DraftKings Q2 2024 Earnings Report: Stellar Customer Growth, Revenue Surge, and Strategic Financial Moves
DraftKings (NASDAQ: DKNG), the leading digital sports entertainment and gaming company, has unveiled impressive results for Q2 2024, demonstrating robust customer acquisition and revenue growth. The company reported an 80% year-over-year surge in new Online Sports Betting (OSB) and iGaming customers, coupled with a significant reduction in marketing costs by over 40%.
DraftKings continues to innovate and expand, integrating Jackpocket smoothly and projecting positive adjusted EBITDA from the acquisition in fiscal year 2025. The company has also launched a share repurchase program of up to $1 billion, while maintaining its adjusted EBITDA forecast of $900 million to $1 billion for fiscal year 2025. Despite an increase in the Sportsbook tax rate in Illinois, DraftKings has adjusted its fiscal year 2024 EBITDA expectations to $340 million to $420 million.
Key Takeaways
- 26% Revenue Growth: DraftKings achieved $1.104 billion in Q2 revenue, marking a 26% increase year-over-year.
- Customer Surge: The company saw a nearly 80% increase in new OSB and iGaming customers.
- Reduced Marketing Costs: Marketing costs decreased by over 40%.
- Gaming Tax Surcharge: DraftKings plans to introduce a gaming tax surcharge in high-tax states starting January 2025.
- Positive Adjusted EBITDA: Anticipated from the Jackpocket deal in fiscal year 2025.
- Share Repurchase Program: Announced a $1 billion share repurchase plan.
- Increased Revenue Guidance: Fiscal year 2024 revenue guidance raised to between $5.050 billion and $5.250 billion.
- Adjusted EBITDA Guidance: Revised for fiscal year 2024 to $340 million to $420 million.
- Future Projections: Optimistic about generating $900 million to $1 billion in adjusted EBITDA in fiscal year 2025.
Company Outlook
- Continued Customer Acquisition: DraftKings plans to maintain its strong customer acquisition trend.
- Expanded US Online Gaming Market: The company sees a larger than anticipated opportunity in the US online gaming market.
- New Features: Investments in new features for its Sportsbook and iGaming platforms.
- Cash Taxpayer Status: Expected to become a cash taxpayer in 2025 or 2026.
Bearish Highlights
- Illinois Gaming Tax Increase: Led to a revision of the adjusted EBITDA guidance for fiscal year 2024.
- New Customer Promotions: May impact revenue and EBITDA despite marketing cost savings.
Bullish Highlights
- Strong Customer Acquisition: No signs of consumer weakness.
- Jackpocket Integration and NFL Streaming: Expected to enhance the user experience and drive growth.
- Positive Contributor: GNOG has been a positive contributor to customer acquisition since migrating to the DraftKings platform.
Misses
- Quality Decline in Acquired Players: Noted decline over time, although it tends to stabilize.
- Customer Feedback on Surcharge: The company is closely monitoring feedback concerning the implementation of a surcharge.
Q&A Highlights
- Surcharge Strategy: CEO Jason Robins discussed the surcharge as a competitive measure against black market operators and a way to raise awareness about high tax rates.
- Illegal iGaming Market: Emphasized the need for regulators to address the illegal iGaming market.
- US Market Focus: No plans for organic expansion into Latin America, focusing instead on the US online gaming market.
- Tribal Partnerships: DraftKings is the partner of choice for tribes, with several partnerships in place, including with the Pequot Tribe in Connecticut.
InvestingPro Insights
DraftKings (DKNG) has shown robust revenue growth and customer acquisition, with a notable 57% increase in revenue over the last twelve months as of Q1 2024. The company's market capitalization stands at $15.28 billion, reflecting a significant growth trajectory, particularly with a 52.67% quarterly revenue growth in Q1 2024. Analysts are optimistic about DraftKings' prospects, expecting net income to grow this year and predicting the company will become profitable within the year. Despite trading at a high Price/Book multiple of 20.73, the company operates with a moderate level of debt, offering some financial flexibility.
For more detailed insights into DraftKings' financial health and future outlook, additional InvestingPro Tips are available.
Full Transcript: Diamond Eagle Acquisition Corp (DKNG) Q2 2024 Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to DraftKings' Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would like to turn the call over to Alan Ellingson, DraftKings' Chief Financial Officer. Please proceed.
Alan Ellingson: Good morning, everyone, and thank you for joining us today. Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties, and other factors as discussed further in our SEC filings, that could cause our actual results to differ materially from our historical results or from our forecasts. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will also discuss certain non-GAAP financial measures that we believe may be useful in evaluating DraftKings' operating performance. These measures should not be considered in isolation or as a substitute for DraftKings' financial results prepared in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release and presentation, which can be found on our website and in our quarterly report on Form 10-Q filed with the SEC. Hosting the call today, we have Jason Robins, Co-Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on the business. Following Jason's remarks, I will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robins.
Jason Robins: Good morning, and thank you all for joining. There are five key points that I'd like to focus on during our call today. First, we are achieving strong and efficient customer acquisition. New OSB and iGaming customers increased nearly 80% year-over-year, while cap declined more than 40% year-over-year in the second quarter, a period with no new state launches. We anticipate the healthy customer acquisition environment to continue through the back half of the year and possibly beyond, which may indicate that the US online gaming opportunity could be even larger than we previously thought. Second, we believe we have a reasonable solution for high tax states, including Illinois. We plan to implement a gaming tax surcharge in the four states that have multiple sports betting operators and tax rates above 20% starting January 1, 2025. We believe additional upside potentially exists for adjusted EBITDA in 2025 and beyond from this gaming tax surcharge. Third, the Jackpocket integration is off to a great start. We are on track to hit the multiyear guidance for the transaction that we provided in the announcement and expect the deal to generate positive adjusted EBITDA in fiscal year 2025. Fourth, we are excited about the future and are reiterating our expectation for $900 million to $1 billion of adjusted EBITDA in fiscal year 2025. Finally, we said last quarter that we would provide an update on capital allocation. We are pleased to announce that our Board authorized a share repurchase of up to $1 billion of our Class A common stock. This inaugural authorization reflects our conviction in the strong trajectory of our business and our expectation that we will generate significant free cash flow in the coming years. I'd also like to emphasize that all of us at DraftKings are very excited for the start of football season. Our product is in a great position as we are continuing to differentiate ourselves by Multibagger in new features and functionality for Sportsbook and iGaming. In Sportsbook, we recently launched in-house player prop wagers for NFL, NBA, MLB, NHL, college football, college basketball, and tennis. We also broadened our progressive parlays to include spread and total wagers. In addition, we plan to integrate a bet-and-watch experience with NFL streaming. In iGaming, the DraftKings and Golden Nugget Online Gaming apps were ranked number one and number two overall in a recent third-party survey. We are on track to double the number of new games we will release this year compared to last year and recently improved our interface to promote game discoverability. In closing, our business fundamentals are very healthy, and we are excited about the second half of 2024 and beyond. With that, I will turn it over to Alan Ellingson.
Alan Ellingson: Thank you, Jason. I'll hit the financial highlights, including our second quarter 2024 performance and our updated guidance. Please note that all income statement measures discussed, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, our business fundamentals were strong in the second quarter. We generated $1.104 billion of revenue, representing 26% year-over-year growth and $128 million of adjusted EBITDA. Importantly, customer acquisition exceeded our expectations as new to DraftKings OSB and iGaming customers increased nearly 80% year-over-year. Customer retention and engagement were healthy and resulted in handle that exceeded our expectations. Handle was strong even with fewer than anticipated NBA playoff games. Structural Sportsbook hold percent improved year-over-year in line with our expectations to approximately 10%. Adjusted gross margin for the second quarter was 43%, primarily due to better than expected customer acquisition and the corresponding promotional reinvestment. Operating expenses, including sales and marketing, products and technology, and general and administrative expenses, were consistent with our expectations as we continued to balance revenue growth with operating efficiency across the organization. Moving on to our fiscal year 2024 guidance. We now expect revenue in the range of $5.050 billion to $5.250 billion from a range of $4.800 billion to $5 billion. The updated range equates to year-over-year growth of 38% to 43%. The increase in revenue guidance is driven by strong customer acquisition, engagement, and retention trends for our existing customers as well as the inclusion of Jackpocket and our recent launch of Sportsbook in Washington, DC. We are also revising our fiscal year 2024 adjusted EBITDA guidance to $340 million to $420 million from the range of $460 million to $540 million. The revision takes into account Illinois raising its Sportsbook tax rate, strong new customer acquisition expectations, as well as the prior mentioned inclusion of Jackpocket and our recent Sportsbook launch in Washington, DC. For fiscal year 2024, we now expect our adjusted gross margin to increase modestly. We expect sales and marketing expense to increase at a mid-to-high single-digit rate year-over-year. The increase is primarily due to the investments in Jackpocket brand. We continue to expect the bridge between adjusted EBITDA and free cash flow to be approximately $100 million based on approximately $120 million of annual capital expenditure and capitalized software development costs, as well as a modest source of cash from changes in net working capital combined with interest income. And we continue to expect 2024 stock-based compensation expense to be flat to down in dollar terms on a year-over-year basis and represents approximately 7% of revenue in fiscal year 2024. Looking ahead to fiscal year 2025, we continue to expect adjusted EBITDA in the range of $900 million to $1 billion due to our underlying business momentum, including the benefit of higher customer acquisitions in the second half of 2024. We believe additional upside potential exists when we apply the gaming tax surcharge in those noted high-tax states that have multiple online Sportsbook operators, which we are not including at this time. We expect to provide more details on our fiscal year 2025 guidance with our next earnings report in November. That concludes our remarks. We will now open the line for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from David Katz with Jefferies. Your line is open.
David Katz: Thank you, and good morning. I appreciate all the information. What I was really hoping to do was just talk about the surcharge for a moment, which is an interesting strategy, and how you thought about the degree to which competitors may or may not follow, and how you react under those circumstances? Just flushing out the strategy a bit more would be really helpful.
Jason Robins: Thank you, David. Great question. I think every company has to do what's best for their own business. I think we believe this is what's best for us. And I would imagine that if that's our calculus, then others would come to the same conclusion. But we really don't know and we'll have to see. And, obviously, there might be other ways, too, that -- other ideas for how to implement something like this that might be better than what we came up with. We thought through this quite a bit, but you never know. So we do have some time between now and January 1st, and we'll see what happens.
David Katz: Right. Interesting. And as a quick follow up, just with respect to putting the surcharge aside, if we think about the impact that we should be reflecting in our models for Illinois, assuming no surcharge, any help, Alan, as to how we might sort of think through that impact and include it for the future, just a lot going on in there?
Jason Robins: I'll answer quickly and then Alan can add any detail. But I think the best way to think about it is the overperformance that we are seeing with customer acquisition. The launch of Washington, DC, our expectation for Jackpocket to deliver positive EBIT next -- EBITDA next year, as well as underlying trends with our existing customers and outperformance on the handle side. All should offset the Illinois tax increase next year. So even if we don't get any benefit from the fee, we will see still $900 million to $1 billion in adjusted EBITDA next year.
David Katz: Yes. Okay. Okay. Thank you very much.
Operator: One moment for our next question. Our next question comes from Shaun Kelley with BofA. Your line is open.
Shaun Kelley: Hi. Good morning, everyone. Jason or Alan, I think a lot of the rest of the subject of the sort of update here is about the increased customer acquisition environment. Obviously, some of the continued investments you're making. So the impact here seems to be -- the net is obviously higher revenue expectations and lower profit flow throughs. Specifically asking about kind of 2025 to start, just the implied -- the implied guidance right now implies some reacceleration. You haven't -- I don't think, you've given explicit revenue guidance. That seems to be kind of the undertone here. So what in your mind would kind of cause the environment to change from where we're at today? And if it doesn't, what would some of the offsets potentially be for DraftKings as we kind of move into next year? And, let's say, the customer acquisition environment remains rich and you continue to see strong adds there? Thanks.
Jason Robins: Yes. It's a great question. Just to explain a little bit about what's going on. One, even if we didn't spend another dime on marketing, new customers -- get new customer promotions. So, you're right, that has a drag on revenue and EBITDA, and we're seeing enough outperformance on the revenue side elsewhere that while it certainly hit the bottom line a little bit or will for the remainder of the year, it didn't actually. We're still seeing improved revenue. So that just kind of demonstrates, I think, the underlying strength of the business and the customers that we're seeing. So when you kind of put all that together next year, we do expect to get a little bit more revenue, because we'll need that to offset -- in order to make the math work that's needed to offset the Illinois gaming tax increase. So that's kind of how you get to the $900 million to $1 billion. And then any additional upside beyond that Illinois gaming tax amount would be either revenue driven or from the impact of the fee that we're instituting in those four states. And then as far as the potential for hot customer acquisition next year, that can always happen. Right now, we feel we've built in some degree of the increased trends we're seeing. And obviously, a lot of that will depend on if there's more state launches and things like that. So, I think, you could sort of think of this as a same state basis type of thing again. And obviously, if there's more state launches next year and more customer acquisition investment, then that might change things a bit. But that just means bigger numbers longer term over the following year. So, I think, that's the right way to think about it. But as of today, I see no reason to think that on a same state basis, we would -- we wouldn't be able to deliver $900 million to $1 billion in EBITDA -- in adjusted EBITDA next year.
Shaun Kelley: Thank you.
Operator: One moment for our next question. Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.
Stephen Grambling: Hi. Thanks. Just want to maybe follow up on Shaun's question, but ask it in a different way. Are you seeing any change in the cost to sustain and engage existing players? And also on the new customer acquisition, is that primarily coming from new states? Are you still seeing even greater uptick from existing states?
Jason Robins: So we are not seeing an increase in the existing player cost. It's all new player driven and mix driven, so meaning, mix of new players to existing. And interestingly, it really is across the board. So certainly we got some boost from North Carolina having launched in late Q1. But if you remember, last year we had two big states, Ohio and Massachusetts, launched in Q1. So this year there were less new state launches around this timeframe and none in Q2. We did have DC launch recently, but that didn't affect the Q2 numbers that was in July. So really it has to come from existing states if you look at it that way. And then it's really across products, too. We did see some particular strength in the Golden Nugget brand as we migrated onto the DraftKings platform and product. We definitely saw a boost in conversion and got some lift on there. But really it's been across states, across products.
Stephen Grambling: Thank you.
Operator: One moment for our next question. Our next question comes from Joe Greff of JPMorgan. Your line is open.
Joe Greff: Good morning, everybody.
Jason Robins: Hi.
Joe Greff: Jason, just wanted to ask on the higher new user acquisition cost plans in the second half of this year. How much of this is offense, meaning, to grow the new user base versus defense versus impacting the competition? And then my follow-up to that is, you mentioned that presently the customer acquisition environment is healthy. What if that environment changes to the downside? How do you react? How do you pivot?
Jason Robins: Yes, great