Trey Bowers, the gaming, lodging, leisure analyst here at Wells Fargo, and it is my pleasure to welcome remotely Jason Robins, CEO and Chairman, co-founder of DraftKings. Thank you so much for your time today. We will just go ahead and kick it off. I think top of mind for a lot of investors these days, Jason, is prediction markets, and maybe you just want to kick off with kind of an update a quarter and a half into the market, what you are seeing and any learnings you have made in this first, what do we have? Five months.
Yeah. It has been only a couple of weeks of NFL, so obviously still early, but we really are seeing just phenomenal trends, not just with predictions, but also in the core business. Actually, maybe I will start for a moment on the core. Everybody was concerned about handle growth. We have seen enormous handle growth to start the season, 15% so far month to date. And really just great engagement from customers there. This is on the Sportsbook side, obviously. iGaming, we have started to regain some share, seeing growth accelerate there as well. So really, really healthy trends in the core business. That business is on track to deliver what we had previously communicated, which is about $1 billion in adjusted EBITDA in 2026 and should increase pretty materially in 2027. So really excited about that.
We will have an update more on what 2027 looks like in our November earnings call. Predictions, not surprisingly, has been a huge growth story for us. We are up almost 2.5x from our July volume. That is just two months ago. Obviously, with World Cup, it was still a big month in July, and we are about 2.5x, a little less, but almost 2.5x, and trending higher every week. And really just seeing great improvement from a competitive positioning. We are up to almost double-digit share of the sports market and higher if you look at just the NFL piece of it. We actually feel we have the best offering now in NFL. We have three times as many NFL markets as our competition, about 1.5 times as many college football and Major League Baseball markets.
So we feel like really quickly, in a very short period of time, we have gone from what was objectively not the greatest product in market about eight or nine months ago, 10 months ago, to now we feel the best sports product in market, backed up by the content offering and the breadth of that. And we have a ton of new features and other stuff coming too. So we are just getting started. As I mentioned, we are only two weeks into NFL season, and we have a lot more planned for the coming weeks and months.
And was that share number you referenced, was that a handle share in prediction market states, or just help us understand
Yeah. Consumer volume. So the total volume that is traded by a customer is not the sort of number that is inclusive of the backing on the other side of the stake, but the actual true consumer volume.
Any update just on what you're seeing from a competitive response from either the prediction market platforms or your OSB peers?
Well, everybody obviously right now, it's just sort of like OSB was in 2020, 2021, maybe even a little bit of 2022. It's kind of the time when there's a lot of competitors out there that are thinking that they can have material share, and we welcome that. We love competition. We've dealt with that in every single vertical we have. And again, our strategy has always been, and consistently has been, to win on our offering, to win on our product and customer experience, and we again think that we're executing that. As I mentioned earlier, we think we have the best sports marketing, at least in the core sports. There's some tail sports stuff in tennis and a few other things that we need to build out, but we obviously prioritized NFL, college football, baseball, the majority of the volume's coming on.
I think the fact that in such a short period we put together the best offering shows that we actually are on a trajectory to, just like we did in Sportsbook, have a superior product and ultimately that's what wins in these industries, I believe.
On the second quarter call, you guys talked about being really pleased with the customer acquisition costs you were seeing. Are you still continuing to see that trend, and where should we go from here?
Same story, really. I think the customer acquisition costs and the pace at which we are getting new volume, new customers on in these non-OSB states is real. We did mention earlier that we are going to evaluate and be data-based. I do expect that we are going to increase some of our spend, probably pulling forward from some of the spend that we intended to deploy in 2027, just because we are seeing such amazing conversion onto the product and the efficiency seems really strong.
Any sense on an order of magnitude on that, or is it too early to say?
I think too early to say. We did want to communicate that based on exciting early results, we do anticipate spending a bit more, but I don't know exactly what that number will be. It will obviously be just like this is very data-dependent, and it's still a long season. We have a lot of ways to go. Based on the trends we're seeing, we could see meaningfully more investment, and I think that's a good thing because it should accelerate our revenue and our gross profit for next year.
Is that investment kind of spread equally amongst promotional dollars, marketing dollars? Just give us a sense for how that's deployed.
Yeah, it's really a bit of both because, of course, new customers, more new customers mean more new customer promotions. So it is some additional marketing spend that we are deploying into a very friendly and efficient environment. Also it's just the fact that we're getting a higher volume of new customers than we thought, and even if we didn't spend any more in marketing, that would come with more new customer promotions, but also, of course, comes with more gross profit next year. Really our plan right now is to kind of let that data come in, optimize, and then on the November call, we're going to have an update for what we think not only the rest of this year will look like, but also how much gross profit and additional revenue we believe we can generate in 2027.
Just to move on to kind of an app update. You referenced this a little earlier in saying that you had the best sports app out there. One, is the app fully rolled out on the universal app? I'm pleased to say, when I got here, I was able to use my Massachusetts deposits to make bets in California. So at least these two states, it's working seamlessly. Can you just give an update of where it stands? Are you guys still a little bit ways to go, or is it kind of fully up and running?
It's pretty fully up and running. There's still a handful of states that haven't fully integrated, but really, for the most part, the experience you're describing is what we've been able to produce now, in most states across the country. We think that is a huge component, especially knowing that, not just do people travel, but also we have a lot of customers that, at some point in their life, have opened up a DraftKings account and made a deposit in another state that had legal Sportsbook when they were traveling. That could be any amount of time ago. For those customers to be able to go in and access those accounts and those funds is really a huge part of the conversion funnel that we're able to jumpstart. I think that was a big feature for us.
Of course, on an ongoing basis, will just be more convenient for people who really, to be fair, do not understand why should I have to have a separate account and separate balance. That's really not what we're trying to get at. Obviously, behind the scenes, there's some maneuvering we had to do in order to make sure that funds were not intermingled in a way that didn't work for our regulators. But from the customer perspective, it's totally seamless.
You referenced this before, but I think, myself included, a lot of people would like better clarity on this. What makes the DraftKings platform or user interface or gameplay just better than your peers? What enables you guys to gain share, either against your OSB competitors or the PM platforms?
Well, a huge part of it is content breadth. We have three times as many NFL markets as any predictions competitor out there. We also think that the smoothness of the user experience. In traditional Sportsbook, that means I can get my live bets down. They're not timing out. I can get the amounts that I want. Everything just sort of works. It's fast. In predictions, it means that my orders are getting filled, and I'm getting the volume that I want. I can make the combinations that I want of different types of markets to be able to create those combos, which has been a great story for us, too. Last weekend, at NFL Sunday, we were up to almost 30% combo mix, which just to put in perspective, it took us five years plus to get to that level with Sportsbook.
Really a great story there, too. That means the product has to work, things have to be combinable, and you have to be able to get the orders filled. A lot of that is trickier, of course, with predictions because it's a little bit of a different model where you have sometimes third-party market makers, sometimes our own market makers, and you have to do RFQs and things like that. These are all problems that we love solving. We think that the more complex it is to create the type of user experience that we want, the more advantaged we are, because traditionally we've just been able to move faster and to innovate more when it comes to those things.
Over time, would you expect on those combo bets, the majority of the market-making to take place through DraftKings, or is it kind of bet specific, as you think about taking on that risk?
Well, we'll have to see how that all plays out. We do believe that there's a path to our market maker being able to do more and more of it. We want to make sure that we're getting the absolute best experience for the customer. If there are times where there's a better offering from another market maker, of course, that's something that we would want to make sure we surface to our customers. It's going to also depend on the category. Of course, in sports, we're really looking to focus a lot of that volume through our market maker. Crypto and elections and other categories have not been as much of a priority, at least in the short term, for us to do market making on. Maybe over the medium term, we would look more at that, of course.
We've really been sports-focused to date.
I know it is highly state-by-state dependent, based on whatever the tax rate is. But over time, if we were to think about kind of a post-tax contribution margin for a prediction market state versus an OSB licensed state, over time, do those look somewhat similar? Is one potentially higher than the other? Just help us frame out kind of the economics for the prediction market states.
Well, it is a great question. Obviously, there is still a lot that needs to shake out. At least to date, what we are seeing is that the actual margins, the equivalent of what I would call hold rate or net revenue margin, are a little lower on prediction markets, but the gross margins are much higher. So there is a reason to believe those things could net out either in a positive way versus sports or neutral. I certainly do not think there is a lot of reason to believe the economics will be worse, although we have assumed a smaller TAM in terms of the top-line side.
But again, I think with higher gross profit margins, there is a lot more room to make bottom line for sure, versus DraftKings Sportsbook, which has a higher, I think, top-line TAM, but has a little bit of a lower, than predictions gross margin profile.
Got it. Just wanted to. It would not be a DraftKings discussion if we did not get into the regulatory and legal side of things. I know much of what you might be able to answer to this is you are making your own guesses or assumptions on this. But maybe we could just do a little bit of game theory of after the Ninth Circuit Court ruling, potential move to the Supreme Court, other district court rulings. Just love to get your thoughts on where we are going from here. If prediction markets are here to stay, if some of the rulings ultimately result in less sports betting on prediction markets, how non-licensed states might react to that. So it is a very open-ended question, but would love to get your broader thoughts on this.
Well, I think it is really hard, of course, to predict what will happen. We are observing and are certainly an interested party and would like clarity, and I think clarity is good for everybody, but we do not control that process. We only control the choices that we make in terms of how we invest, how we think about paybacks, how we think about long-term value creation. I will say one of the really positives for us is we feel like we are in a great position either way. We have a healthy core business that is on track to produce $1 billion of adjusted EBITDA, and growing pretty substantially in 2027 and beyond. That business, despite all of the chatter about cannibalization, we have seen as resilient and as strong. I mentioned 15% year-over-year handle growth to start the NFL season.
Really good number, considering, I think, a lot of what people were expecting. Really pleased on that front. Then obviously there's the predictions investment. I will say that we are seeing great cross-sell as well. When we acquire a predictions customer, we're cross-selling double-digit percentages of them onto Pick6, onto lottery, onto DFS. We have other products that we can retain those customers on if there were to be a ruling that removes sports from contracts from these states. I would also say crypto's been interesting. We are seeing pretty good conversion of these customers onto some of the crypto trading as well, and that could be a nice little thing that we weren't expecting that could contribute meaningfully to the business. Something to keep an eye on also that I think could give us upside.
Overall, we're just watching, we're observing, we're seeing what the different plays that this could play out are, and we're making sure that we are making choices that position us to be really strong, and in a really great competitive position regardless of what the outcomes are.
I guess to summarize, you feel like you're kind of in a win-win position, that prediction market's here to stay. You're effectively competing in the early days. Prediction markets maybe see an OSB shut down. You're still one of the best games in town, and you still have that optionality of those states then deciding to go licensed.
Yeah. It's funny because if you ask me, I would say I'd rather see them stay, but I would also guess that if prediction markets got shut down by the Supreme Court tomorrow, our share price would pop. Seems like our investors are happy with that outcome. I do think we are in a good position either way, though. I really believe that we are well set up regardless of the outcome, which was not easy. I think credit to our team in doing a lot of great work, both strategically and executing really in a great way, and having strong relationships and transparent conversations with our regulators. All of that is what has led to us being in a position where I really think we are well-positioned no matter what the outcome is.
And as I said, I hope it sticks around because I think it's a huge incremental TAM, and we're doing well. We are clearly separating ourselves as right there alongside Kalshi and Polymarket, and climbing in terms of the conversation and who I think will be long-term viable competitors in this market. I feel like we've really done a great job there. We have the best product in market. Obviously, those are all investments I'd like to see pay off for many years to come, but I do think we're well-positioned regardless of what the outcome is.
You referenced the licensed state growth in OSB. But before we get to that, the iGaming business you mentioned as well, and I know it's a focus for the balance of the year. It's a small number of states represent a pretty meaningful piece of revenue. So maybe we could just dig in a little bit on some of the actions that are being taken to get that iGaming business back on a growth trajectory that you guys would like to see. And then any broader thoughts on what the ultimate TAM of iGaming is from here? Any states that you think could come over the transom in the next couple of years? And again, an open-ended question, but would love to dig in a little deeper on that piece of the business.
Well, I'm glad you brought that up. The iGaming story, finally, has been a good one for us the last month or two. If you look at the latest state reports to come out, we have regained share pretty substantially in a couple of states. And, I believe we are on a trajectory to continue to gain share in the coming months. A lot of the things that we are doing seem to be resonating with customers from the content that we have to the experiences that we're creating. A lot of new features have been launched and more are coming in the fall. So really feel like that product is humming and in a completely better place, much different place than it was even a year ago. And now the results are starting to show with those share regains and that growth acceleration. So really excited about that.
As far as additional TAM, we hope Maine will be launching later this year. As a reminder, it will be us and Caesars as the sole operators in Maine, so we should have a pretty good share of that market. Obviously, not a huge state, but helpful one to get on the board. And then pretty decent momentum in a few other states. Hard to say what will or won't get done, but definitely feel like there's some momentum in the D.M.V. area, for example. And I do think that in the coming years you will see more iGaming states. But I also know that it's been a little while, so I'm hesitant to start throwing states out there and making any projections on that. But I do feel like, especially in the D.M.V. area, there's a lot of momentum.
And I also think states like Illinois and New York, it's a matter of when, not if, but not sure that that's as immediately on the horizon as some of the momentum we're seeing in the D.M.V. area.
And any sense for when you mentioned some of the new features and gameplay that have enabled this rebound in share. Could you just dig in a little deeper and just give us a feel for what that is, or is that the special sauce of iGaming that it's hard to really articulate?
Well, I will say that a lot of this, and this is true of any product, people want to say there's some silver bullet feature thing, but if it worked that way, actually it would be bad because people could copy it. The way it really works is it's a lot of little things, and it's a lot of really strong execution over a sustained period of time. And you can't really look at one thing and say, "This is what did it," or even two or three things. It's the collection of many, many features and also just cleanup of experiences. But since you asked, I will point to a few things. One, we had a really successful Lightning Link launch. Lightning Link was the biggest land-based game that was not yet online. Now it is.
Really, really felt like we had a strong, both from product all the way through CRM and marketing, a strong cohesive plan to maximize that launch, and I think that helped us a lot. We've also done really, really well with our daily rewards that we're a little late to the game on, but now I think is the best in market, so really excited about that. But again, there's so many little things that you do that one or two on their own aren't going to move the needle, but a collection of dozens or more over the course of many, many months and years really do add up to just the overall best experience. And then, of course, it takes time for customers to notice, and you really get credit for it, too. So I think it's just been sustained execution.
I think we've mentioned this in the past. We did a lot of shakeup in terms of who was on the team, leading the team. Made a lot of changes in terms of our product roadmap. That was almost 12 months ago at this point. It was a pretty lengthy period of sustained execution before we finally started seeing these results, but now that we do, we feel like we have tremendous momentum to build on.
Do you feel like everything happening in the world of prediction markets and OSB licensed states and just what that means for tax revenue, do you think all of this will maybe accelerate some iGaming uptake? Are you getting any sense of that from the regulators?
I do think that it is early to say whether it will have a spill or effect on iGaming. I definitely think it could help with some of the sports betting legalization conversations. I also think a lot of that's going to come down to where the Supreme Court ruling ends up netting out. I think in some cases, people are waiting and seeing. iGaming is really going to come more from the need that states will have for revenue, combined with the, it took time, but we're finally starting to, I think, get really through to a lot of the legislators and other policymakers that there is a huge illegal market. From a policy perspective, this isn't just about generation of revenue. It's also a better thing when it comes to protecting consumers and making sure that you're cleaning up illegal activity that's happening in your state.
I think it took quite a bit of time for that to really resonate, and there's been a lot of noise, and still is a lot of noise, but I do think that people are starting to really understand that message and starting to view this as not just a way to generate revenue, but also something that makes sense purely from a policy perspective, too. Plus, people love the product. More and more people are asking their legislators for it. They're playing it in other states. I think that's a huge thing as well.
I'd love to get an update, and I'm not sure where it stands today, but in Oregon, there was the use of historical sports outcomes to do kind of an iGaming-like business in that state. Just curious if there's any update there, and if you expect to see other states maybe explore a way to get into something like iGaming that's somewhat related to sports.
Are you talking about for us, or DK Replay, or are you talking about more historical horse racing?
It was use of historical at-bats, I believe.
Yeah. You're talking about DK Replay.
Yeah.
I wouldn't quite call that iGaming. I do think it's still a sports product. It's a way for people, though, who like baseball, and we could apply it to other sports as well, when it's not on, when baseball games aren't happening, to still be able to get action on baseball. Really, that was kind of how we thought of it is, how do you make sports really more 24/7 and have people that particularly have an affinity for one sport, have an opportunity to engage throughout the year, even when their sport isn't in season? I do think that's something that we have seen interest from in the consumer side. Haven't really pushed it as much. We've been more focused with everything else going on other parts of the business.
We haven't really pushed it as much in terms of trying to launch in more states, but we have seen some success in Oregon, and hopefully that's something that will provide another point of expansion for us in the future.
Great. You touched on this earlier, but I think it's a great chance to dig in a little bit in terms of the OSB licensed states and the growth dynamics. If I think about it's more users, more users placing more handle, and then potentially more hold of that handle. Could you just walk through as you think out over the next three to five years in your existing OSB licensed states, how investors should think about what those drivers of growth are, kind of against penetration levels, win levels, betting levels? It's a very big question, but I think super important. As you just referenced earlier, it feels like handle is getting back to a pretty nice growth position as well. I'll leave it to you.
Yeah. I really think you got to look at it, as you noted on the existing state basis, separate from any new states or predictions. Focusing on the existing OSB states, I think really, revenue and ultimately adjusted EBITDA growth, gross profit growth are the most important metrics right now. Obviously, handle growth has been great to start the season. We're pleased about that, but we're also excited that parlay mix is up 300 basis points, which has exceeded our expectations. Great number there. People keep asking where that caps out, and every year it keeps going higher. Don't have an answer for that yet, but seems like there's still some ceiling to be reached on that, some upside to be reached on that. The other part I would say is we've also been very cost-focused as a business.
Number of initiatives throughout the business, many of which have been driven by some of the progress we have made on the AI front, have really enabled us to control costs. We saw G&A decline year-over-year last quarter. We expect to continue to see fixed cost growth benefits. I think in addition to that top-line humming and that continued revenue and gross profit growth, we also believe there is room to improve the bottom line through additional fixed cost trimming, as well as just marketing spends for the core business continuing to decline as these states mature. All of those things should lead to pretty nice EBITDA growth in the coming years.
As you think about that, obviously you cannot control any changes in the tax regime in different states, but given some of those ability to harvest G&A, over time, is any sense of a longer tail EBITDA margin target that the existing states could eventually achieve?
Well, we still are targeting somewhere in that 30%-ish range that we mentioned, plus or minus a couple hundred basis points. I think that is a good range for us to be targeting, and we still believe we can get there on the core business. Obviously, as new states come in, as predictions ramps up, that will be a moving target, hopefully moving to the positive end. But just on the core business, just in those existing states, we still believe that that is an achievable adjusted EBITDA margin.
Got it. You referenced good revenue growth, but I do not think we got a chance to hear more just around kind of monthly unique players or user dynamics. Based on where we are today as we look out of the states that you are currently in, how much runway is left of potential players? Obviously, there is competitive dynamics to that, but just give us a feel for kind of the P times Q equation, how much Q is left out there in terms of players that you guys do not think you have already harvested.
Well, one of the also great stories has been customer acquisition in our existing OSB states has been really healthy to start the season, too. We are still seeing an influx of new players, even in the states that we've been live in for many, many years. We've obviously penetrated quite a bit, too, as we noted in our last year. We had double digit, I think it was like 11 million or 12 million was the trailing 12-month active customers. Definitely feel like that's a number that'll keep going up, and obviously, we continue to try to do everything we can to get more states as well to expand that number. Then on the prediction side, it's been absolutely exploding. We are well over 1 million customers that have engaged with our predictions product now.
I expect that to be multiple millions by the time this NFL season is over. We haven't even entered the busiest time of year. Obviously, we got NFL going now, but there's that period where you have October, where you have all four major sports going at the same time. I think the best days of activity are ahead of us in terms of raw total customers and total actives.
Have you noticed on a geographic basis any interesting trend that you're doing better in California versus Texas versus Florida, or has it been pretty even, these million and hopefully millions of customers that you're seeing in the PM states?
Well, I'm sure not surprising to anybody, it's the states you mentioned, California, Texas, Florida, Georgia. The biggest states population-wise that don't have legal OSB are where we are seeing our predictions growth, and those are obviously states that we believe we have great established brand and customer bases in already with our fantasy DraftKings Pick6 lottery products in some cases. It's not like we're starting from scratch. One thing we've been very pleasantly surprised on is, as good as customer acquisition's been, we've seen even better success with what we're calling cross-sell, which is conversion of players already in our database that had previously used one of our products, either in that state or in another state that they were traveling to.
That's the thing people also forget, is we had enormous databases in these states already, both from our existing products in those states, but also a lot of those people at some point had traveled to another state that had legal OSB, that had legal iGaming, had legal lottery, had one of the products we offered and had used it in that state. Many of them still had funds in their accounts. Really great activation path there, and that's kind of been the, I think, pleasant surprise that we weren't expecting. We thought we'd get really healthy customer acquisition growth. Obviously seeing that, but didn't realize that we would get such success on the cross-sell side as well.
In terms of that marketing reach, what channels have you guys found to be the most effective in re-reaching those customers or ultimately getting new customers on the platform?
It's really a wide mix of different things. We've been doing this a long time, so as you can imagine, we've optimized this to quite a degree, both in terms of that early stage when we call, new state launch sort of phase, all the way through to more mature states that we're operating at lower marketing budgets. The channel mix changes depending on where you're at. In the early stages, when you're spending more, you're naturally using more channels and spending at volume and more channels, and it's really hard to say this works or that. We look at it more as a cocktail that we've optimized, and we've tested different media mixes and different messages and things like that.
But less so kind of like this is the channel that's delivering, and more what mix of spend across different channels is the right one to both deliver the new customers, but also to do so at a rate that's efficient and meets our payback thresholds. Then, of course, in more mature states, we dial back a lot on the marketing. In a lot of those cases, you do end up focusing away from some of the higher reach, expensive channels like television, and they're more digitally focused, more targeted, and thus maintain their efficiency and still are acquiring at a decent rate, even in many of these mature states.
You mentioned some numbers earlier in the call, so I would be remiss not to jump back in on those a little bit. Still believe strongly in the $1 billion of core EBITDA with significant growth next year. Potentially, given how well you are doing in the prediction market states, there is a little incremental investment. As we think about going forward from that, though, in 2027, is that kind of a pull forward? If there was a little more negative against the reported EBITDA this year from additional spending because of success-based spend, would that kind of result in higher numbers next year as we think about just the EBITDA trajectory from here?
Well, we haven't finalized anything for next year. We will be sharing that on the November call. However, I will say that we view it a little bit more as a pull forward. I don't think that because we are increasing spend this year, anyone should assume that spend would be higher next year. I think if anything, it will be neutral to maybe even beneficial because some of the spend that we are deploying now might mean that the market is growing more quickly, and we don't need to spend as much as we previously may have thought later in the year. I don't know yet, though. It is too early to say. But I definitely wouldn't look at it as we are spending more now, therefore, we are going to be spending more next year. I think if anything, it is probably the opposite.
I know we are running pretty short on time here, but just you guys still produce a fair amount of cash flow. Just thoughts on kind of capital allocation from here. Do you feel like there is any M&A in the future for the company? Or what is the best uses of cash as this EBITDA continues to ramp?
Right now we are really focused on growing the organic business. Obviously, there are always interesting deals out there, so we are always looking, but we haven't been very acquisitive lately. I think a lot of the most successful acquisitions that we made were things that were really tuck-ins to enhance the product, enhance the pricing and trading capabilities, and right now we feel like we are best in class in those areas. Not to say something else couldn't materialize, but really nothing we need at the moment. It would be more opportunistic. So we are always looking, but right now really feel like there is such an amazing growth story, without having to do M&A, that it is not a primary focus for the company.
Got it. Well, Jason, I'm looking at my timer. We only have a couple minutes left, but is there anything else that I didn't hit on that you wanted to make sure was addressed or talked about in our time together today?
I think we hit on it. I mean, core business is humming with 15% handle growth to start the season, on track to do about $1 billion in adjusted EBITDA that we mentioned, and really excited about the predictions progress we're making, seeing great efficiency there, and really look forward to having a more fulsome update, not just on what this year will look like, but also on what next year will look like on our November earnings call.
Well, Jason, thank you so much. It was a pleasure talking to you, and we'll chat again soon.
All right. Thanks for having me.
All right. Thank you.