DraftKings Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

Key Takeaways

  • DraftKings reported 53% year-over-year revenue growth in Q1’24, raised its full-year revenue outlook to $4.8–$5.0 billion (34% Y/Y growth) and lifted adjusted EBITDA guidance to $460–$540 million, implying a 53% EBITDA flow-through rate.
  • New sportsbook launches in Vermont and North Carolina achieved customer acquisition efficiencies in line with prior rollouts, and both states are expected to contribute positively to adjusted EBITDA in H2 2024.
  • Marketing and promotional optimization drove a 40% year-over-year reduction in customer acquisition cost (CAC) in April, a 700 basis-point decline in promo reinvestment, and delivered Q1 adjusted EBITDA margin of 60%.
  • With projected free cash flow of ~$400 million in FY24 (after ~$120 million in capex) and an expected year-end cash balance of ~$1.6 billion (pre-Jackpocket acquisition), DraftKings is evaluating capital allocation options, including returns to shareholders.
  • Product innovation remains a priority, from migrating to an in-house tech stack and launching in-house jackpot games to expanding Progressive Parlay and responsible gaming tools, while emphasizing proprietary modeling and customer-centric features like same-game parlay cash-out.
AI Generated. May Contain Errors.
Earnings Conference Call
DraftKings Q1 2024
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to DraftKings First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Stanton Dodge, Chief Legal Officer. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today. Certain statements we make during this call may constitute forward looking statements that are subject to risks, uncertainties and other factors as discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our forecasts. We assume no responsibility to update forward looking statements other than as required by law. During this call, management will also discuss certain non GAAP financial measures that we believe may be useful in evaluating DraftKings operating performance. These measures should not be considered in isolation or as a substitute for DraftKings financial results prepared in accordance with GAAP.

Speaker 1

Reconciliations of these non GAAP measures to the most directly comparable GAAP measures are available in our earnings release and presentation, which can be found on our website and in our quarterly report on Form 10 Q filed with the SEC. Hosting the call today, we have Jason Robbins, Co Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business and Alan Ellingson, Chief Financial Officer of DraftKings, who will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robbins.

Speaker 2

Good morning and thank you all for joining. DraftKings is off to an outstanding start in 2024 and we're excited to be raising our outlook for the year. There are 5 important takeaways as we reflect on our Q1 results and the rest of the year. First, our revenue growth is strong as we continue to efficiently acquire new customers, deepen our engagement with existing customers, improve our structural sports book hold percentage and optimize promotional deployment. Revenue grew 53% year over year in the Q1 and our increased revenue guidance midpoint implies 34% year over year growth for fiscal year 2024.

Speaker 2

Secondly, we delivered successful sportsbook launches in Vermont and North Carolina. We acquired customers efficiently and at population penetration rates consistent with prior launches. With prior launches. We expect both states to contribute positively to adjusted EBITDA for the second half of twenty twenty four. 3rd, we continue to focus on driving product innovation and customer centricity.

Speaker 2

Our platform and overall customer experience are rapidly improving. And as a result, we are achieving excellent customer retention and participation across sports and gaming. 4th, we continue to focus on driving operational efficiency across the organization. We expect adjusted EBITDA flow through percentage of 53% for fiscal year 2024 due to our largely at scale fixed cost structure and our continued optimization of marketing and promotions. 5th, we are continuing to explore capital allocation options given the strong trajectory of our free cash flow.

Speaker 2

Beyond our financial highlights, there are 2 important topics I'd also like to briefly discuss. The first is responsible gaming. There have been several recent headlines on responsible gaming, a topic that has always been very important to DraftKings. Building products that our customers can enjoy responsibly is rooted in our DNA And we believe that we are at the forefront in responsible gaming initiatives, including technology, processes, industry affiliations and internal leadership. We will continue to drive these initiatives in conjunction with our regulatory partners and industry participants to responsibly grow this industry to its full potential.

Speaker 2

2nd, we continue to innovate on our products while focusing differentially on proprietary technology solutions. In sports book, we made substantial progress on our efforts to shift our highest impact content into our in house technology and modeling platforms, while also expanding unique offerings like our Progressive Parlay product across all states and all major sports. We are also launching cash out for same game parlay, which is a critical addition to our offering. In iGaming, with the completion of the migration of the GNOG platform onto our in house technology stack, we achieved important milestones touching both content and technology expansion. We launched must hit by jackpots, another popular variant powered by our proprietary jackpots platform.

Speaker 2

And we also continued to expand our homegrown casino games portfolio with the launch of 8 new unique to DraftKings titles in the Q1 of 2024, including Rocket II, the sequel to our popular original Rocket game. In closing, 2024 is shaping up to be another fantastic year for DraftKings. With that, I will turn it over to Allen Ellingson.

Speaker 3

Thank you, Jason. I'll hit the highlights including our Q1 2024 performance and our updated guidance for the year. Please note that all income statement measures discussed except for revenue are on a non GAAP adjusted EBITDA basis. As Jason mentioned, we are off to an outstanding start to the year. In the Q1, we generated $1,175,000,000 of revenue, representing 53% year over year growth and $22,000,000 of adjusted EBITDA, representing adjusted EBITDA flow as a percentage of 60%.

Speaker 3

We achieved strong results across our core value drivers. Customer acquisition, retention and engagement were excellent and resulted in higher than expected handle in the Q1. Our structural sports book hold percentage was slightly ahead of expectations at 9.8% and increased approximately 150 basis points year over year. Promotional reinvestment for OST and iGaming continued to become more efficient year over year and improved by more than 700 basis points as a percentage of GGR. Adjusted gross margin increased more than 5.50 basis points year over year to 44% in the Q1 as a result of higher structural sports book hold and improved promotional efficiency.

Speaker 3

Sales and marketing declined 11% on a year over year basis and was consistent with our expectations. Both products and technology as well as general and administrative expenses were consistent with our expectations. As you are all aware, we are continuing to exert cost discipline across the organization while simultaneously increasing revenue on a year over year basis. Moving to our full year 2024 guidance, we are poised for a rapid increase in adjusted EBITDA to continued strong revenue growth coupled with our efficient fixed cost structure. On February 15, 2024, we guided fiscal year 2024 revenue of $4,650,000,000 to $4,900,000,000 and adjusted EBITDA of $410,000,000 to $510,000,000 Today, we are improving our fiscal year 2024 revenue guidance to a range of $4,800,000,000 to $5,000,000,000 and our fiscal year 2024 adjusted EBITDA guidance to a range of $460,000,000 to $540,000,000 Importantly, the midpoints of our updated 2024 revenue and adjusted EBITDA guidance ranges implies a year over year adjusted EBITDA flow through percentage of 53%.

Speaker 3

This attractive flow through percentage is based on continued excellent performance across our core value drivers as we rapidly expand our gross margin and exert discipline on our cost structure, while simultaneously investing in promotion and marketing in accordance with our LTV to CAC targets. We will continue to focus on our dual goals of improving our financial expectations, while also investing in customer acquisition and our product and technology capabilities. The $125,000,000 improvement in our fiscal year 2024 revenue guidance midpoint and $40,000,000 improvements in our adjusted EBITDA guidance midpoint breakdown as follows. Customer acquisition, retention and engagement continue to exceed expectations due to marketing optimization initiatives and product advancements. These trends account for $165,000,000 of the revenue improvement and $68,000,000 of the adjusted EBITDA improvement.

Speaker 3

Structural sports book hold percentage increasing primarily as a result of momentum into our same game parlay offering. We now expect our structural sports book hold percentage to approach 10.5% in fiscal year 2024, which accounts for $20,000,000 of the revenue improvement and $14,000,000 of the adjusted EBITDA improvement. Customer friendly outcomes in late March April were a headwind of $60,000,000 $42,000,000 to our fiscal year 2024 revenue and adjusted EBITDA guidance, respectively. We continue to expect our adjusted gross margin to be in the range of 45% to 47% for the year, an improvement of 3.50 basis points at the midpoint compared to fiscal year 2023. We also continue to expect adjusted sales and marketing expense to decline modestly in fiscal year 2024.

Speaker 3

Finally, we expect to generate approximately $400,000,000 in free cash flow in fiscal year 2024 based on approximately $120,000,000 of annual capitalized expenditures and capitalized software development costs as well as a modest source of cash from changes in net working capital combined with interest income. As a result, we expect our year end 2024 cash and cash equivalents will be approximately $1,600,000,000 before our expected use of approximately $413,000,000 in cash to fund our proposed acquisition of Jackpocket upon closing. That concludes our remarks. We will now open the line for questions.

Operator

Thank Our first question comes from Shaun Kelley with BofA. Your line is open.

Speaker 4

Hi, good morning, everyone. Welcome, Alan, and thanks for taking my questions. Jason or Alan, just wanted to see if we could dig in on the hold side a little bit. Obviously, a couple of puts and takes, both in the quarter and just for, I think relative to investor expectations out there. So Jason, if you could talk about like the evolution of kind of your theoretical whole, you actually said that overall, I think it came in a little bit better than management's expectations.

Speaker 4

So what's driving that? And how do you think about the product evolution maybe both this year and in the out years? What's sort of a good baseline for investors to think about improvement as we get out into 2025 and beyond? Thank you.

Speaker 2

Yes. I think this has been obviously a big topic for a few years now and our understanding of it is better than ever. So first just to explain, when we say we think that structural hold is XYZ, that is based on expected hold and then any differences are bet mix driven. So what that really means is that our bet mix came in better than we expected as it relates to projected hold. As far as how we're thinking about it going forward, I think we continue to believe that there's a lot of upside here.

Speaker 2

I know everybody wants to know what's the ceiling. I think the answer is we don't know. We continue to monitor metrics and

Speaker 5

all customer behavior, handle per active

Speaker 2

rates all look healthy as we parlay mix and average leg count. So I think that will continue to be the focus as long as we continue to see healthy customer metrics and get positive feedback that our customers are enjoying the products we're putting out there. So we'll see how far we can get it, but right now we do believe there's a good bit of upside still remaining.

Speaker 4

Thank you.

Operator

Our next question comes from Stephen Grambling with Morgan Stanley. Your line is open.

Speaker 3

Hi, thanks. Guess one of the big debates seems to be around flow through versus some of your peers. So I'd love to hear your thoughts on where the company is capturing marketing channels or even national versus local has changed?

Speaker 2

Yes. I mean we had an unbelievably efficient first quarter and it really continued into April. In fact, April we had a 40% roughly 40% year over year decrease in our CAC. So I think it's just optimized performance and also really strong growth in the TAM and addressable market. So I think all of that is contributing to really healthy and efficient marketing.

Speaker 2

And I give the team a lot of credit. They worked hard over the last year or 2 to optimize. And if anything, I think we see maybe some opportunities now to invest a bit deeper. So really excited about the work that's been done there.

Speaker 3

Great. Thank you. I'll get back to the queue.

Operator

One moment for our next question. Our next question comes from Joe Greff with JPMorgan. Your line is open.

Speaker 6

Hi, good morning everybody. Jason, I was hoping you can update us with your views on M and A from here. Obviously, you have jack pocket pending and closing in short order here. One, how do you think about M and A? Is it still more domestically focused versus international?

Speaker 6

And then could you do multiple M and A simultaneously? My question is kind of generated by within the quarter, there were some industry chatter with regard to one publicly traded iCasino operator.

Speaker 3

Thank you.

Speaker 2

Yes. So first we hope have been very consistent in saying that we have a very high bar for M and A. We understand there's a lot of ways that we can deploy capital, return value to shareholders. And M and A and going on an M and A spree is not something that we're like, hey, this is all we can do with our capital. I do think that M and A will be a lever for us, but we're also practical about 1, how much to your question we can bite off at a time.

Speaker 2

I do think it is obviously a question of size, but to do 2 materially sized transactions simultaneously would be very challenging. So that's certainly something that will weigh in our mind. And I think secondly, we feel like our organic growth path is really strong right now. So we don't really feel particularly compelled to do M and A as a source of growth. If anything, we understand that the integration and other work required with M and A is actually a distraction from that organic growth.

Speaker 2

So I think, long way of saying bar will continue to be high. Never say never, but I think 2 at exactly the same time of size would be challenging. And I think for us really, we look at capital allocation as a broader question, as well as resource and time allocation. And we don't just look at it as, hey, M and A is the answer on that. It's also what are all the other things, whether it's organic investments we can be making or other methods of earning capital and creating value for our shareholders.

Speaker 2

So that's something that we're mindful of as well. Thank you.

Operator

One moment for our next question. Our next question comes from Ben Miller with Goldman Sachs. Your line is open.

Speaker 7

Thanks so much for taking the questions. I'm curious how you think about the playbook around iGaming cross sell the OSB users over time as we potentially see more states go live with iGaming that currently have OSB. Are there any updated views on how to think about any incremental investments needed in that scenario and how you think about reinvestment of likely better LTVs and share of wallet into faster customer acquisition versus the flow through to incremental margins?

Speaker 2

Thanks. It's a great question. I mean first any time we have multiple products in a market it's a huge boon to LTV and the cost is you already acquired the customer. So there might be a promo or something associated with getting them to adopt a new product. But it's really a fraction of what it costs to acquire the customer on the platform.

Speaker 2

And once you've already acquired them, cross selling is an incredibly effective and very fast payback means of increasing not only LTV but also short term gross profit as well. The main funnel we're seeing is really sports to iGaming. We do see some iGaming to sports cross sell be effective. And of course, we are cross selling between all of our products. But really, when we find markets have both iGaming and Sports, the much more effective funnel is to acquire them on Sports and cross sell them to iGaming.

Speaker 2

And actually what I'm really excited about once we close Jackpocket is I think that will be a really attractive funnel as well, really efficient funnel acquiring on Lottery and cross selling into OSB and iGaming. So very excited about that one. But the short answer is we try to cross sell between all of our products and it doesn't cost that much more once you've acquired the customer onto the platform to get them to try new products.

Speaker 7

Great. Thanks so much.

Operator

One moment for our next question. Our next question comes from Robin Farley with UBS. Your line is open.

Speaker 8

Great. Thank you. I was originally going to ask how you balance your thoughts about capital allocation with M and A, but it sounds like you already sort of clarified that M and A is kind of not a major priority right now. So I wonder if you could talk a little bit about capital allocation options and what types of things you're considering? Thanks.

Speaker 3

Yes. Robin, I'll speak to that. I think in the last few months, we've developed a lot more confidence than ever in our free cash flow trajectory for 2024 and beyond. To add some color, we recently kicked off our multi year planning process. This is an exercise that touches all the functions, verticals of the organization.

Speaker 3

And as part of this, we do evaluate potential uses of cash within our core business. We reevaluate the growth trends of the business and we look to maximize shareholder value. That does include potentially returning capital to our shareholders. So we anticipate we'll be able to share more specific details with you in the next quarter, but we're very comfortable with where we're at right now.

Speaker 8

Okay, thanks.

Operator

One moment for our next question. Our next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Speaker 9

Hey, guys. Thanks. If you guys look out over kind of 2024, 2025, what are kind of the key focal points or items that you're looking at from a legislative perspective where you think whether it's iGaming or sports betting, you think it will be kind of worth the efforts from your end to kind of make a push and what are maybe the focus states and or focus opportunities in your view? Yes.

Speaker 2

I think it's a great question. Obviously, having gotten up and running in 50% of the country population wise, also roughly 50% of the states in only a little over 5 years is fast. And so I think, naturally, you're going to see a little bit of a slowdown on the sports side. And also when you consider the fact that about a little less than half of the remaining population resides in 3 states, that will kind of give you a sense of where the focus is. There's a lot of states left for sure, but there's only a handful of really big ones.

Speaker 2

And when you kind of extend beyond the top 3 into like 5, 6, 7 states, you're going to capture a lot of that. So, obviously, we made a push in Georgia this year, it came up a little short in several other states as well. I do think you'll see a couple of bills done later in the year on OSB. But as far as picking out in 2025, I think the big focus will be on Texas. Texas, I think, has a real shot.

Speaker 2

It got through 1 chamber last year. And as you may know, the Texas legislature doesn't meet in 2024, so we're really gearing up for 2025. Also, I think that if you shift over to iGaming, that's probably where there's going to be a little bit more rapid once I think you start to see some momentum legislation because still just a lot of untapped population there. We're still only live in about 11% of the population. So, I think that once the states that, in certain regions start moving on Igaming more, you'll see a more rapid succession of them.

Speaker 2

And I also think that the need for tax revenues is going to increase. I think there's a little bit of a delay in that with some of the COVID relief money that was sent to states. So I do expect to see some momentum pick up in iGaming. I think that's where you might see the next kind of wave of states really quickly. And then as I noted, I think the focus in sports betting will be on the handful of large states.

Speaker 2

Obviously, we'll try to get bills passed wherever we can, but the real needle movers will be not just the top 3 I mentioned, but states like Georgia that are also very large states population wise. And then I guess the last thing I'd note is obviously as you know, we're in the process of completing our jack pocket transaction and I think there's a ton of state expansion opportunity there. And the vast majority of it doesn't have to be legislative. It's done without legislative action. So really excited about the prospects of getting that business up and running in a lot of different states.

Speaker 2

And I think you'll see some additional states come get up and running for jack pocket before the end of the year.

Speaker 9

Great, Jason. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from Clark Linfin with BTIG. Your line is open.

Speaker 10

Hey, good morning. Thanks for the question.

Speaker 2

I wanted to come back to marketing efficiency, especially since, Jason, you noted

Speaker 10

that there's it seems like efficiency, especially since Jason, you noted that there's it seems like now there's an opportunity to invest a little bit deeper. Can you help us understand what's sort of driving some of the improvements that you noted in the shareholder letter? And I guess maybe more importantly, whether what we're seeing now is indicative of ongoing improvements you guys think you can draw out. I guess if I look at the numbers for the year, it seems like the OpEx guidance went up a little bit. And I'm wondering specifically, are you guys seeing better payback periods right now that are leading you to lean in a little bit more aggressively on marketing?

Speaker 10

Appreciate it.

Speaker 2

You nailed it. I mean, I think I mentioned earlier the CAC for April was roughly 40% lower year over year. I mean we are seeing as efficient marketing as we've seen since I think basically launching sportsbooks. So really, really excited about that. I don't I mean just to be clear, we're not going to have a massive increase.

Speaker 2

I think this is like optimization around the edges where we see an opportunity maybe invest a little bit deeper in a couple of areas. But this isn't going to be like a major shift in strategy by any means. I think we're going to continue to focus on as markets mature seeing lower and lower external marketing spend. And at the same time, it's not going to be a straight line. There'll be periods where we find good solid things that we can cut or just natural kind of market conditions lead to us cutting certain spend.

Speaker 2

And then there'll be other times we identify windows where we can increase. And I think given some of the efficiency we've been seeing, we think there's an opportunity maybe for a little bit of deeper investment. But like I said, it's a little bit, as you mentioned, it was not a huge move. It was just a slight increase in OpEx versus where we were before. And I think that's a sign of the strong revenue growth and unbelievable tax that we're seeing.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from Joe Stauff with Susquehanna. Your line is open.

Speaker 11

Thank you. Good morning. I wanted to ask maybe, Jason, if you can discuss like your more recent customer acquisitions or cohorts versus say a year ago or whatever kind of time period ago and the lifetime value or the LTVs that you calculate for those, are you seeing an improvement largely because of marketing efficiency or are the economics or the spending levels for the more recently acquired customers similar to say a year ago? I was wondering if you could discuss that.

Speaker 2

It's really both sides of the LTV and CAC equation. As I noted a moment ago, we had a really sharp decrease about 40% better CAC in April this year than last year and as a continuation of really strong CACs through Q4 and Q1. And at the same time, we've also made a tremendous number of improvements to our product, to our CRM, to our customer experience overall, which has led to stickier customers. Our activity rates are higher than ever and our handle and spend per customer is up. So I think we're just in a period of industry growth and still very early stage of the industry where a lot of things are just out there to be optimized and improved upon.

Speaker 2

And, where I think the team is executing really well against both sides of the LTV and CAC equation right

Speaker 9

now. Thank you.

Operator

One moment for our next question. Our next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Speaker 12

Hi, good morning. Jason, on Media Rights partnerships, I'm wondering if you can talk about your Amazon relationship and how that's helped drive incremental opportunities for Thursday Night Football. And then really any early thoughts on how that partnership can be expanded if they're able to secure a big NBA package or maybe any other comments you want to make on NBA's new media deal, and how that could impact DraftKings? And then just separately, if I can add, wondering if you could just speak to Jason Parks' new role and how you could characterize the biggest near term versus longer term opportunities with that? Thank you.

Speaker 2

Yes, great question. So on the first one, Amazon has been a great partner of ours. We've really gotten a lot of value and I think they have 2 out of the relationship. And if there's ways we can expand it depending on what their future plans are then that's certainly a rumored to be involved in the bidding. So wherever it lands, I look forward to hopefully finding ways to build relationships and bring great content to customers and partner with other great organizations.

Speaker 2

So we'll have to see how that plays out. And then in terms of Jason Park's role, as you may know, Jason actually just turned the reins over to Alan officially, I think like a day or 2 ago. So he's been working hard on the queue and on everything else just like the rest of us. And I think where he's had some spare bandwidth, he's really dove into the Jackpocket integration, which obviously is a very immediate term thing that we need to really make sure we do a good job with. So, that's been his immediate term focus.

Speaker 2

I think as he rolls off the CFO role and Alan rolls in, I think you'll see him start to have more time free up. And my expectation is that areas like payments and AI will be a major focus for him in the next 6 to 12 months. So more to come there, but really I think looking at things that hence the title can be more medium to long term transformational for DraftKings as well as obviously making sure, given how important the Jack pocket integration is that we do a great job there.

Operator

Thank you. One moment for our next question. Our next question comes from Dave Katz with Jefferies. Your line is open.

Speaker 8

Hey, guys. This is Ara Masias for David Katz. Congrats on the quarter and thanks for taking my question. I wanted to ask how you're thinking about AI, maybe high level, but in terms of range of uses and responsible gaming?

Speaker 13

Thanks.

Speaker 2

Yes. I'm excited you asked that. This is one of the areas that I know a lot of companies are talking about and we certainly agree can really be impactful and a significant and transformational way to DraftKings in the future. So, we're all in on it. I think some of the early momentum we've gotten and really the focus for us is utilizing best in class third party applications.

Speaker 2

Right now we're using multiple tools from 5 to 10 vendors and we're testing a variety of different use cases across the company. Things that improve our product like rapid prototyping and sprint metrics reporting and also initiatives that improve efficiency like code refactoring, code review and marketing asset creation. And then obviously being customer centric, customer experience is at the center of our AI initiatives including using AI to help model and detect signs of problem gaming, so that we can properly flag things for our player intervention team to go and investigate. So lots of really good stuff there. And I think we're just scratching the surface.

Speaker 2

It's super early. But our focus is not on trying to build proprietary tech as much as it is. I mean we've built some on top of it, but it's really getting in there and using best in class third party tools and figuring out the proper applications to drive value for DraftKings.

Speaker 8

Great. Thank

Operator

you. One moment for our next question. The next question comes from Michael Graham with Canaccord Genuity. Your line is open.

Speaker 13

Good morning. Thank you. I wanted to help ask you to help us think through the platform becoming more of a mass market entertainment product in some of your more mature states like New Jersey. Are you seeing penetration slowdown there? Is it hitting a J curve type of dynamic?

Speaker 13

And could you also address, what's going on with GGR concentration at the top end of the customer base? Is it becoming a little spread out or more concentrated? Or just hit on some of those dynamics?

Speaker 2

Yes. It's a great question. I mean all of our older states and we have to remember there's still even New Jersey is still only 5.5 years in. So they're all still really growing nicely. In fact, if you take sort of a same store view of our 2018 to 2022 states, we grew net revenue about 40% year over year in Q1.

Speaker 2

So really healthy growth in our existing states and I think we'll continue to see that as we improve product and also just as the industry develops and the TAM increases. As far as the concentration, we're seeing it actually trend a little bit away from that. So definitely as with any industry, there is a cohort of customers that spends a lot and that drives a decent amount of the revenue. But I think especially relative to other companies in the industry, we're much more diversified and the trend we're seeing is more and more casuals coming to the market, particularly as you noted in older states, I think as more people come into the market, that percentage of casuals increases. So definitely something that we're seeing trend in that direction.

Speaker 13

Okay. Thank you, Jason.

Operator

One moment for our next question. Our next question comes from Ben Shyken with Mizuho. Your line is open.

Speaker 14

Hey, thanks for taking my question. You mentioned promo expense was down over 700 basis points year over year, which is clearly generating a lot of operating leverage on net revenue. Would love to hear your thoughts around maybe what's driving the improvement? Is it just the natural evolution of the existing customers who are happy to use the product? Is DraftKings becoming more accurate and efficient in how you target?

Speaker 14

Or is it a function of just kind of entering less states? It'd be great to hear any color on what you think the biggest drivers are of the traction and then the largest opportunities going forward? Thanks.

Speaker 2

Yes. I mean, I think the biggest thing is the natural evolution and you mentioned this in your last point, a lot of that comes from entering some new states. So last year in Q1, we launched Ohio and Massachusetts. This year we launched North Carolina and Vermont, which are still 2 big states, but populations combined population in North Carolina and Vermont is definitely lower than Massachusetts and Ohio. Secondly, just as the customer base matures, we're seeing an increase in the ratio of existing customer volume to new customer volume, which is naturally bringing down the promo rate.

Speaker 2

So a lot in fact the majority of it is just the natural maturity of states and as you noted, having a lower percentage of the population launch in Q1 this year than last year. Secondly, we always are working to optimize and the team has done a fantastic job over the last year really finding ways to lean in, in places that are working and cut in places that aren't. And I think that's made a lot of improvement also in the year over year drop. And there's still a ton of opportunity there. I mean, we're just scratching the surface on some of this stuff.

Speaker 2

And I think the level at which we can kind of personalize the experiences will also help us increase return and optimize promo and we're just scratching the surface there too. So there's a lot of upside on that line item.

Operator

Thank you. One moment for the next question. Our next question comes from Brett Montour with Barclays. Your line is open.

Speaker 12

Hey, everybody. Thanks for taking my question. So the iGaming market accelerated in the 1Q, the growth rate for the overall market. You guys accelerated your iGaming growth rate. Jason, wondering if you have any thoughts on what was driving that at the market level, if it was you and your peers, better marketing, better cross sell, if you think you saw more for you guys at least, did you saw more acceleration on the MAU side or the ARPU upside?

Speaker 2

Yes, it's a great question. I think that a lot of it is just momentum of the industry and we're seeing it in sports too. Just a lot of new customers coming in and a lot of people that are crossing over from sports into iGaming. I also do think that some of it has been product driven. We made a lot of improvements to our product many of which we noted on our earnings call earlier, so on the scripted part of the earnings call earlier.

Speaker 2

So, definitely a combination of those things. And then, I think certainly on the marketing side, we've improved as well. That's definitely been a little more recent. So I don't know how much of that's driven the industry growth, but I think we found some wins in the recent days that have helped us acquire customers more efficiently as well.

Speaker 12

Great. Thanks so much.

Operator

One moment for our next question. Our next question comes from Barry Jonas with Truist. Your line is open.

Speaker 2

Good morning, guys. First off, congrats, Alan, on the new role. I wanted to ask about technology, smaller competitors talk about narrowing the gap. And we know you're not standing still, but are there more specific parts of the product you think you'll be able to maintain your competitive edge over time better than others? Thank you.

Speaker 2

Absolutely. I mean, 1st, sports in particular, but really all online gaming products are incredibly complicated. There is a ton going on. I think 1st and foremost having a lot of scale and a very wide customer base gives us an advantage because we have more data and more data points to model and to improve personalization and make other decisions off of. Secondly, as you noted, we continue to invest and being at scale gives us a much larger revenue base to invest in product and engineering.

Speaker 2

And so, we continue to lean in there and I think that there's a ton we can do to improve the product that it will hopefully be revenue additive and certainly will be competitively differentiated. The other thing that I would say is that a lot of what we're focused on now, yes, we continue to things that help us optimize hold rate and things, things that help us optimize hold rate in trading, things that help us personalize experiences that retain and create stickier customers. Those things are harder to copy because it's not an obvious consumer facing feature that somebody could say, oh yes, I'm just going to figure out how to do that. Oftentimes it's invisible to the front end. So I think there's a lot of advantage that can be maintained long term in those sorts of things as well as sort of just the inherent advantages of scale and robustness of data size and size and efficacy of product and engineering team.

Speaker 3

That's great. Thank you.

Operator

One moment for our next question. Our next question comes from Dan Politzer with Wells Fargo. Your line is open.

Speaker 2

Hey, good morning, everyone. I wanted to touch a bit on iGaming again. 1 of your closest competitors in that market seems to be gaining some share momentum. Could you maybe talk about the promotional environment and how you think about kind of the share outlook for yourselves as we look forward? Thanks.

Speaker 2

Yes. I mean, I think what you're seeing, which probably isn't surprising, is the same dynamic emerging in iGaming as in OSB. So on the one hand, I think that that gives a lot of sort of clarity in terms of investors of what long term market structure could look like, which is good. And I think for us, we just continue to focus on trying to deliver the best customer experience. And think if we do that, we'll maximize our long term share of the pie.

Speaker 2

But I do want to note that share is not the only metric. Obviously, everybody follows that and that's a lot of questions. But we're focused on being the most profitable company in the space and making the most money. So I think that's ultimately how we define share of the space, not GGR share. Obviously, GGR share is

Speaker 5

a helpful metric to look at, but bottom

Speaker 2

line share is the Q1? I know you gave the structural, but if you could provide actual, that Q1? I know you gave the structural, but if you could provide actual, that would be helpful. Yes. I think we've said about 9.5%.

Speaker 2

Got it. Thanks so much.

Operator

One moment for our next question. Our next question comes from Jed Kelly with Oppenheimer. Your line is open.

Speaker 9

Hey, great. Thanks for taking my question. Just can you talk about MAU trends? I saw it was down in the Q1, realize you were comping some state launches. But can you speak to that?

Speaker 9

And then just as a follow-up, you're launching your new PIK6 product. Can you talk about how that can help you build your database in states where sports betting is not yet legal? Thank you.

Speaker 2

So on the first one, are you talking about like versus consensus because we were up on mops here over

Speaker 5

the year?

Speaker 9

No, I'm talking it was down sequentially.

Speaker 2

Oh, from last quarter.

Speaker 9

Yes. So it was in the 1st quarter. Yes.

Speaker 2

That's just seasonality. Yes, that's just seasonality. That typically happens. And I think the biggest thing also that drove that was the state launches, actually probably even more than seasonality to be honest. That's what you're seeing there is the state launches.

Speaker 2

We had Ohio and Massachusetts launch in Q1 of last year. So that drove a lot of MAU in that quarter. So I don't there's nothing kind of other than that going on there. And then sorry, what was your second question?

Speaker 9

Just on how does your PIC6 product help you build up your databases in states where sports betting is not yet legal?

Speaker 2

Great question. I mean PIC6 is our latest fantasy product. I think we're pretty excited about it. We think it's something that could definitely as all of our fantasy products have help us build a database in states that aren't yet legal and also just create additional revenue and new ways to engage with our customers. So, you nailed it.

Speaker 2

That's kind of the goal there. And, I think we haven't done a lot to innovate in fantasy until the last year or so. And I think the team is energized and focused on getting back to innovation in the fantasy space as well and this

Speaker 5

is a great

Speaker 3

example of

Speaker 5

that. Thank

Operator

you. One moment for

Speaker 5

our next question.

Operator

Our next question comes from Bernie MacTiernan with Needham and Company. Your line is open.

Speaker 9

Great. Thanks for taking the question. Jason, given the increased news flow this year about state tax rates potentially going higher in some areas, If there was an existing or relatively mature state to increase taxes, what would the impact be? And then what levers would you have to offset that and over what timeframe?

Speaker 2

Yes. So first, I do think states understand that, there is still a very large illegal market that's not going away. And in order for us to continue to be able to be competitive and not drive customers back to that market and also continue to customers out of that market because there's still quite a few even in the most mature states, that they need to keep tax rates at a reasonable level. So I do expect that that will be the case. But we're prepared either way.

Speaker 2

I mean in the end, the cost has to get absorbed by the consumer if the government raises taxes. So there's various levers to do that. Also we could lower external marketing, which I think will be also partially just driven by the fact that if taxes go up, we're going to have to create better margins and that will be a lever that we'll have to pull as well. But like I said, I think that states do understand that any sort of negative impacts to the consumer offering that companies would have to take where tax rates to increase would really be counter to the notion that we're trying to drive activity from the illegal market to the legal market, which has enormous number of benefits, only one of which is generating taxes. So, I think states get that and I expect that maybe there'll be 1 or 2 here and there that look to do that, but I don't think many of them will.

Speaker 2

And I even think the ones that are getting a lot more information now and my expectation is that we'll be able to convince them that it's not a good policy decision.

Speaker 3

Thanks, Jason.

Operator

One moment for our next question. Our next question comes from Jordan Bender with Citizens JMP. Your line is open. Great.

Speaker 9

Good morning. Thanks for taking my question. Going off of Jason Parks' new role in the payment processing, how should we be thinking about what that looks like to bring your payment costs more in line with your long term goal? Was it coming through initiatives like bringing down the interchange rate that you're paying or more strategic like bringing some or all of that technology in house? And then Jason, I just have a follow-up.

Speaker 9

In your prepared remarks, I think you said the new state launch should add to EBITDA in the back half of the year. Is that to say that the paybacks are just way ahead of any states that have been launched in the past? Thank you.

Speaker 2

Yes. So on the first question, it's still early, so I don't have a lot of specifics. But I think the types of things that Jason will be looking at are consumer facing optimizations like are there ways that we can motivate consumers to use lower cost payment methods as well as other sorts of medium to longer term solutions like in housing of certain pieces. So really don't know where it's going to go because it's very much an exploratory. And as I noted earlier, he just turned over the reins down in the last day or 2.

Speaker 2

So I haven't really had a chance he hasn't really had a chance to dig in there yet. But I do expect there's a lot of opportunity there. And just to clarify one thing, you mentioned in order to reach our long term levels, right now we are tracking to where we have set expectations long term as far as payment costs go. I think this is really looking for opportunities for upside above and beyond that. But we feel like already we're based on the trajectory of our current business.

Speaker 2

And this isn't just for payment processing, it's across all the different metrics the KPIs that we have. We feel good about that trajectory. So this is really about looking for additional upside above and beyond what we shared at Investor Day last year. And then, I'm sorry, what was the second question?

Speaker 9

Yes, just a follow-up. In your prepared remarks, I thought you said that the 2 new states that were just launched should add to EBITDA in the back half of the year. Just is that did I hear that correctly?

Speaker 2

You did. Yes. So that is baked into our guide. And you're right, I think the last it's really been a trend not just with these 2, but with the last year or 2 of states. Last year, we noted Ohio and Massachusetts both contributed positively by Q4.

Speaker 2

I think this year our expectation is that the 2 that we launched North Carolina and Vermont will actually contribute positively to the entire back half of the year. So I think it's just another example of how we continue to get better and better at optimizing our state launch playbook. We're able to capture tremendous amount of value in a much shorter period of time with a much more efficient level of investment than we did say 3, 4 years ago.

Speaker 9

Thank you very much.

Operator

One moment for our next question. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Speaker 15

Good morning. Thanks for taking my question. Jason, I wanted to ask really what gave you the confidence to raise the structural hold to 10.5%. Obviously, it's early in the year. Is that just kind of a combination of what you're seeing with pre match, legs of parlays, in play, etcetera?

Speaker 15

Any color around that would be helpful. Thanks.

Speaker 2

That's exactly right. It's really a function of some of the product enhancements we've made and what we're seeing that due to our parlay mix and average leg count. Progressive parlay as an example is a much higher average leg count than a typical Parley. So that's been one of the many examples of contributors. We also are right now in the process of rolling out across states cash out for SGP, which is another lever I think.

Speaker 2

So, it's really a testament to the work the team has done, to drive that mix and average life count.

Operator

Thank you. One moment for our next question. Our next question comes from Ryan Sigdahl with Craig Hallum Capital Group. Your line is open.

Speaker 3

Hey, good morning guys. How do you think about pricing going forward? Our checks indicate DraftKings offers the most competitive or best odds for consumers, while also generating industry plus hold due to the bet mix. So kind of a win win there. But how much of a competitive advantage do you think that is as it relates to customer retention?

Speaker 2

I think for most markets, the price is the price. So I think when it comes to like being able to have optimal pricing for say some of the lesser bet markets. There are some customers that may line shop. I don't think it's the majority of them, but some do. And then there's other bet types that tend to have more line shopping like futures bets.

Speaker 2

But most of the mainstream bets, the player props, the game lines, the over unders are typically fairly comparable. That said, we always make sure that we're competitive. And so we're not trying to win on price, but we're also not trying to have worse pricing than anyone else out there. And I think you noted this, but the real sweet spot is if you have great models and your pricing is tight, you can actually hold better and continue to be super competitive on the pricing side. Those things are not at odds at all.

Speaker 2

And the other thing I would mention is, and this is also a really important part about having great models and tight pricing, the market uptime can be much higher, which I think particularly for live betting is a significant advantage. If customers are trying to live bet and can't get through, then they're going to go somewhere else. So that's another real advantage to having tight pricing and strong models.

Operator

Thank you. One moment for our next question. Our next question comes from Jeff Santel with Stifel. Your line is open.

Speaker 9

Hey, good morning, everyone. Thanks for taking our question. Jason, it's been several quarters now of pretty meaningful upside from user acquisition retention and monetization trends. As time goes on, are you seeing sort of the relative impact for each of those individual drivers shift around? In other words, are you seeing user acquisition surprise to the upside more so than monetization relative to trends last year or the inverse or is the relative contribution of each state mostly constant?

Speaker 9

Thanks.

Speaker 2

At any point in time, there's definitely something that you're more like, wow, that is just crushing what we expected. But I will say last few years, really the last 2 years in particular, it's been across the board. I mean this last sort of quarter and particularly in April, it's been customer acquisition for sure, which I think was true for Q4 and Q1. But I also I've seen significant increases to LTVs made over that period of time too. Our player activity and retention levels have been higher than ever.

Speaker 2

So I think as we improve the product and also as we just get more data and continue to do the analysis, continue to optimize, continue to build better tools that allow the teams to trade and also tools on the marketing side that allow the teams to get data to optimize the marketing better. Same thing with promos. We're just again, we're at that stage I think of the industry of the company where there's just so much that's obvious that we can do and it's just cranking through all of it. And it's really moving metrics across the entire value chain. So, I can't point to any one thing overall, but you are correct that at any point in time, you might be like, wow, we had a great quarter from a customer acquisition standpoint.

Speaker 2

But often that comes with a great quarter from a retention standpoint

Speaker 5

too, because a lot of times the same things that you're doing that

Speaker 2

drive acquisition also

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Jason Robbins for any closing remarks.

Speaker 2

Thank you all for joining us on today's call. As you can see, DraftKings is off to a fantastic start for 2024 and we're really excited about the rest of this year and beyond. I look forward to speaking with you over the coming weeks and hope you all stay safe and well. Thank you.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Powered by Quartr