sports calendars that have been announced come to fruition, including the commencement of their 2020 to 2021 seasons, and that we continue to operate in states in which we are live today, which collectively represent 20% of the U.S. population for mobile sports betting and seven percent of the U.S. population for iGaming. We will continue to refine and update our internal budgets as we move through Q4, and we'll issue formal 2021 revenue guidance on our Q4 and full year earnings call. That concludes our remarks, and we will now open the lineup for questions.
Our first question comes from Michael Graham with Canaccord Genuity.
Hey, thanks so much for the question and impressive numbers. Can you just please talk about your 2021 guidance for a second? Thanks for giving us that. Just, you know, maybe at a high level, you know, talk about the relative contribution from MUPs and ARPMUPs. Jason, did you say that only includes states where you're live today? Should we expect that, you know, as you can add more states potentially that could, you know, drift higher?
Thanks, for the great question. Yes, this only includes. We have continued to follow a philosophy of only including states where we are either live or have a certain launch date. While we are hopeful that we will be able to add states like Michigan and Virginia next year, we don't know yet. That's not included. Those states are not included in those numbers. You know, the results were really, you know, driven by excuse me, the increased guidance is really driven by the results we've seen in the last quarter, particularly on the customer acquisition side, which is going to give us more revenue and, you know, hopefully continue to have more, MUPs as well into next year.
Okay, thanks a lot.
Our next question comes from Vince Johan with Credit Suisse.
Hey, how's it going? Thanks for taking my question. Ontario seems like a great opportunity. I don't know if you have any color on steps or timing. With regard to OSB versus iGaming, not sure if either segment has momentum or if it's an all or nothing dynamic.
Ontario, for those who are not familiar, added to their budget, a basically allowance for private operators to offer both sports betting and iGaming in the province. Ontario previously had only had a, you know, single operator, the province, lottery, that was operating sportsbook and iGaming. Although, you know, some have been operating in the gray there for quite some time as well. Ontario is, you know, a very large province. It's Canada's largest province. If it were a U.S. state, it would be a top five state. DraftKings has been present in Canada, including, of course, Ontario, for almost a decade now. We have a very nice size user base there, and we think it could be a really great opportunity.
As far as timing, you know, I think similar to some of the other processes you see with U.S. states, it's always not, you know, not always very clear exactly what the timing or process will be. We think it was a great step to see Ontario put forth what they did, and, you know, we're very hopeful that we'll be able to have both sports betting and iGaming in Ontario sometime next year.
Gotcha. Just a quick one, is that something you anticipate needing a partner like most states in the U.S., or is this gonna be more similar to maybe how Tennessee is structured or the U.K.?
The indications we've been given is it will be a direct license. Obviously anything could change, but that's what we've been so far told. That's our expectation that we'd be able to, like Tennessee, obtain our own license.
Gotcha. I appreciate it. Thanks.
I will say, though, that a lot has been left to the regulator. It was a very, you know, sort of brief, you know, change in terms of the budget and the law. A lot is still left up to the discretion of the regulator, including questions like that.
Gotcha.
The next question comes from Chad Beynon with Macquarie.
Good morning. Thank you for taking my question. From a product standpoint on your sports wagers in the quarter, can you kind of help us think about what you learned about your database? Meaning are your customers skewing more towards football than what you were originally thinking just because of the DFS? Were there any surprises just in terms of kind of how the proportions split out with different sports? Thanks.
Great question. You know, one of the challenges in even answering that is the sports schedule itself has been so strange this year. You know, looking at things like year-over-year comparisons or even comparing sport to sport has been challenging, you know, to draw conclusions from. From what we can see, the balance of sports is quite similar to what we've seen in the past, and less in sports betting skewed towards NFL than in daily fantasy sports. However, NFL is definitely the largest sport, both in daily fantasy sports and sports betting. It's just the gap is a little bit smaller, you know, in part because things like college sports make up a little bit more of the room on sports betting and, you know, they're not as popular on the daily fantasy sports side.
Really tough to tell if anything's kind of changed this year as more states have done sports betting. From what we can tell, it hasn't. You know, that's with the caveat that, you know, typically when we look at things, we look at year-over-year comparisons to control for seasonality, and, that obviously was not very possible this year.
Okay, great. Can you elaborate a little bit more on the ESPN sports book link out, the timing of that and when the full integration will be in place?
Yeah, we're very excited about that. We have a, you know, great relationship with ESPN. Disney continues to be one of our largest shareholders. You know, we think there's a great long-term relationship that we hope to build upon there. As far as timing of any individual features, we plan to announce anything that we do wanna announce, you know, in sort of our normal course, as things roll out. We don't have at this time anything that we're publicly saying about timing of any sort of direct integrations or other things. You know, teams are working very hard on it, so we hopefully will start to see some of those things very soon.
Thank you, Jason. Best of luck.
Thank you.
Our next question comes from Kevin Rippey with Evercore ISI.
Hey, good morning, guys. Thanks for taking the question. I just had one on sort of marketing spend and the efficiencies you're seeing there. Looks like, you know, marketing spend per MUP addition came down quite a bit. Wondering if you could help us parse out how much of that comes by way of pent-up demand, given the unique sports calendar, and how much of it is coming by way of, you know, internal efficiencies that you're driving. Thanks.
That's a great question. You know, that is a million-dollar question that I don't know that I do have an answer for you. It's hard to quantify how much pent-up demand is driving increased response, how much the stay-at-home nature of COVID is driving increased response, how much the overlap in sports calendar is affecting things. All those are new data points for us, so very tough to compare to other periods. Overall, we are seeing great performance. The efficiency, the CAC is actually better than what we expected, and we were able to spend deeper at a lower CAC. While, you know, it's hard to pinpoint exactly how much is a sort of relic, or not a relic, but a function of the current environment versus, you know, just better, optimization.
While that's tough to tell, we do know it's better, and I'm certain it's some combination of the two. Just hard to kind of parse apart how much of each. The team is always optimizing the marketing, so I would always expect continued improvement. you know, we're getting close. We're not quite there yet, but we're getting close to that 30-plus% level of, you know, population having, of the U.S. population having sports betting, which then will allow those national marketing efficiencies to start to kick in. I think that's part of why you're seeing us start to do some of these more national media deals.
Great. Thank you.
Thank you.
Our next question comes from Stephen Grambling with Goldman Sachs.
Hey, this is Stephen Grambling. I guess one, just following up on the ESPN deal, and maybe I missed this, but are there any potential implications as you think about the impact to customer acquisition costs? Also, if you can just touch on more broadly how you think about content and media as a future area of growth.
That's, you know, our expectation when we do any strategic deal is that it will have a positive effect on our customer acquisition costs. You know, the true win-win is when you're able to actually spend more at better efficiencies that benefits both the media company that's, you know, on the other side of the deal as well as us. I think the ESPN deal is a perfect example of that, where they're allowing us access to inventory like link-outs and integrations that normally you can't buy on the open market. Those are very high performing from past experience that we've had in similar deals, as well as deals we've done on the daily fantasy side with ESPN in the past. We have a high degree of confidence that this is a win-win deal that should improve our customer acquisition efficiency over time.
you know, certainly we're excited about partnering with ESPN as well as, you know, other great media partners like Turner that we've formed relationships with over the last quarter.
Great. Maybe one quick follow-up on marketing and promotion. Can you just remind us of where you're kind of targeting the win rate, and does your flexible marketing approach try to manage around that?
Sorry, can you repeat the question one more time?
It's a question on marketing and promotions and where you kind of target win rate, and does your flexible marketing and promotion approach effectively enable you to manage around that? Should we be generally thinking that the win rate, if it's higher, you know, you maybe promote a little more, and if it's lower, promote a little bit less?
You know, it's a great question. I think in effect, it sort of works that way. It's not exactly how we manage it. We look at promotions much like external marketing based on, you know, an LTV analysis and the cost on the other side. We look at whether we think that, you know, whatever value we're generating on an NPV basis exceeds whatever cost the promotion has. You know, that's applied very similarly like our external media to new customer promotions as well as promotions designed to reactivate or generate new sport play and things like that.
I think the effect though, just, you know, practically is similar probably to what you're saying because promotions will certainly work better, in times where, you know, maybe the company is holding more and players are seeing, you know, less wins come forth versus in times where they're winning a lot. that's not really the driving force behind how we manage it. that's just more of kind of a correlated output.
That's helpful. Thanks so much.
Thank you.
Our next question comes from Jed Kelly with Oppenheimer.
Hey. Great. Thanks for taking my question. Just a couple. Can you sort of share how October is trending right now relative to your overall guidance? Just with Illinois, you immediately launched there. You put some promotions. Is that state now starting to move the needle revenue-wise, or is it still not as much with some of the promotions? I have a follow-up.
I got Illinois. What was the first question again?
Just how is October trending relative to your overall 4Q guidance?
You know, We haven't really said much about October, but as you see, we raised our Q4 guidance. You know, prior to today, we had been guiding to a midpoint that would represent 22% year-over-year growth. We are now guiding to a midpoint that would represent 40% year-over-year growth, so fairly substantial increase to the Q4 guidance. Without commenting specifically on October, you know, I can tell you we feel very good about the way Q4 is trending. As far as Illinois goes, Illinois has now become our second-largest state by handle behind New Jersey. It's also our fastest-growing state. We're pretty excited about it. I think you'll start to see some contribution on the revenue side in Q4.
Usually the first couple months of a new state launch, we don't see a whole lot of contribution on the revenue side. Tennessee is a great example of that, where, you know, we just launched Tennessee, but we don't actually expect it to have a ton, if any, impact on revenue this year. Illinois, I think, will start to have some impact on Q4, and that is part of why we think that we're, you know, going to be better than where we thought we were previously in Q4 this year.
Great. Then just a longer-term question for you, Jason. You know, you mentioned product development, your integration with SBTech. As we kind of get into next year, what do you think's ultimately gonna drive the customer stickiness in this industry? Is it gonna be more product development where you can actually generate or drive product differentiation among live betting? Or is it gonna be more CRM management where you know how to manage the customer, provide them bonuses? Just how do you see, you know, long-term stickiness with the consumer?
Well, you know, we definitely try to have best-in-class product and CRM programs. We have a great data science team and a lot of what we do is model-driven. I think if you wanna kinda simplify it, we believe that promotions drive trial and activation, product drives long-term stickiness and monetization. I think really we feel that it's also a stage of the industry thing. We are just starting. We haven't even, you know, migrated yet. We are just starting to put the investments behind building out the best live betting and, you know, new forms of teasers, prop bets, other things, that you're going to see us develop in the coming years.
I also think as the industry progresses and we have more time and more energy that we'll have been able to put behind that, we feel we'll be able to put more and more distance between our product and customer experience and, you know, what else is out there. I think that will increase the effect of that on stickiness over time. Right now it's very much, you know, so many new states opening up, it's customer acquisition mode for everybody, and that's an important part of it too. you know, people, we believe, will ultimately stick with the best experience, and that's what we're working hard to build.
Thank you.
Our next question comes from Thomas Allen with Morgan Stanley.
Hey, good morning. There's a lot of investor focus on gross and net win margins and concerns that they'll be impaired long term because of how competitive the market is right now. Can you discuss your thoughts on the topic? Thanks.
Yeah, I mean, we're, you know, two years into the industry. Just to put in perspective, we had exactly two states, New Jersey and West Virginia, live at the start of last NFL season. We're in 10 states now. You know, I think the long-term margins and other aspects of the industry are going to shake out over time. You know, we saw this in DFS, so it doesn't surprise me that those questions are coming up in the early days of daily fantasy sports. We ran at much lower margins than what we did longer term, and it ended up, you know, once we moved to more of the, you know, harvesting stage pretty quick, being a pretty easy change. Then the last point I'd make is the margins are actually pretty good right now.
Even when you factor in a lot of the promotional activity and free bet, you know, that all comes out of our net revenue. Net revenue is up significantly, 42% in Q3. We're guiding to 40% growth in Q4, 45% growth next year. You know, if there is any upside on the margin, it should be, you know, on top of what is already a very healthy growing net revenue number.
Thanks. Just a follow-up on a similar topic. You know, where are you in terms of profitability in the more mature markets?
You know, we are planning. You know, more mature markets are really New Jersey and West Virginia. You know, those were the only two that we were even present in last year at the start of NFL. You know, we have in the past provided some projections, multi-year projections on New Jersey. Obviously, COVID threw things for a loop, but, you know, we actually think we're at a pretty similar spot to where we had hoped to be. That said, we still have, you know, another month and a half of the year. What we're planning to do is in our next earnings call, in Q1, we will provide an update on New Jersey specifically, and we'll talk about how that's tracking versus what we had previously talked about.
Helpful. Thank you.
Thank you.
Our next question comes from Shaun Kelley with Bank of America.
Hi, good morning, everyone. Jason, just to follow up on that last question about the promotional piece, 'cause you know, just should we think about modeling this a lot like, you know, the way the cadence of the way that external marketing spend works? Obviously, as you're in the early phases of launch, you know, those numbers are gonna accelerate a lot. Or, you know, and then it comes down over time, or will the promotional piece, again, I'm really thinking about this net versus gross, will that actually come down faster, just given that it really applies more to sort of initial bonusing and, like you said, activation?
I think that they really, I wish I'd thought of that. That's a great way to describe it. It's very correlated to the acquisition. Certainly, some promotions are aimed at activation or getting people to try new sports or new products, but the bulk of the promotional dollars are aimed at acquisition. As acquisition in any given state becomes less of a focus and, even if we do continue to spend there, just as, you know, kind of we build our user base, naturally, new customers will be a smaller percentage of the total user base. Absolutely would expect promotional dollars to follow a similar trend. It's really, as you kinda alluded to, a new repeat mix thing that's driving it. It's not us deliberately doing anything differently.
You know, obviously, if we see things in the data that suggest something's not working or working, we'll alter. Even if that doesn't happen, just the simple shift between, you know, new customers being a very high percentage of our current actives and, you know, eventually repeat being the much higher percentage for new sportsbook states, that'll obviously change the promotional dollars as well as the external marketing spend.
Very helpful. Then just as a follow-up, you know, in some of these more mature markets, and really it's pretty much probably a case study around New Jersey, do you see any change in retention rates one direction or another? You know, how is this all kind of, you know, how is the cohort, you know, trend, you know, like working relative to the some of the guidance, and initial things that you laid out, you know, let's call it back in March and April?
We're seeing positive news on retention across the board. Virtually every state that we were present in last year, again, with the caveat that it was a small number, you know, for sports book, we're seeing growth. New Jersey is way up year-over-year. Even just, you know, at The Masters, which yesterday started, New Jersey had a 181% increase in handle year-over-year for The Masters. Really tremendous growth in existing states, and retention has been strong. Some of that might be due to, you know, COVID and people staying home and so many sports on the calendar. A lot of it, I think, is also due to us having optimized for, you know, having another year to have optimized our CRM efforts.
Thank you very much.
Our next question comes from Vasily Karasyov with Cannonball Research.
Thank you. Good morning. Back, early this year at the Analyst Day, you argued that a good proxy for us to model states that you are rolling out in is New Jersey, and that the revenue and gross profit and marketing spend indexed to one percent of the population should be more or less similar. I was wondering if you could give us an update of if that is holding true right now in the states for comparable period compared to comparable period in New Jersey, and if it's still a good assumption on average going forward. If not, whether it's, you think, driven by the sports calendar or it's just something systemic there. Thank you.
Yeah. I mean, I think you mentioned the sports calendar. It's hard to compare this year. This has been such an unusual year. You know, we had only two states, New Jersey and West Virginia, live at the start of last NFL. Most of the data we have is from a COVID-impacted 2020. Really tough, I think. You know, there's a difference, obviously, in New Jersey in that it had iGaming, so some of the states that had sports betting only that fell off a cliff in Q2. You know, very different story in New Jersey, where iGaming was still there to carry a lot of the weight, during that period. Very hard to compare.
We are planning, if we can, and, we're certainly working hard analytically to do so, to have, a more definitive viewpoint on that at our next Analyst Day, which will be, in Q1 of next year. Hopefully we'll have enough data and enough things sort of back to, you know, I guess, normal as far as you can call anything normal, to be able to do that. Right now, we don't feel that we have enough data to really be able to compare state to state effectively, and we don't wanna put anything out there that we're not, you know, very confident in.
Thank you very much.
Our next question comes from Brad Erickson with Needham & Company.
Hi. Thanks. can you just talk about the relative profitability levels you expect between sports betting and iGaming, and if they're different? I guess just philosophically, when you're looking at your P&L for iGaming next to sports betting in a particular state, do you run them together more or less, given the cross-sell synergies that they can drive, so you worry kind of less about one or the other being more profitable, or are they just looked at separately? Just maybe talk about your philosophy on that.
We look at everything together. You know, we view it as we have a platform, the user has an account and a wallet, and we wanna maximize the amount of value that we can generate over the lifetime of that user. We direct the team to do that in whatever way the data is suggesting is going to accomplish that goal. In doing so, you know, we don't really view product level economics as something that's relevant to how we analyze.
There are some things, you know, that you can attribute directly to a particular product, but a lot of things like promotion dollars, marketing spend, you know, things like that are very hard to attribute to a particular product, and we don't wanna unnecessarily, you know, and falsely attribute it to one or the other and make something, you know, look misleading or different that really isn't at all representative of how we think about it internally. If you take only the things that you can directly attribute to sports betting and iGaming and take some of those other things out, the products actually have almost identical margins.
You know, I think there could be some evidence growing that iGaming might be a larger TAM ultimately, but, I don't think aside from that, there'll be a difference in profitability, at least in the things that you can directly, you know, attribute to each product, which of course is not the entire P&L.
Got it. That's really helpful. Maybe just a follow-up, if I can. Recognize most sports betting and iGaming are huge contributors to the growth right now. Can you just talk about DFS and just what the growth trajectory looks like there and sort of any sort of help on magnitudes we're seeing both in the results as well as the outlook for DFS growth? Thanks.
Yeah. DFS has had a great year. Obviously, you know, COVID impacted sports calendar. Q2, you know, we didn't see as much DFS activity as we typically do, but it really came roaring back in Q3, in particular, you know, the August and September time frames after NBA, NHL, and of course, eventually college football and professional football became live. Just as an example, The Masters was up way up year-over-year for DFS. Right now, you know, it's new. The team is trying to kind of parse apart how much of that is true growth and how much of that is, you know, The Masters came on a different, in a different part of the calendar this year. Oftentimes, what we see is when we have more activity, everything goes up.
you know, it's interesting because a lot of people had asked us, not to deviate from your question, but it's related. A lot of people had asked us, "Hey, do you expect iGaming just really grew in Q2 because there weren't a lot of sports, and is it gonna go down in Q3?" It's actually been the opposite because we've had more activity on the platform, and that just lifts everything. DFS, I think similarly, when you have so much sporting event overlap, like The Masters, for example, and you know, this part of the NFL season, I'm not surprised we saw growth.
The team's working now to try to parse apart how much of that is natural growth that we, you know, feel will continue into future years and how much of it is, you know, really a function of just a very unique sports calendar this year.
That's great. Thanks.
Our next question comes from David Katz with Jefferies.
hi, good morning, and thank you. I wanted to ask about in-game wagering in sports. you know, I hope you can accept the sports references, but what inning would you say that we're in, you know, one, in terms of educating your customer base and in terms of the breadth of offering, you know, that you're at today and where you expect to be? are there any particularly interesting learnings so far, you know, with the NFL season to date?
Well, continuing with your sports analogy or baseball analogy, I think we're in spring training. I don't think we're even in the first inning yet. It is super early. We have not even rolled out, a lot of what we are, you know, developing on our own platform because we haven't migrated over to, you know, our owned and operated, platform yet. There's a lot. It's going to take years to build, and then, you know, it'll obviously, also be alongside just the customers naturally, you know, finding in-game bet. The two things will work in, you know, together, where as the product offering improves, more customers will adopt it. I think even if you just froze the product offering as is, you'd see more adoption over time as well.
Both those things, we think will, you know, have a very positive effect on each other and create a flywheel that will increase adoption of in-game betting at a rapid pace once we're able to migrate over to our own platform.
if you don't mind, I'd like to follow that up which, you know, which is do you expect or do you have any intelligence about, the degree to which that, you know, brings new players in or expands wallets on existing players or, you know, some combination thereof? Just, you know, I guess prevent me from getting carried away, prevent us from getting carried away as to, you know, how big, you know, how it ultimately could be.
You know, I think it'll have a combination. You'll see a combination of both of those things. There's other parts of the ecosystem that'll affect that too. You know, our hope is that the sports leagues become increasingly comfortable with integrating fun little prop bets and in-game bets into their actual sports broadcasts. You know, I think the more things like that you see, the ESPN effect that makes these things mainstream, you know, the more adoption that you'll see and the more it'll have an effect on new customers. I am very confident that it's an increased, you know, retention and monetization play, and I think that, you know, it can have an impact on new customers as well.
A lot of that will depend on, you know, to what degree the rest of the ecosystem evolves alongside and, you know, how quickly that happens.
Understood. Thanks very much.
Thank you.
Our next question comes from Mike Hickey with Benchmark Company.
Hey, good morning, Jason, Joe. Congrats on your quarter, guys. Awesome. Great guide too. I was just curious if you could, I guess, pull back a layer on Tennessee. They had a sort of a rather barbaric 10% hold mandate within their regulatory constructs. I'm just curious if, you know, that sort of shapes your success or not in that market and sort of moving over players from the black market. I'm guessing you have some workarounds there. Related, when you look at Michigan and Virginia and you get a sense of, you know, their regulatory construct, how much cleaner is that for players and operators from what you've seen in Tennessee? I have a follow-up. Thanks.
Yeah. Tennessee will be an interesting one because, you know, I think our ongoing belief is that, you know, by having, you know, higher mandated hold percentage, it will be harder, as you noted, to compete with the illegal market, and we might not see as much adoption therefore. We've factored that into our numbers next year. We are assuming Tennessee, for that reason, doesn't perform, as well as it otherwise would have, you know, as a comparison to states that don't have that. That said, it could go the other way. It could be because, you know, there is an increased hold percentage. It could be that that's, you know, enough to offset whatever drop you see in adoption and migration from the illegal market. We just don't know. It'll be an interesting experiment.
you know, like I said, our ongoing view is that it will have a negative effect, and that's why we've assumed that in our numbers for next year. you know, could go the other way, and we'll have to see. I think that's one of the interesting aspects of this industry is it's going state by state. Different states are going to try different models. They're going to have different mixes of products. you know, our belief is that that'll lead to, you know, much faster, and much more obvious determination of what the optimal model is, and it'll lead to other states kinda, you know, gravitating in that direction. certainly I think Virginia and Michigan are more, approaching it the way that, you know, other states across the U.S. have done.
I'm actually kind of excited that Tennessee is, you know, we love to test here. We love data. You know, it's an opportunity that we have to see how a different model could work and use that to inform, you know, what we think is appropriate going forward.
Nice. The second one from me, just an update, if you would, maybe on the SBTech integration. I think you launched the app, your app in Ireland, in combination with SBTech as sort of a test market, if I remember that correctly. Curious sort of how that's unfolding for you. I know your deal with Kambi, I think, is the third quarter 2021. When you look at new markets coming live here, hopefully early 2021, Michigan, Virginia, are you sort of at the moment now where you think you could launch in those markets with SBTech versus Kambi?
Everything is on track. We have previously said that we believe we will migrate in the second half of next year. As you noted, our Kambi contract goes through end of September. As of now, you know, we are still feeling good about committing to that timeline. There might be an opportunity to accelerate it, and we'd certainly look at that. You know, that then kinda leading to your question on Michigan and Virginia, it really depends on the timing of those. If they launch early next year as expected, I would expect that we will utilize Kambi. If they launch much later in the year, then it might be that we go on the platform that we now own and operate, the SBTech platform.
We'll just have to see what the timing is on that, but we do feel like we continue to be on track for our migration commitment to second half of next year, and we feel very good about either being able to meet that or exceed that expectation.
Nice. Thanks, guys.
Our last question comes from Carlo Santarelli with Deutsche Bank.
Hey, guys. Acknowledging there's a lot of ambiguity in the outlook, but the $750 million-$850 million revenue guidance, could you guys talk a little bit about kind of what defines the end post of that guidance and kind of what are some of the key things that would put you towards the high end and/or towards the lower end, acknowledging that, you know, states like Michigan and Virginia are not in there at this point?
You hit on an important point. It is not, you know, any assumption around any new states. That's all upside. That isn't it. I think it's just, you know, us being generally still at an early stage of this industry. We have several states, you know, that we've only recently launched. There are things like right now Illinois has, you know, the governor has temporarily suspended a requirement to register in person at a casino. That has taken Illinois from, you know, barely a market that registers for us to our second-largest market behind New Jersey and our fastest-growing. A pretty big deal whether that continues to be extended for several months, and that could have a significant impact on our customer acquisition and therefore on our revenue for next year.
it's really a function of just some of those types of variables and just, you know, being so new in so many states and, not having, you know, the confidence and the precision yet to be able to pinpoint a tighter range.
Great, Jason. If I could just ask one follow-up. As it pertains to your customer acquisition, you know, one thing that I think has stood out with you guys relative to peers has been kind of your aggressiveness towards the higher end, more VIP type of sports betting customers specifically. Have you seen any of your competitors start to change their strategy at all around kind of seeking that type of action or those types of players, especially in some of the newer markets like in Illinois, for example?
you know, I think right now, we're seeing a pretty competitive market overall, and that includes, you know, the VIP, higher end segment of customers. I appreciate you saying that we're doing a good job there. I think a lot of that comes from having very strong analytics and, you know, discipline around using that data to make determinations on where we invest and where we don't. you know, I don't necessarily think we're being that much more aggressive than any competitors. I think we're just, you know, hopefully being a little bit smarter about where we choose to push and where we don't.
You know, as we get more data, we should get better and better at that, and we feel like time is our friend, and we should be able to widen that, much the same as we feel like we should be able to continually put distance between ourselves and the competitors on the actual experience we can give those customers once they do join the platform.
Great. Thank you very much.
Thank you.
Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back to Jason Robins for any closing remarks.
Thank you all for joining us on today's call. We really appreciate your insightful questions and look forward to continuing our conversations with you. At DraftKings, we are excited about the future. We continue to build the quintessential sports brand and align with well-known media organizations such as ESPN and Turner Sports, as well as many major professional sports leagues and iconic franchises. We are well-positioned with a strong debt-free balance sheet to capitalize on unique customer acquisition opportunities, enter new states as soon as practicable, drive continued product innovation to stay ahead of the competition, and explore opportunistic and accretive M&A. I hope all of you stay safe and well, and we look forward to speaking with everyone again soon. Thank you.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.