DraftKings Inc.

Good day and thank you for standing by. Welcome to the DraftKings Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1-1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. and I would now like to hand the conference over to your speaker today, Mr. Stanton Dodge, Chief Legal Officer. Sir, please go ahead.

Good morning, everyone, and thanks for joining us today.

Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties, and other factors, as discussed further in our SEC filings, that could cause our actual results to differ materially from our historical results or from our forecasts. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will also discuss certain non-GAAP financial measures that we believe may be useful in evaluating DraftKings operating performance. These measures should not be considered in isolation or as a substitute for DraftKings financial results prepared in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings presentation, which can be found on our website, and in our quarterly report on Form 10-Q filed with the SEC. Hosting the call today, we have Jason Robbins, co-founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business. And Jason Park, Chief Financial Officer of DraftKings, will provide a review of our financials, and we will then open the line to questions. I will now turn the call over to Jason Robbins.

Good morning, and thank you all for joining. I'm excited to be with you today to talk about our outstanding second quarter and significantly improved outlook for fiscal year 2023. Revenue and adjusted EBITDA exceeded expectations in the second quarter, and importantly, we generated significant positive adjusted EBITDA. Second quarter revenue increased 88% year-over-year to 875 million dollars.

Our revenue growth trajectory has been very strong due to our continued focus on enhancing our products and improving our customer experience, which is driving excellent retention and rapidly improving monetization. At the same time, we remain relentlessly focused on efficiency, and our mantra of revenue growth and cost efficiency is now a core tenet of the organization. As a result of our strong revenue growth and ongoing efforts to capture efficiencies, we delivered $73 million of positive adjusted EBITDA in the second quarter. We are increasing our full-year revenue guidance to a range of $3.46 billion to $3.54 billion, implying growth of 56% year-over-year at the midpoint. Our fiscal year 2023 revenue guidance includes our expectation of nearly $1.2 billion of revenue in the fourth quarter of 2023. We are also improving our full-year adjusted EBITDA guidance to a range of negative $190 million and negative $220 million. an improvement of 35% at the midpoint versus our May full-year guidance. Our fiscal year 2023 adjusted EBITDA guidance includes our expectation of $150 million to $175 million in adjusted EBITDA in the fourth quarter of this year. Turning to our OSB product, we have continued to focus on powering our own same-game parlays and differentiating our live betting content. We now have live same-game parlays built in-house for most of the major sports, including NFL, NBA, MLB, college football, and college basketball, and added to our live markets for golf, tennis, and MLB. We are improving our product at a very fast velocity with very high quality. In iGaming, we're executing our two-brand strategy while focusing on differentiating through more in-house content, including live dealer and jackpot offerings. Our persistent focus on product differentiation is already apparent in share trends. In the states where we are currently live, we achieved OSB handle share of 35%, and OSB GGR share of 32% in the quarter, which were the highest they have been since the COVID impacted second quarter of 2020. We also maintain number one iGaming GGR position and set an all-time record for our iGaming GGR share of 27%. Looking ahead, we are very excited for football season. Our entire organization is dialed in and ready for the start of NFL and NCAA football. I am proud of the team and the culture we have put in place. In particular, I am proud of our team for their relentless focus on efficiency and expense management over the past 12 months. Our work of achieving ands is not done, and we feel great about the trajectory of the business. With that, I will turn it over to Jason Park.

Thank you, Jason. I'll hit on the highlights, including our Q2 performance and our improved 2023 guidance. Please note that all income statement measures discussed, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, the organization is executing very well, and that is showing up in our results. We achieved $875 million of revenue in the quarter, which is 88% higher than our second quarter 2022 revenue. And our adjusted EBITDA of positive $73 million significantly outperformed our expectations and improved by nearly $200 million on a year-over-year basis. Customer retention and engagement outperformed expectations, As we successfully transitioned customers from the MBA season into MLB, we have seen significantly better than expected engagement on MLB due to our enhanced product. Structural hold was also above expectations at approximately 9% for the quarter, while promotional intensity improved, together supporting a more than 550 basis point year-over-year improvement in our adjusted gross margin rate to 47%. Fixed expenses were slightly better than expected as we managed vendor-related costs and exerted discipline on our compensation expenses. We were particularly pleased with the results in our more mature online sportsbook and iGaming states. In our states that launched from 2018 through 2021, combined handle growth accelerated quarter over quarter and increased more than 35% compared to the same period in 2022. In these states, revenue increased more than 70% year over year, adjusted gross margin rate increased more than 800 basis points, and external marketing declined more than 10%, while total unique customers increased approximately 25%. These strong results and our visibility into continued improvement have enabled us to raise our full-year 2023 revenue guidance range to $3.46 billion to $3.54 billion, from $3.135 billion to $3.235 billion, or by $315 million at the midpoint. We are also improving our full-year 2023 adjusted EBITDA guidance range to negative 190 million to negative 220 million, from negative 290 million to negative 340 million, or by 110 million at the midpoint. The bridge from our May full-year 2023 guidance to our current full-year 2023 guidance includes increases due to stronger customer retention, acquisition, and engagement, structural sportsbook hold improvement, and favorable sport outcomes in the second quarter, these items are partially offset by Kentucky now launching this year and being included in our forecast, and Ohio's tax rate increasing effective July 1st. Customer retention, acquisition, and engagement are exceeding expectations and account for $225 million of the revenue improvement and $100 million of the adjusted EBITDA improvement. Our structural sportsbook hold percentage forecast is also higher, supported by our introduction of in-house in-game parlay capabilities and new live betting markets. This trend accounts for $40 million of the revenue improvement and $30 million of the adjusted EBITDA improvement. Favorable sport outcomes in the second quarter contribute $30 million to the revenue improvement and $20 million to the adjusted EBITDA improvement. We are very excited that Kentucky's Horse Racing Commission recently set a target launch date of September 28, 2023 for online sports betting, which is sooner than we previously anticipated. As a result, we expect $20 million of additional revenue in 2023 and a headwind of $30 million to 2023 adjusted EBITDA. Last, we expect Ohio's increased tax rate from 10% to 20%, which went into effect July 1, to result in $10 million of additional cost this year. In terms of our full year 2023 adjusted gross margin percentage, we now expect to be in the 43 to 45% range, an improvement from our previous guidance of 42 to 45%. We expect contribution profit, which we define as adjusted gross profit, less external marketing, to grow to approximately $700 million in fiscal year 2023, which includes our investment into Kentucky. With regard to our balance sheet, we ended the second quarter with $1.1 billion of cash and now plan to end the year with more than $1 billion. As a reminder, we expect approximately $120 million of capital expenditures and capitalized software development costs for fiscal year 2023 and change in networking capital to be slightly positive for the year. In sum, we had a strong second quarter and are very excited for the upcoming football season. That concludes our remarks, and we will now open the line for questions.

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

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

Thank you, Sean. So, you know, first on the question around product, it's been a lot of things. You know, I think it's a very complicated product and there's a lot of things that can create customer friction. if you're not careful. And I think really a big focus for us over the last year and a half has been removing customer friction throughout the journeys. So that's been a big deal. We've obviously greatly enhanced our same game parlay offering. That's been a huge part of the story over the last six to eight months. And I think our live betting options have gotten better as well. I can objectively say, I think, in age two, we feel we're going to have the best product in the market. So really excited about that, and I think that's the big difference maker, as you noted. As far as hold rate goes, you know, we're continually working to improve that. We've obviously closed the gap quite a bit between handle share and GGR share, and I have no reason to believe that we can't continue to do that. Thank you very much.

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

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

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

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

No, we don't have any cost reductions embedded in the guidance from any of that. We certainly, as I mentioned, always look at when things come up, but we're at this point not building any favorable renegotiations into the guidance.

Makes sense. Thank you.

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

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

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

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

It's a great question. I think that this is an area that there's still a lot left to do. You know, it's true of any product in the digital space that there's always going to be room to optimize your funnels and improve the experience, but particularly in regulated gaming, where there's a lot of requirements that you have to follow, and there's a lot of states that launch very quickly. So, you know, the focus for us has been on how do we get live and make sure that we're complying with all relevant laws and regulations. I think as you then kind of say, okay, let's take a look at along the way, What is that done that might have created bad experiences for customers? Flags that go off that were misfires or things that were actually correct but don't really properly give the customer a path to resolving them. Even just better explanation. I think there's so much there. And for us, it's really about the customer experience. We look at the product and we say, if you're a customer, what elements of it would be frustrating? What elements of it would make you frustrated? feel like I'm just going to go try somewhere else. And we try to improve that the best we can, obviously making sure that we continue to stay compliant with all regulations and laws in every jurisdiction that we operate. But I think there's a lot there and just will continually be because of this sort of nature of the regulated gaming industry. And I think particularly now, given how many states launched and how quickly, there's just a lot of low-hanging fruit still available on that front.

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

You know, I know there's a lot of chatter about M&A. At this point, We're about – I mean, we had a great quarter. We're really excited about that. But, you know, we're kind of on to this quarter. It's about to be the most important time of year seasonally for us. We have, you know, fall coming up with the NFL and college football calendar, NBA, lots of things happening this fall. So, you know, this is the most important time of year. This is when we acquire the most customers, when we have the biggest opportunity to gain more market share. It's where we generate the most revenue and we'll generate the most EVDA. I think this is so important, you know, a moment for DraftKings that we have the team laser-focused on executing, and everybody's really dialed in now. We have a lot of exciting stuff coming for NFL and college football and basketball and hockey and everything else, and we're pretty excited about that. And, you know, listen, there's always talk of things happening in the background, and we have, you know, small teams that make sure they're aware of what's going on. But as a company, we're very, very focused on executing and winning in the U.S. Perfect.

Thank you very much. Good luck.

Thank you.

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

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

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

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

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

Okay, great. Thank you. Thank you.

And one moment for our next question. Our next question will come from Joe South of SIG. Your line is open.

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

Hello? Pardon me? Hi.

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

Hello? We're back.

Back again? Yeah, this should be hopefully better. So you're asking about the penetration of new states. I apologize, I missed the last part of the question.

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

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

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

Interesting.

And one follow-up, if I could, are you willing to maybe share with us maybe the percentage of jurisdictions or the number where you're contribution positive?

Yeah, we'll definitely be talking more about that this fall on our Q4 earnings call in November and on our investor day. So I don't want to front run the team on that one, but we have a lot to do.

Okay. Thank you, guys. Thank you.

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

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

Yeah, it's a great question on feeling. I think we're still trying to figure out what we think the right level and appropriate level to get to is, and we'll continue to follow the data. I don't feel like we have enough yet to say that we have a long-term target there other than I think there's still room to increase and we thus far have seen, you know, really no material impact to handle. So, definitely room to go up. And, you know, parlay mix was actually right on expectation for us this quarter. You know, there's definitely some upside. I think an average light count with the rollout of our new bed slips, it'll be powered by our in-house SGP models. I think that'll improve the leg adding experience in the UI, and that should hopefully increase average leg count this fall. But, you know, as far as Q2 goes, we were really at where we expected.

One moment, please.

Speakers, are you able to hear us?

Yep, yep. Could I just squeeze in one more for my ball?

Actually, one moment, please, sir. Mr. Robbins, Mr. Park, are you able to hear us?

This one will be just having a technical difficulty. Please stay on your lines. And pardon me.

Mr. Robbins, Mr. Park, are you able to hear us? Mr. Park, Mr. Robbins?

Yeah, I'm here.

Sorry. Thank you.

Can I just squeeze in one quick follow-up? Yeah, sure. Okay. Yeah, just looking out the next few years, maybe more long-term. As you think about seasonality involving, do you envision a scenario where you could be EBITDA positive in all four quarters, or are you going to always kind of have this, you know, big jump just given, you know, the start of sports season and then maybe the shoulder season?

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

One moment, please. Okay.

Speaker will be back on in a moment. We ask you to please stand by because we'll be back on momentarily.

Hello.

Yes, because we are able to hear you. I apologize. I don't know if there's a technical issue on the service provider's end, but we've tried several different phones here. I apologize to those listening to the call.

Go ahead, please. Thanks. That's all for me. Okay. Thank you.

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

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

Speakers, are you there?

Mr. Santorelli? Mr. Santorelli, if you could please repeat your question.

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

One moment, please.

Should we join as a participant?

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

I could hear you. Yep. Thanks.

Welcome. If you could please repeat your questions.

Is the management team there? Yes, we're here. Oh, hey, guys. While you guys were gone, I just gave guidance for 24 to the rest of the folks on the call. I hope that's all right.

Our work is done. Thank you.

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

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

Thank you, Jason.

Thanks, Carlo.

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

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

I think it's definitely both. You know, when you can do more for less, that drives both revenue and cost efficiency. And so I think that's really the thematic. Obviously, depending on what it is and where in the stage of development it is, that'll affect the relative ways that we use it. I think, for example, Right now, with our developer efficiency initiatives, we're focused on how do we get more done with our development team. So I think that what that probably means is over time, we don't need to add as many engineers to get the work done that we want to do as we continue to scale the business and build out the product and serve the customer. But I do think it's a combination, if you think about it from a P&L standpoint, of both cost opportunity and revenue opportunity. None of that is baked into any of our guidance or any of the things we've shared in the past at Investor Day. This is something that we really view as upside, and it's in the category of the long list of things that we're working on that we think could create even better long-term economics for our shareholders.

Is it helping some of the product roadmap that's coming out for this current NFL season, or is that too early and it's more of a 24-25 event?

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

Great. Thanks for taking the questions.

Thank you. One moment, please, for our next question.

Our next question will come from the line of Jed Kelly of Oppenheimer.

Your line is open.

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

Yeah, it's a great question. I think on the CAC side, it's a combination of several things. One, certainly what you're mentioning, this national scale, the brand that we've built and the leverage we're getting out of that. It's also... you know, this is another area of the business that's constantly being analyzed and optimized. We have a team of analytics people, we have machine learning, and now we're actually starting to implement AI as a means of helping with things like bidding on PPC platforms or creation of, you know, multiple, you know, many multiples more of different types of creative that you can test and optimize in the market. So, you know, that's just a continual thing that we've been doing and I think is going to continue and potentially could be even with some of the AI work that we're exploring, you know, and for another sort of step function improvement. But it is what you're saying too, absolutely. I think that there's sort of an underlying advantage that we have in that we have a brand, we have national scale, but then we also have a team that's really been honing and optimizing the marketing engine. And it's a complicated thing, right? I mean, this is very, you know, not straightforward analysis. We're at any given point in time during our peak seasons, spending in so many different places with so many different partners, so many different creatives in market. So it's really, you know, just the opportunity to just continually optimize an engine like that, I think should be a continual tailwind for us for many years to come.

And then on player engagement.

Oh, right, right. So, you know, I think the big difference this year is, was the way that we were able to continue to retain NFL players into NBA season. And that's continued into baseball season as well. Those have both exceeded our expectations. We also have seen excellent cross sell into iGaming. Robin was asking about that earlier. That's continued as we've, you know, it's kind of like this halo effect of when you retain better and cross more people into NBA on the sports side, that then has some spillover effect on iGaming because more active players on the OSB platform cross-sell more into more active players on the iGaming product. So that's really, I think, what I would attribute Q2. If you look at past years, we've typically seen revenue decline Q2 to Q1. We weren't expecting this. I mean, this was the result of a huge market share gain year over year. Lots of really just, you know, metrics that for last year and a half we've been testing and really just hit a great point where the optimization is really kicking in. And, you know, just the culmination of a ton of great product work. I mean, the product is so much better year over year from where it was last year. And as I said earlier, I feel like in the back half of the year we're going to have the best product in the market.

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

Thank you. Good quarter. Thank you.

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

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

Absolutely. So, definitely, you know, the bulk of the growth is going to come from the states that we launched from 2018 through 21. We are starting to get, you know, some real good contribution from some of the 22 states as well. I think, you know, the degree to which we are still seeing growth in our older states, you know, it's just very significant. And they're obviously a bigger piece of the pie. So when you can get that kind of growth in your older states, it makes it very, you know, very big impact on the overall business. And then I'm sorry, what was the second part of the question? Kentucky. Kentucky. So Kentucky, I think we had a slide on this, but we're projecting roughly – We're expecting, I should say, $20 million of revenue and $30 million EBITDA loss from Kentucky in fiscal year 23. And I think that assumes a September 28th launch date. Last time when we guided, we did not actually have a clear launch date for Kentucky. And now that we do, we've put it into the guidance. And I'll note that, you know, despite that not being in our prior guide and now being in our current guide, we still had a massive improvement in the guide. So, you know, that shows that not only can we fund new state launches through the results that we're generating in old states and the cost efficiencies we're finding, but we can do that and continue to see upside on top of that, which is a great story, I think, from, you know, years past where we've always had to kind of increase the loss outlook every time that we've had a new state launch.

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

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

You're right. It's a combination of two things. It could be actual wallet that was going to your competitors, customers that were using your competitors before, or it could simply be just better engagement and monetization of customers on your platform. I think what we felt like in Q2, it was a combination of both. Definitely being able to increase hold rate year over year made a big difference in share. But it was a combination of both. We think we got handle share from, you know, people that were playing NBA with competitors last year as well. And I think that's really a result of just the product improvement year over year. So to answer your question, absolutely. Could there be upside? Yes. I mean, you know, the goal for the team is to go out and beat anything that we put out there and, I think that we feel like we have quite a few initiatives that could help us gain share and could help us further retain, engage, and monetize our users in the back half of the year. We just consistently take an approach of not putting things that we don't feel we have full line of sight to, you know, to in the guide. Our guide we consider to be what we commit to. And then we go out and we try to deliver above that by executing better and Um, you know, hopefully some of the things that you hope come through, come through, but, um, we don't put hope in the guide. We put what we know in the guide.

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

Thank you again. One moment, please. For our next question. Our next question will come from Steven Diagola of TD Cowan. Your line is open.

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

Thank you. Yeah, so we're assuming a similar hold rate to what we had in the back half of last year. I think for, you know, the Q3, Q4 question, Kentucky definitely made a little bit of a difference, you know, but the fact that we were able to increase the guide for the back half of the year, increase the Q4 guide, I think really had to do with just the overall performance of the existing states that were in and of the overall business on the cost efficiency side. And I think that that's more than enough to offset the Kentucky EBITDA that we're, or negative EBITDA that we're expecting to generate in the back half of the year. So we're pretty optimistic about a really great second half. And, you know, I think we'll have to see exactly what ends up happening with states like North Carolina and Vermont. But right now we feel like Kentucky is, you know, going to provide a great opportunity for us to, go and invest in acquiring customers and then our existing states. And there's also several new states that haven't had a full NFL season. Massachusetts hasn't had any NFL season. Ohio didn't launch until January last year. So there should be a lot of upside in the customer acquisition numbers in H2 this year.

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

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

Thanks, Jason.

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

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

Yeah, so Amazon has been a great partner. Last year, we were really happy with Thursday night football results. It was a big driver of customer acquisition for us. Those games are also really well built for same game parlay offerings. So really helped drive a lot of parlay mix through better promotion of same game parlays on Thursday nights. We have a few extra things that we're going to be doing with Amazon this year that I'm pretty excited about that will be, I think, coming to everybody in due order once the season launches. So it really should be a great year with Amazon, and we're really just thrilled with that partnership. And as far as ESPN goes, same story. We've been really happy with them as a partner. They've been great. We continue to get great value out of that relationship and You know, we'll have to see. I think, obviously, we saw the same comments everybody else did from Bob Iger, and, you know, I think it's still fairly early days for them, but, you know, I don't want to speak for them. They'll know better than I will what their plans are, but we're always happy with, you know, great partners like ESPN. If there's a way to have a deeper relationship that makes sense for both companies, then, you know, it's something we would certainly consider, and If it doesn't make sense and there's something that, you know, doesn't really work for us or for them, then we won't. We're perfectly happy with the relationship as it is now. So I think that's how we're thinking about it.

Great. Thank you, Jason. Thank you.

One moment, please, for our next question.

Our next question will come from the line of Ryan Segal of Craig Hallam Capital Group. Your line is open.

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

Yeah, I think, first of all, MLB itself has made some great changes that have helped increase engagement with the sport, so I give them credit for that. But, you know, I think betting has helped a lot, too. And MLB, first of all, is very well built for live betting. You know, so that's been a real product that works very well with that sport. And we're excited about the offering we have there this year. Also, the same game parlay product has been significantly enhanced this year. We brought our own models into the fold and I think, you know, really just improved both the UI and the overall offering of same game parlays for MLB. And there's been a number of other things we've done. We've done some work on the cash out feature. I mean, there's a lot of different areas that we've worked on that I think have really helped improve the MLB offering year over year. And, you know, that combined with really strong engagement from a viewership perspective, I think is driven, you know, unexpectedly positive to the upside results for MLB season so far.

Thanks, Jason. Nice job, guys. Thank you.

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

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

Yeah, I think it's very similar to what we had shared last year that, you know, the results can definitely range between, you know, negative 10 and probably positive 20%, depending on, you know, if you're really taking like that 95% confidence interval, it can get that wide in any given week. Obviously, over the course of several weeks, over the course of the season, that band tightens, but that's how I would think about kind of a week-to-week thing. And You know, really it's the results generally in NFL of two things. One, you know, do the favorites win or lose? And second is how the player props do. And that second part has become increasingly important as, you know, the industry's evolved because so much betting is now happening on player props and so much same game parlay depends on player props. So that's really made a big difference. You know, I think given Q3 is always one that, For our business planning group, it's their least favorite quarter because so much volume comes in the last three weeks of the quarter. Not that it's the only thing going on, but relatively speaking, July and August are slower months. It's really the last few weeks you get all this NFL volume in. A few good or bad weeks can definitely swing the results a little bit, but I think that as we've gotten bigger and our customer base has become more diversified, the effects of that are lower as we've gotten more of a mix of player parlay. So it's not just straight game outcomes. You know, so I think we have to look at this season. I think this year we might see a little bit tighter band, certainly over three weeks we will, but I think still fair, given what we know today, to think week to week about, you know, that minus 10 to plus 20% possibility on hold, depending on the game outcomes and player parlay outcomes.

That's helpful. And just a quick follow-up.

Wanted to get your thoughts on Florida, given the recent court decision. Do you see a pathway for DraftKings to compete in the state?

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

Great. Congrats on the quarter.

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

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

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

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

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

Great. Next quarter. Thank you.

Thank you. And one moment, please, for our next question. Our next question will come from Jeff Stanchel of Stifel. Your line is open.

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

It's a very good question. I think you're absolutely right that we've talked and everybody's talked a lot about parlay mix and average leg count. And those are certainly very important drivers of whole rate improvement. But there is also, you know, there are also the other levers that you mentioned. I would say that really across the board, we feel we've improved. In fact, You know, the Q2 outperformance is really more a function of those other things that you mentioned because ParlayMix, even though it was way up year over year, was kind of on track with our expectations. So it was really the customer risk management, the trading improvement. You know, we've spent a lot of dev effort on tooling for our traders to make it easier for them to adjust lines, to spot soft lines, to move them faster and to better optimize them. We've also really significantly invested in our modeling and approach for customer risk management. So I think those are things that are really paying off as well as you look at the hold rate improvement and the outperformance in Q2. Thanks, Jason.

Thank you.

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

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

Absolutely. I mean, DFS actually has had a great year so far, and that's been driven by a lot of improvements we've made across the product. Best of all, it's seen a big jump year over year, and that's something that you can sort of use as a little bit of a litmus test for or maybe the advanced test for how NFL season is going to go because a lot of those drafts happen in the July-August timeframe. So very exciting year for DFS. We have some really good stuff planned for the back half of the year on that product. And it is continually adding new customers. We have seen really strong crossover continue from DFS when we launched new states. So everything seems to be working on that front, and it continues to be a big source of engagement for customers in states that don't have sports betting as well as a great funnel. for new states that launch.

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

Oh, definitely seeing multi-product use. I mean, there's some cannibalization, of course, but it's not very significant. The products are pretty different, and people like them for different reasons. People also are not spending a ton of money on DFS, so it's really not like a big wallet thing. It's more of an engagement thing. And they are different products, and I think that they provide different types of experiences for people. So We are seeing a great deal of crossover, but we're also seeing great retention across all of those products as well. And it appears that the cannibalization is fairly minimal. And a lot of it also happens in the initial launch stages. People are very excited about sports betting. They maybe forget about DFS for a little bit. But what we're seeing in some of our older state vintages is as time goes on, they come back. And some of the cannibalization, even though it wasn't that significant to begin with, even that small bits of cannibalization we're seeing reversed in some of our older states.

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

Thank you so much.

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

Thank you all for joining us on today's call. We had an excellent first half of 23. We are laser focused on the back half and on the fall, and we're very excited about the rest of the year and beyond. I look forward to speaking with you over the next few weeks and hope you all stay safe and well. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend. Music. Thank you. Good day and thank you for standing by. Welcome to the DraftKings Q2 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Stanton Dodge, Chief Legal Officer. Sir, please go ahead.

Good morning, everyone, and thanks for joining us today.

Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties, and other factors, as discussed further in our SEC filings, that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will also discuss certain non-GAAP financial measures that we believe may be useful in evaluating DraftKings operating performance. These measures should not be considered in isolation or as a substitute for DraftKings financial results prepared in accordance with GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings presentation, which can be found on our website, and in our quarterly report on Form 10Q filed with the SEC. Hosting the call today, we have Jason Robbins, Co-Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business. And Jason Park, Chief Financial Officer of DraftKings, will provide a review of our financials and we will then open the line to questions. I will now turn the call over to Jason Robbins.

Good morning, and thank you all for joining. I'm excited to be with you today to talk about our outstanding second quarter and significantly improved outlook for fiscal year 2023. Revenue and adjusted EBITDA exceeded expectations in the second quarter, and importantly, we generated significant positive adjusted EBITDA. Second quarter revenue increased 88% year-over-year to 875 million dollars.

Our revenue growth trajectory has been very strong due to our continued focus on enhancing our products and improving our customer experience, which is driving excellent retention and rapidly improving monetization. At the same time, we remain relentlessly focused on efficiency, and our mantra of revenue growth and cost efficiency is now a core tenet of the organization. As a result of our strong revenue growth and ongoing efforts to capture efficiencies, we delivered $73 million of positive adjusted EBITDA in the second quarter. We are increasing our full-year revenue guidance to a range of $3.46 billion to $3.54 billion, implying growth of 56% year-over-year at the midpoint. Our fiscal year 2023 revenue guidance includes our expectation of nearly $1.2 billion of revenue in the fourth quarter of 2023. We are also improving our full-year adjusted EBITDA guidance to a range of negative $199 million to negative $220 million. an improvement of 35% at the midpoint versus our May full year guidance. Our fiscal year 2023 adjusted EBITDA guidance includes our expectation of $150 million to $175 million in adjusted EBITDA in the fourth quarter of this year. Turning to our OSB product, we have continued to focus on powering our own same-game parlays and differentiating our live betting content. We now have live same-game parlays built in-house for most of the major sports, including NFL, NBA, MLB, college football, and college basketball, and added to our live markets for golf, tennis, and MLB. We are improving our product at a very fast velocity with very high quality. In iGaming, we're executing our two-brand strategy while focusing on differentiating through more in-house content, including live dealer and jackpot offerings. Our persistent focus on product differentiation is already apparent in share trends. In the states where we are currently live, we achieved OSB handle share of 35%, and OSB GGR share of 32% in the quarter, which were the highest they have been since the COVID impacted second quarter of 2020. We also maintain number one iGaming GGR position and set an all-time record for our iGaming GGR share at 27%. Looking ahead, we are very excited for football season. Our entire organization is dialed in and ready for the start of NFL and NCAA football. I am proud of the team and the culture we have put in place. In particular, I am proud of our team for their relentless focus on efficiency and expense management over the past 12 months. Our work of achieving ands is not done, and we feel great about the trajectory of the business. With that, I will turn it over to Jason Park.

Thank you, Jason. I'll hit on the highlights, including our Q2 performance and our improved 2023 guidance. Please note that all income statement measures discussed, except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, the organization is executing very well, and that is showing up in our results. We achieved $875 million of revenue in the quarter, which is 88% higher than our second quarter 2022 revenue. And our adjusted EBITDA of positive $73 million significantly outperformed our expectations and improved by nearly $200 million on a year-over-year basis. Customer retention and engagement outperformed expectations, As we successfully transitioned customers from the MBA season into MLB, we have seen significantly better than expected engagement on MLB due to our enhanced product. Structural hold was also above expectations at approximately 9% for the quarter, while promotional intensity improved, together supporting a more than 550 basis point year-over-year improvement in our adjusted gross margin rate to 47%. Fixed expenses were slightly better than expected as we managed vendor-related costs and exerted discipline on our compensation expenses. We were particularly pleased with the results in our more mature online sportsbook and iGaming states. In our states that launched from 2018 through 2021, combined handle growth accelerated quarter over quarter and increased more than 35% compared to the same period in 2022. In these states, revenue increased more than 70% year over year, adjusted gross margin rate increased more than 800 basis points, and external marketing declined more than 10%, while total unique customers increased approximately 25%. These strong results and our visibility into continued improvement have enabled us to raise our full-year 2023 revenue guidance range to $3.46 billion to $3.54 billion, from $3.135 billion to $3.235 billion, or by $315 million at the midpoint. We are also improving our full-year 2023 adjusted EBITDA guidance range to negative 190 million to negative 220 million, from negative 290 million to negative 340 million, or by 110 million at the midpoint. The bridge from our May full-year 2023 guidance to our current full-year 2023 guidance includes increases due to stronger customer retention, acquisition, and engagement, structural sportsbook hold improvement, and favorable sport outcomes in the second quarter, these items are partially offset by Kentucky now launching this year and being included in our forecast, and Ohio's tax rate increasing effective July 1st. Customer retention, acquisition, and engagement are exceeding expectations and account for $225 million of the revenue improvement and $100 million of the adjusted EBITDA improvements. Our structural sportsbook hold percentage forecast is also higher, supported by our introduction of in-house in-game parlay capabilities and new live betting markets. This trend accounts for $40 million of the revenue improvement and $30 million of the adjusted EBITDA improvement. Favorable sport outcomes in the second quarter contribute $30 million to the revenue improvement and $20 million to the adjusted EBITDA improvement. We are very excited that Kentucky's Horse Racing Commission recently set a target launch date of September 28, 2023, for online sports betting, which is sooner than we previously anticipated. As a result, we expect $20 million of additional revenue in 2023 and a headwind of $30 million to 2023 adjusted EBITDA. Last, we expect Ohio's increased tax rate from 10% to 20%, which went into effect July 1, to result in $10 million of additional costs this year. In terms of our full year 2023 adjusted gross margin percentage, we now expect to be in the 43 to 45% range, an improvement from our previous guidance of 42 to 45%. We expect contribution profit, which we define as adjusted gross profit, less external marketing, to grow to approximately $700 million in fiscal year 2023, which includes our investment into Kentucky. With regard to our balance sheet, we ended the second quarter with $1.1 billion of cash and now plan to end the year with more than $1 billion. As a reminder, we expect approximately $120 million of capital expenditures and capitalized software development costs for fiscal year 2023 and change in networking capital to be slightly positive for the year. In sum, we had a strong second quarter and are very excited for the upcoming football season. That concludes our remarks and we will now open the line for questions.

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

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

Thank you, Sean. So, you know, first on the question around product, it's been a lot of things. You know, I think it's a very complicated product and there's a lot of things that can create customer friction. if you're not careful. And I think really a big focus for us over the last year and a half has been removing customer friction throughout the journeys. So that's been a big deal. We've obviously greatly enhanced our same game parlay offering. That's been a huge part of the story over the last six to eight months. And I think our live betting options have gotten better as well. I can objectively say, I think, you know, in H2, we feel we're going to have the best product in the market. So really excited about that, and I think that's the big difference maker, as you noted. As far as hold rate goes, you know, we're continually working to improve that. We've obviously closed the gap quite a bit between handle share and GGR share, and I have no reason to believe that we can't continue to do that.

Thank you very much.

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

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

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

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

No, we don't have any cost reductions embedded in the guidance from any of that. We certainly, as I mentioned, always look at when things come up, but we're at this point not building any favorable renegotiations into the guidance.

Makes sense. Thank you.

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

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

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

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

It's a great question. I mean, I think that this is an area that there's still a lot left to do. You know, it's true of any product in the digital space that there's always going to be room to optimize your funnels and improve the experience, but particularly in regulated gaming, where there's a lot of requirements that you have to follow. and there's a lot of states that launch very quickly. So the focus for us has been on how do we get live and make sure that we're complying with all relevant laws and regulations. I think as you then kind of say, okay, let's take a look at along the way, what has that done that might have created bad experiences for customers, flags that go off that were misfires or things that were actually correct but don't really properly give the customer a path to resolving them, even just better explanation. I think there's so much there. And, you know, for us, it's really about the customer experience. We look at the product and we say, if you're a customer, what elements of it would be frustrating? What elements of it would make you, you know, feel like I'm just going to go try somewhere else? And we try to improve that the best we can, obviously making sure that we continue to follow all compliant, stay compliant with all regulations and laws in every jurisdiction that we operate in. But I think there's a lot there and just will continually be because of this sort of, you know, nature of the regulated gaming industry. And I think particularly now, given how many states launched and how quickly, there's just a lot of low-hanging fruit still available on that front.

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

You know, I know there's a lot of chatter about M&A. At this point, we're about – I mean, we had a great quarter. We're really excited about that. But, you know, we're kind of on to this quarter. It's about to be the most important time of year seasonally for us. We have, you know, fall coming up with the NFL and college football calendar, NBA. lots of things happening this fall. So this is the most important time of year. This is when we acquire the most customers, when we have the biggest opportunity to gain more market share. It's where we generate the most revenue and we'll generate the most EBITDA. I think this is so important, a moment for DraftKings that we have the team laser focused on executing and everybody's really dialed in now. We have a lot of exciting stuff coming for NFL and college football and basketball and hockey and everything else, and we're pretty excited about that. And, you know, listen, there's always talk of things happening in the background, and we have, you know, small teams that make sure they're aware of what's going on. But as a company, we're very, very focused on executing and winning in the U.S.

Perfect. Thank you very much. Good luck.

Thank you.

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

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

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

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

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

Okay, great. Thank you.

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

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

Pardon me? Hi.

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

Hello? We're back.

Back again?

Yeah, this should be hopefully better. So you're asking about the penetration of new states. I apologize, I missed the last part of the question.

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

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

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

Interesting.

And one follow-up, if I could, are you willing to maybe share with us maybe the percentage of jurisdictions or the number? Were your contribution positive?

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

Okay. Thank you, guys. Thank you.

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

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

Yeah, it's a great question on feeling. I think we're still trying to figure out what we think the right level and appropriate level to get to is and, We'll continue to follow the data. I don't feel like we have enough yet to say that we have a long-term target there, other than I think there's still room to increase. And we thus far have seen, you know, really no material impact to handle. So definitely room to go up. And, you know, parlay mix was actually right on expectation for us this quarter. You know, there's definitely some upside. I think an average light count with the rollout of our new bed slips that'll be powered by our in-house SGP models. I think that'll improve the leg adding experience in the UI, and that should hopefully increase average leg count this fall. But, you know, as far as Q2 goes, we were really at where we expected.

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

Yep, yep. Could I just squeeze in one more for my follow-up?

Actually, one moment, please, sir. Mr. Robbins, Mr. Park, are you able to hear us? This one will be just having a technical difficulty. Please stay on your lines. And pardon me, Mr. Robbins, Mr. Park, are you able to hear us? Mr. Park, Mr. Robbins?

Yeah, here. Sorry.

Thank you.

Can I just squeeze in one quick follow-up? Yeah, sure. Okay. Okay. Yeah, just looking out the next few years, maybe more long-term. As you think about seasonality involving, do you envision a scenario where you could be EBITDA positive in all four quarters, or are you going to always kind of have this, you know, big jump just given, you know, the start of sports season and then maybe the shoulder season?

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

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

Hello?

Yes, speakers, we are able to hear you. I apologize. I don't know if there's a technical issue on the service provider's end, but we've tried several different phones here. I apologize to those listening to the call.

Go ahead, please. Thanks. That's all for me. Okay, thank you.

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

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

Figures, are you there? Mr. Santorelli? Hello? Mr. Santorelli, if you could please repeat your question.

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

One moment, please.

Should we join as a participant?

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

I could hear you. Yep. Thanks.

Welcome. If you could please repeat your questions.

Is the management team there? Yes, we're here. Oh, hey, guys. While you guys were gone, I just gave guidance for 24 to the rest of the folks on the call.

I hope that's all right. Our work is done. Thank you.

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

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

All right. Thank you, Jason.

Thanks, Carlo.

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

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

I think it's definitely both. You know, when you can do more for less, that drives both revenue and cost efficiency. And so I think that's really the thematic. Obviously, depending on what it is and where in the stage of development it is, that'll affect the relative ways that we use it. I think, for example, Right now with our developer efficiency initiatives, we're focused on how do we get more done with our development team. So I think that what that probably means is over time we don't need to add as many engineers to get the work done that we want to do as we continue to scale the business and build out the product and serve the customer. But I do think it's a combination if you think about it from a P&L standpoint of both cost opportunity and revenue opportunity. None of that is baked into any of our guidance or any of the things we've shared in the past at Investor Day. This is something that we really view as upside, and it's in the category of the long list of things that we're working on that we think could create even better long-term economics for our shareholders.

Is it helping some of the product roadmap that's coming out for this current NFL season, or is that too early and it's more of a 24-25 event?

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

Great. Thanks for taking the questions.

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

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

Yeah, so great question. I think on the CAC side, it's a combination of several things. One, certainly what you're mentioning, this national scale, the brand that we've built and the leverage we're getting out of that. It's also, this is another area of the business that's constantly being analyzed and optimized. We have a team of analytics people, we have machine learning, and now we're actually starting to implement AI as a means of helping with things like bidding on PPC platforms or creation of, you know, multiple, you know, many multiples more of different types of creative that you can test and optimize in the market. So, you know, that's just a continual thing that we've been doing and I think is going to continue and potentially could be even with some of the AI work that we're exploring, you know, and for another sort of step function improvement. But it is what you're saying too, absolutely. I think that there's sort of an underlying advantage that we have and that we have a brand, we have national scale. But then we also have a team that's really been honing and optimizing the marketing engine. And it's a complicated thing, right? I mean, this is very, you know, not straightforward analysis. We're at any given point in time during our peak season spending in so many different places with so many different partners, so many different creatives in market. So it's really, you know, just the opportunity to just continually optimize an engine like that, I think, should be a continual tailwind for us for many years to come.

And then on player engagement.

Oh, right, right. So, you know, I think the big difference this year was the way that we were able to continue to retain NFL players into NBA season. And that's continued into baseball season as well. Those have both exceeded our expectations. We also have seen excellent cross sell into iGaming. Robin was asking about that earlier. That's continued as we've, you know, it's kind of like this halo effect of when you retain better and cross more people into NBA on the sports side, that then has some spillover effect on iGaming because more active players on the OSB platform cross-sell more into more active players on the iGaming product. So that's really, I think, what I would attribute Q2. If you look at past years, we've typically seen revenue decline Q2 to Q1. We weren't expecting this. I mean, this was the result of a huge market share gain year over year. Lots of really just, you know, metrics that for last year and a half we've been testing and really just hit a great point where the optimization is really kicking in. And, you know, just the culmination of a ton of great product work. I mean, the product is so much better year over year from where it was last year. And as I said earlier, I feel like in the back half of the year, we're going to have the best product in the market.

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

Thank you. Good quarter. Thank you.

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

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

Absolutely. So, definitely, you know, the bulk of the growth is going to come from the states that we launched from 2018 through 21. We are starting to get, you know, some real good contribution from some of the 22 states as well. I think, you know, the degree to which we are still seeing growth in our older states, you know, it's just very significant. And they're obviously a bigger piece of the pie. So when you can get that kind of growth in your older states, it makes it very, you know, very big impact on the overall business. And then I'm sorry, what was the second part of the question? Kentucky. Kentucky. So Kentucky, I think we had a slide on this, but we're projecting roughly – We're expecting, I should say, $20 million of revenue and $30 million EBITDA loss from Kentucky in fiscal year 23. And, you know, I think that assumes a September 28th launch date. Last time when we guided, we did not actually have a clear launch date for Kentucky, and now that we do, we've put it into the guidance. And I'll note that, you know, despite that not being in our prior guide and now being in our current guide, we still had a massive improvement in the guide. So, you know, that shows that not only can we fund new state launches through the results that we're generating in old states and the cost efficiencies we're finding, but we can do that and continue to see upside on top of that, which is a great story, I think, from, you know, years past where we've always had to kind of increase the loss outlook every time that we've had a new state launch.

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

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

You're right. It's a combination of two things. It could be actual wallet that was going to your competitors, customers that were using your competitors before, or it could simply be just better engagement and monetization of customers on your platform. I think what we felt like in Q2, it was a combination of both. Definitely being able to increase hold rate year over year made a big difference in share. But it was a combination of both. We think we got handle share from, you know, people that were playing NBA with competitors last year as well. And I think that's really a result of just the product improvement year over year. So to answer your question, absolutely. Could there be upside? Yes. I mean, you know, the goal for the team is to go out and beat anything that we put out there and I think that we feel like we have quite a few initiatives that could help us gain share and could help us further retain, engage, and monetize our users in the back half of the year. We just consistently take an approach of not putting things that we don't feel we have full line of sight to, you know, to in the guide. Our guide we consider to be what we commit to. And then we go out and we try to deliver above that by executing better and Um, you know, hopefully some of the things that you hope come through, come through, but, um, we don't put hope in the guide. We put what we know in the guide.

Great. Thanks for the comments. Congratulations Porter. Thank you.

Thank you. Again, one moment, please for our next question. Our next question will come from Steven Diagola of TD Cowan. Your line is open.

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

Thank you. Yeah, so we're assuming a similar hold rate to what we had in the back half of last year. I think for, you know, the Q3, Q4 question, Kentucky definitely made a little bit of a difference, you know, but the fact that we were able to increase the guide for the back half of the year, increase the Q4 guide, I think really had to do with just the overall performance of the existing states that were in and of the overall business on the cost efficiency side. And I think that that's more than enough to offset the Kentucky EBITDA that we're, or negative EBITDA that we're expecting to generate in the back half of the year. So we're pretty optimistic about a really great second half. And, you know, I think we'll have to see exactly what ends up happening with states like North Carolina and Vermont. But right now we feel like Kentucky is going to provide a great opportunity for us to, go and invest in acquiring customers and then our existing states. And there's also several new states that haven't had a full NFL season. Massachusetts hasn't had any NFL season. Ohio didn't launch until January last year. So there should be a lot of upside in the customer acquisition numbers in H2 this year.

Jason, just one more if I can. In light of the Ohio move to double its tax rate, could you maybe just discuss the long-term risk to your business and state government's would look to take increasing taxes on gross gaming revenue. And sort of what are the incentives that would keep state governments maintaining lower tax rates? Thank you.

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

Thanks, Jason.

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

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

Yeah, so Amazon has been a great partner. Last year, we were really happy with Thursday night football results. It was a big driver of customer acquisition for us. Those games are also really well built for same game parlay offerings. So really helped drive a lot of parlay mix through better promotion of same game parlays on Thursday nights. We have a few extra things that we're going to be doing with Amazon this year that I'm pretty excited about that will be, I think, coming to everybody in due order once the season launches. So it really should be a great year with Amazon, and we're really just thrilled with that partnership. And as far as ESPN goes, same story. We've been really happy with them as a partner. They've been great. We continue to get great value out of that relationship and You know, we'll have to see. I think, obviously, we saw the same comments everybody else did from Bob Iger, and, you know, I think it's still fairly early days for them, but, you know, I don't want to speak for them. They'll know better than I will what their plans are, but we're always happy with, you know, great partners like ESPN. If there's a way to have a deeper relationship that makes sense for both companies, then, you know, it's something we would certainly consider, and If it doesn't make sense and there's something that doesn't really work for us or for them, then we won't. We're perfectly happy with the relationship as it is now. So I think that's how we're thinking about it.

Great. Thank you, Jason.

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

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

Yeah, I think, first of all, MLB itself has made some great changes that have helped increase engagement with the sport, so I give them credit for that. But, you know, I think betting has helped a lot, too, and MLB, first of all, is very well built for live betting. You know, so that's been a real product that works very well with that sport. And we're excited about the offering we have there this year. Also, the same game parlay product has been significantly enhanced this year. We brought our own models into the fold and I think, you know, really just improved both the UI and the overall offering of same game parlays for MLB. And there's been a number of other things we've done. We've done some work on the cash out feature. I mean, there's a lot of different areas that we've worked on that I think have really helped improve the MLB offering year over year. And, you know, that combined with really strong engagement from a viewership perspective, I think is driven, you know, unexpectedly positive to the upside results for MLB season so far.

Thanks, Jason. Nice job, guys. Thank you.

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

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

Yeah, I think it's very similar to what we had shared last year that, you know, the results can definitely range between, you know, negative 10 and probably positive 20%, depending on, you know, if you're really taking like that 95% confidence interval, it can get that wide in any given week. Obviously, over the course of several weeks, over the course of the season, that band tightens, but that's how I would think about kind of a week-to-week thing, and You know, really it's the results generally in NFL of two things. One, you know, do the favorites win or lose? And second is how the player props do. And that second part has become increasingly important as, you know, the industry's evolved because so much betting is now happening on player props and so much same game parlay depends on player props. So that's really made a big difference. You know, I think given Q3 is always one that, for our business planning group, it's their least favorite quarter because so much, you know, volume comes in the last three weeks of the quarter. And, you know, not that it's, you know, it's the only thing going on, but like relatively speaking, July and August are slower months. So it's really, you know, the last few weeks you get all this NFL volume and, a few good or bad weeks can definitely swing the results a little bit. But I think that as we've gotten bigger and our customer base has become more diversified, the effects of that are lower as we've gotten more of a mix of player parlay. So it's not just straight game outcomes. That's You know, so I think we have to look at this season. I think this year we might see a little bit tighter band, certainly over three weeks we will, but I think still fair, given what we know today, to think week to week about, you know, that minus 10 to plus 20% possibility on hold, depending on the game outcomes and player parlay outcomes.

Oh, that's helpful. And just a quick follow-up.

Wanted to get your thoughts on Florida, given the recent court decision. Do you see a pathway for DraftKings to compete in the state?

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

Great. Congrats on the quarter.

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

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

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

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

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

Great. Next quarter. Thank you.

Thank you. And one moment, please, for our next question. Our next question will come from Jeff Stanchel of Stifel. Your line is open.

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

It's a very good question. I think you're absolutely right that we've talked and everybody's talked a lot about parlay mix and average leg count. And those are certainly very important drivers of whole rate improvement. But there is also, you know, there are also the other levers that you mentioned. I would say that really across the board, we feel we've improved. In fact, You know, the Q2 outperformance is really more a function of those other things that you mentioned because ParlayMix, even though it was way up year over year, was kind of on track with our expectations. So it was really the customer risk management, the trading improvement. You know, we've spent a lot of dev effort on tooling for our traders to make it easier for them to adjust lines, to spot soft lines, to move them faster and to better optimize them. We've also really significantly invested in our modeling and approach for customer risk management. So I think those are things that are really paying off as well as you look at the hold rate improvement and the outperformance in Q2. Thanks, Jason.

Thank you.

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

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

Absolutely. I mean, DFS actually has had a great year so far, and that's been driven by a lot of improvements we've made across the product. Best Ball has seen a big jump year over year, and that's something that you can sort of use as a little bit of a litmus test for or maybe the advanced test for how NFL season is going to go because a lot of those drafts happen in the July-August timeframe. So very exciting year for DFS. We have some really good stuff planned for the back half of the year on that product. And it is continually adding new customers. We have seen really strong crossover continue from DFS when we launched new states. So everything seems to be working on that front, and it continues to be a big source of engagement for customers in states that don't have sports betting as well as a great funnel. for new states that launch.

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

Oh, definitely seeing multi-product use. I mean, there's some cannibalization, of course, but it's not very significant. The products are pretty different, and people like them for different reasons. People also are not spending a ton of money on DFS, so it's really not like a big wallet thing. It's more of an engagement thing. And they are different products, and I think that they provide different types of experiences for people. So We are seeing a great deal of crossover, but we're also seeing great retention across all of those products as well. And it appears that the cannibalization is fairly minimal. And a lot of it also happens in the initial launch stages. People are very excited about sports betting. They maybe forget about DFS for a little bit. But what we're seeing in some of our older state vintages is as time goes on, they come back. And some of the cannibalization, even though it wasn't that significant to begin with, even that small bits of cannibalization we're seeing reversed in some of our older states.

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

Thank you so much.

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

Thank you all for joining us on today's call. We had an excellent first half of 23. We are laser focused on the back half and on the fall, and we're very excited about the rest of the year and beyond. I look forward to speaking with you over the next few weeks and hope you all stay safe and well. Thank you.

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