Despite posting mixed financial results over the second quarter of this year, DraftKings has reiterated its outlook for fiscal year 2025 when the company projects approximately $1 billion in earnings.
One reason for the optimism lies in the company’s improved metrics on customer acquisition, a closely watched data point throughout the gambling industry.
For the three-month period ending June 30, DraftKings increased its sports betting and iGaming customer base by nearly 80%, according to a letter to shareholders. At the same time, customer acquisition costs fell by more than 40%, according to DraftKings, an improvement that is reflective of quicker paybacks.
Due to underlying business momentum, DraftKings projects 2025 Adjusted EBITDA in the range of $900 million to $1 billion. Before then, DraftKings expects fiscal year 2024 Adjusted EBITDA of between $340 million and $420 million. The company previously provided FY 2024 guidance in the range of $460 million and $540 million.
DraftKings initially introduced the 2025 outlook at the company’s 2023 Investor Day presentation. The company reaffirmed the outlook in part due to the customer acquisition dynamics.
“We very efficiently acquired many more new customers than we expected and saw continued healthy existing customer engagement in the second quarter,” said Jason Robins, DraftKings’ CEO, in a statement.
Mixed Results 35275u
During the quarter, DraftKings generated revenue of $1.10 billion, an increase of $230 million, or 26%, from the same period in 2023. DraftKings narrowly missed analysts’ expectations for revenue of $1.12 billion on the quarter.
DraftKings also reported Adjusted EBITDA of $128 million, just below analysts’ consensus estimates of $129.3 million. On a non-GAAP basis, DraftKings reported earnings per share of $0.22, topping analysts’ expectations of $0.19.
One factor for the revenue miss surrounds a series of unfavorable sports outcomes. Over a two-month period beginning in June, the most-bet MLB teams won at a higher clip than expected, DraftKings noted.
DraftKings’ structural sportsbook hold percentage still improved in line with expectations, reaching around 10% on the quarter.
Other highlights from DraftKings’ second-quarter earnings’ report:
- DraftKings’ metric known as “monthly unique payers” (MUPs) increased to 3.1 million average monthly unique paying customers in the second quarter of 2024, representing an increase of 50% compared to the second quarter of 2023.
- Another metric with the abbreviation “ARPMUPS” came in at $117, representing a 15% decrease compared to the same period in 2023. The abbreviation stands for “average revenue per monthly unique player.” DraftKings continues to bring aboard customers from its acquisition of lottery courier Jackpocket earlier this year. The decrease was due partly to lower ARPMUP for Jackpocket customers when compared to customers of DraftKings’ existing product offerings, the company said.
- DraftKings’ board has authorized a share repurchase plan of up to $1 billion of the company’s Class A common stock. The inaugural authorization reflects DraftKings’ conviction in the upward trajectory of its business and expectations that it will generate significant cash flow in the coming years.
- Sales and marketing expenses remained high, topping $215 million on the quarter. Since DraftKings went public in 2020, expenses in the category have typically exceeded $100 million per quarter. But DraftKings expects 2024 executive stock-based compensation to represent 7% of fiscal year 2024 revenues, CFO Alan Ellingson said on Friday’s earnings call. By comparison, the metric represented about 11% of annual revenues last year, DraftKings noted.
Proposed Surcharge On Winnings 3t6nr
A hot topic on the call centered on DraftKings’ proposed plan to impose a surcharge on bettors’ winnings in select states.
Under the plan, DraftKings will add the charge in four states next year: Vermont.
DraftKings crafted the proposal in response to swelling tax rates in some jurisdictions. Illinois, for instance, instituted a new progressive tax rate on sports betting revenues earlier this year. The modifications bump the tax rate from 15% to as much as 40% for operators that hit certain thresholds.
Responding to a question from Jeffries analyst David Katz on the industry-wide implications, Robins indicated that other sportsbooks may follow with a similar plan. Robins cited policies in and Australia where gambling operators have imposed the charge in response to comparatively high tax rates. All four states maintain a tax rate of 20%+, including New York at a nation-high 51%.
DraftKings plans to add a gaming surcharge to winning bettors in four states, including New York and Pennsylvania. The immediate reaction from bettors was understandably negative, writes @BennettConlin. https://t.co/1efmDbTx0O
— Sports Handle (@sports_handle) August 1, 2024
While Robins does not envision plans to abandon the policy, he emphasized that DraftKings will closely monitor customer . The proposal received pushback from several prominent gamblers on Thursday night, including popular sports bettor Gadoon “Spanky” Kyrollos.
Robins also alluded to several other businesses, specifically the taxi and hotel industries, where the surcharge is common. Rather than obfuscate the charge by burying it as a hidden line-item, DraftKings preferred to be up front about the policy, Robins explained. In the long run, he believes customers will appreciate the transparency.
A bevy of analysts weighed in with assessments on the proposed charge. The surcharge demonstrates how far the company is willing to go to protect profitability, JMP Securities analyst Jordan Bender wrote in a research note. As Bender likes to remind investors, sports betting is a low-margin business, and as tax rates increase, profitability is impacted. Another analyst, Macquarie’s Chad Beynon, remarked that he isn’t surprised by the proposal given the changes in Illinois.
Carlo Santarelli, an analyst with Deutsche Bank, cautioned that the proposal may become an “expensive gamble” if other sportsbooks do not impose a similar charge.
The view was shared by Truist Securities’ Barry Jonas, who wrote that other operators may view it as an opportunity to capture market share. Ultimately, FanDuel’s reaction may determine the success of the initiative, he added. While Bank of America analyst Shaun Kelley wrote that investors seem concerned about flow-through for 2025, the concerns are offset somewhat by tax mitigation potential.
Robins, however, characterized the surcharge as “nominal.” According to an earnings presentation, a $20 payout in Illinois will carry a surcharge of 32 cents (see above). At that rate, the charge represents a fee of 1.6% on customer winnings.
On Friday, Robins agreed with one analyst’s assessment that the surcharge may be “inelastic,” meaning that customer demand will not change drastically from the marginal increase associated with the charge. Robins argued that the charge will help DraftKings maintain reasonable margins, while allowing the company to remain competitive with offshore sportsbooks.
Before Friday’s earnings call, DraftKings traded around $35 a share, down about 1.6% from the previous day’s close. Following the call, DraftKings’ shares plunged 11% to $31 a share. DraftKings hovered in the low $30s when it released second-quarter earnings last August. Shares in DraftKings are still up approximately 19% from last October’s lows.
