DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

[Presentation] Good morning, everyone, and thank you for joining us for DraftKings 2021 Virtual Investor Day. Today, we'll talk about a number of topics, including our latest TAM outlook; market share; brand and marketing; product and technology; unit economics; and long-term EBITDA. I'll begin the presentation, then we'll hear from my Co-Founders. Matt Kalish is our President of North America, and Paul Liberman is our President of Global Technology and Product. We'll also hear from our CFO, Jason Park. We encourage you to submit your questions during today's event for the Q&A session. Before we begin, I'd like to refer all of you to our safe harbor statement and remind you that statements we make during this presentation that are not statements of historical fact constitute forward-looking statements that are subject to risks and uncertainties. We assume no responsibility for updating forward-looking statements. With that, let's begin. We will be covering 5 topics today. First, we're going to talk about TAM. Our 2020 actual results suggest that at 100% legalization, the OSB and iGaming market could be $67 billion plus in North America. Of course, we are not assuming that we will see 100% legalization, so we're going to update you more on what we're thinking there later in the presentation. Legalization trends, however, do continue to be very positive. Secondly, we're going to talk about market share. Our market share for OSB and iGaming is run rating at 30% and 19%, respectively, as evidenced by Q4 2020. DraftKings is also online in more states than any other operator. Third, we're going to be covering LTV to CAC. We have updates on our customer retention as well as our revenue retention. And we are continuing to learn and improve our playbook. And we will also be updating you on payback periods that we're seeing early in the market. Fourth, we are going to be talking about our long-term EBITDA outlook, which we now are thinking is going to be $1.7 billion, as evidenced by some of the recent updates to TAM. Fifth, we're going to talk about how we are well capitalized for growth, and we're in a good position as new legalization occurs in states. Improving upon last year, we've now included 2 methods for estimating the TAM for online sports betting. One is the population method, which is the same way that we estimated it last year. And we've also now included a GDP method, which is using the relative GDPs of these different markets as compared to the other markets in the U.S. that we're forecasting. Using these methodologies, we arrive at a range of $22 billion to $36 billion. For the rest of the presentation, we have assumed the lowest of these numbers, $22 billion, for all of our future calculations. One of the things we've been asked over the past year or 2 is whether New Jersey is a good proxy for the rest of the U.S. As it turns out, the answer is yes. In fact, if you look at the other states and you normalize for seasonality and for also time line of launch by only looking at the first consecutive September to December, New Jersey is quite in line with how they're performing. In fact, New Jersey is a little bit lower than what the other states are doing. Notably, this includes some states such as Rhode Island and the District of Columbia, where DraftKings is not present. And we believe those places could actually be doing better, were DraftKings to be operational there. Also, Pennsylvania has a higher tax rate than most other states, and so we haven't invested as heavily in Pennsylvania. And we would imagine the same may be true for certain other operators, which could be leading to a little bit lower performance in Pennsylvania. The iGaming market is where we believe we have really been underestimating TAM. In fact, in just New Jersey alone, iGaming was almost $1 billion last year. Of course, partly this is due to the fact that iGaming grew faster without sports being played in most of Q2 as well as in the end of Q1. That said, we've assumed a very modest 5% growth rate for the next 3 years, which is clearly much lower than what we've been seeing. And it accounts for the fact that some of the growth that we would have seen may have been pulled forward in 2020. We've also only assumed that 5% CAGR through 2023. And in doing so and then using New Jersey as a proxy for the rest of the U.S., you get to somewhere between a $40 billion and $43 billion TAM using the population method and the GDP method that we described earlier. For the purposes of the rest of the presentation, we have assumed the more conservative of these 2 numbers, $40 billion. On to legalization trends. We've seen really good progress in only the 2.5 years or so since the Supreme Court struck down PASPA. We are up to about 27% of the U.S. population having legal online sports book. DraftKings is present in states that have 25% of the U.S. population. And of the remaining 2%, Nevada represents the largest opportunity. We also have seen iGaming legalized in states that represent 11% of the U.S. population. DraftKings is present in states with 10% of the population with, again, Nevada representing the largest open opportunity. Canada has been an exciting new development over the past year as well. This was not really something we were focused on in last year's presentation, but due to some very favorable legislation trends, we now believe Canada could represent a very meaningful opportunity for DraftKings. The most progress has been made in Ontario, where the budget is legalized and now is onto regulatory approval, which in Canada is most of where the rest of it is defined. Things like tax rate and other sorts of things are actually defined through the regulatory body. Ontario, of course, is almost half the population in Canada, and it's also a very sizable daily fantasy sports market for DraftKings. Were Ontario to be a U.S. state, it would be a top 10 state for us. Canada we estimate, using the same 2 population and GDP methods, to be anywhere from a $5 billion to $8 billion potential market. For the purpose of the presentation, we have used the lower of these 2 numbers, $5 billion, in our market estimates going forward. Now on to the punchline. We believe, as we said, that a good and conservative perhaps estimate for full legalization TAM and sports betting is $22 billion, and iGaming is $40 billion, and for Canada is $5 billion. Of course, we are not assuming full legalization, and we have kept these numbers the same as last year at 65% of the U.S. population for sports betting online and 30% of the U.S. population for iGaming. In Canada, we've assumed 64% of the population with Ontario representing the largest piece, but we have also assumed that there may be a few other provinces that act as well. On market share, we kept our sports betting market share at the same place as last year in the 20% to 30% range. In iGaming, we've tightened the range a little bit. It was 10% to 20% last year. We've now made it 15% to 20%, the reason being that we are not below 15% in any market that we're in, and we've actually been growing our iGaming share very steadily, and most states are actually over 20% at this point. So we felt like 15% to 20% was a realistic range. In Canada, we assume 10% to 20%. The reason for this is there have been gray market operators for quite some time in Canada, so DraftKings will not have the early mover advantage that we've had in other states. However, we have assumed that we're at 10% to 20% because even in New Jersey, where we entered the iGaming market 5-plus years into it, we've still achieved 15% share and have been growing that share. So we think 10% to 20% is a realistic assumption for Canada. When you total all of that up, we are looking at $5 billion to $7.3 billion as the gross revenue opportunity. As a reminder, our Q4 market share is at the top end of these U.S. ranges with 30% in OSB and 19% in iGaming, so we feel very good about these estimates. Additionally, this does not include 35% of the U.S. for online sports betting, 70% for iGaming, 36% of the population of Canada, and it includes no further international expansion. Next, we'll talk about market share. To start, we want to describe where we're present and how the rest of the market looks. DraftKings, as a reminder, is in more states online than any other operator for sports betting at 12. If you look at other operators, only 5 are even in 8 states, and the vast majority of them are at 2 or 1 state. There is a long tail of 21 operators that are only in 1 state. We believe, as we've noted in the past, that being present in a larger portion of the population -- for a larger portion of the population is a huge advantage in terms of scale but also in terms of marketing. As we'll talk about later, marketing becomes much more efficient as you achieve more and more population presence across the states. The next thing we want to talk about is why we're different and why we believe our market share is very sustainable and perhaps we can grow it even over time. First is our trusted brand. That is extremely important not just for any company but particularly in our space, where customers are trusting us with their data, trusting us to hold their money, trusting that we're settling things in a fair way, really important. Second is our Daily Fantasy user base. That keeps growing and is now up to about 5 million paid users. We've been at this for 9 years. And as more states take time to open up, we will continue to grow our Daily Fantasy user base as well as grow it in states that already have legal online sports betting. Third is our marketing machine. We are a very technology and data-driven company, and the way we approach marketing is no different. We look at specific LTVs by channel, by state and a number of other metrics to optimize. We also are very tech-driven and data-driven in how we manage the marketing with a lot of the bidding that we do on platforms like Google and Facebook managed by machines. Fourth, our product innovation and user centricity. As we've noted in the past, we consider ourselves, first and foremost, a product company. Our technology powers everything we do and allows us to bring products to market faster, and our innovative culture and user-centric culture allows us to really understand what the customer wants and needs in a way that we believe is greater than others. Time is our friend on this one as these products are very complicated, and they're still very much in the nascent infancy stage. The more time we have, the more we believe we'll be able to put distance between ourselves and the competition on the product front. Fifth is the vertical integration that we have with SBTech after the business combination last year. This is important on 2 dimensions. One, it gives us full control of our technology and trading stack, which is an important part of being able to innovate and move at the pace we want to on product. Second, it is a huge cost saving as outside of state taxes, the largest piece of cost of goods sold for us is the revenue share that we pay currently to our third-party provider. Sixth is the single wallet that we have across the platform. This is important not just for user convenience in terms of being able to have their dollars in one place and not have to deposit in separate places, it's also really important because it's actually an account-level integration that allows us to link things like the data between every single product that people are on, which allows for our data science engines to be more effective. It also allows for future innovation on things like having a loyalty program that spans across products, also social features that span across products. Seventh is geographic flexibility and velocity. As we've noted, we are in more states than any other online operator. And part of the reason why is the infrastructure that we built in our Daily Fantasy days that has allowed us to toggle things very easily and be ready to go up and running in new states as they open up sports betting. We will continue to focus on being an early mover and try to be close to or at first to market in as many places as possible as we believe this is important for long-term market share. Eighth is our scalable regulatory platform. Regulatory is a very important aspect of our business. And being a gold standard in things like responsible gaming and other sorts of regulatory requirements is very important to us not just because they're required but also because it's the right thing to do in order to make this industry operate and be perceived and be the way that it should be. We believe that this is something that will continue to be able to not only move quickly on but do it in the right way. And it's very core to our culture. Our mission statement includes the words responsible in it, and we take the word responsible in it, and we take this very seriously. Ninth is our data science engine. This is something that we think is going to continue to also be an increased advantage for us over time not just because we'll continue to improve the models and the models will continue to improve themselves but also because more data makes them better. This is an area that we use to power all parts of the DraftKings experience from our product to our marketing, to our customer support. And we believe that this is something that will also be a huge advantage for us over the long term. On this slide, we talk about what our actual market share was in Q4 of 2020. As a reminder, it was 30% in online sports betting and 19% in iGaming. And as another reminder, this is at the top end of what we have assumed for our long-term market share projection ranges. Next, I'm going to turn it over to my Co-Founder, Matt Kalish, and he is going to talk about our marketing and brand.

Thank you, Jason. DraftKings is headed into 2021 with a tremendous amount of momentum, and that's really led by the United States' #1 brand across all of our key products. DraftKings is #1 in unaided awareness and is the most preferred app across our fantasy sports platform, our sports betting platform. And one thing we're really excited about is all the momentum that we've built up in iGaming over the last year. DraftKings build a lot of the content in our iGaming platform that engages our users, and that differentiation, we think, is really helping us quite a bit. For example, in Michigan, we recently launched and saw over 75% of our revenue coming in on DraftKings custom games that we built, that can only be found on DraftKings. So we're really excited about all the momentum and how top of mind DraftKings is in this new, really exciting industry in the U.S. A lot of the progress we've been able to make on the brand side and in engaging and converting users come down to our key relationships, which we believe are unparalleled in the industry. We have a key relationship with the NFL, all of the major sports leagues such as Major League Baseball and the NBA, the PGA Tour. We recently announced an agreement with the UFC to be their sports betting partner. And then in terms of what's next, some new deals that we've done with Drone Racing League, with Major League Eating, with the American Cornhole League really show what's next in sports in terms of engaging our audience. So all of these deals are really exciting. In terms of localizing our team strategy, what we've seen is that DraftKings has been very successful getting team deals in place in all of our key markets, whether that's deals like the Eagles and 76ers in Pennsylvania, heavying up in New York and New Jersey, for example, with the New York Giants deal, which is the first of its kind to include iGaming, sports betting and fantasy all in one deal. And our landmark agreement with the Chicago Cubs, which includes a retail sportsbook in the heart of Wrigleyville. Finally, on the media side, we have a huge array of great media distribution deals, things like Turner Sports, which includes The Match 2, The Match 3, Major League Baseball; deals with ESPN, Vox Media, DISH Network, which was recently announced, all really exciting for us in terms of reaching our audience at the highest scale of anyone. DraftKings operates a high-scale performance marketing engine. And this capability is really driven by our leading technology platform, our analytics capabilities and our data science capabilities. DraftKings is able to optimize everything from our media mix to automated bidding on digital platforms to personalization on our product suite. All of that is done through our leading capabilities on data science. We are able to personalize the experience on promotions, on the content that people see in the products in play and all the way down through the CRM treatments that they receive through e-mail push and retargeting. All of that is really driven through a proprietary technology that we've built using trillions of data points across 10 million-plus customers over almost a decade. And it's something that really differentiates DraftKings and our ability to get performance marketing at scale. Finally, one area that's really come into prominence over the last year has been in-game media. With sports betting coming into the forefront of the mind of the American consumer, there's been more and more interest from broadcasters to integrate that into the live sports experience. So you will see DraftKings everywhere from -- through our deal with Turner in the MLB playoffs or The Match 2 or Match 3, sports betting integrations being built into the pre-game or during the games themselves broadcast; agreements with Triller to cover the Mike Tyson-Roy Jones fight, we're extremely successful with sports betting integrations; as well as in NFL, doing Big Play Payday, which is, if there's a large fourth quarter touchdown during an NFL game, the viewers can win something on DraftKings. All of these sort of in-game integrations have really helped us get to a higher scale of performance marketing, engage more and more users and enhance the content that we're amplifying through the DraftKings product offerings. So with that, I'm going to hand it off to Paul Liberman, who is our Global Head of Product and Technology, to speak to our product road map and our technology platform.

Thank you, Matt. I'm going to take a moment to review where we're at today, first, in terms of product and technology, and then we'll discuss a little bit about what we're doing in the future. 2020 was an exciting year for DraftKings. The product and technology teams adapted well to the COVID-19 pandemic and delivered some great new product innovations. Let's begin with Daily Fantasy Sports. Over the past year, we launched 19 new sports and game types, including our basketball game and snake drafts. Both have received great adoption with over 150,000 customers playing our product within the first week. Our DFS product continues to grow, including in states where sportsbook has been legalized. In 2020, our Sportsbook product continued to improve and expand. We launched in 4 new states in 2020 and 2 additional ones in 2021. In all those jurisdictions, we continue to be the top-rated sportsbook app. We have added many features such as live streaming video and pop culture pools contests. We integrated our data science platform and improved our experience to be a lot faster, smoother and more stable. We're just at the beginning of our Sportsbook innovation and look forward to migrating over to our own technology platform in Q3 of this year. For our iGaming product, since our last Analyst Day, we were the first to market in 3 jurisdictions with both a stand-alone product and our Sportsbook-embedded iGaming product. We launched over 20 new games, and we'll continue to invest heavily in our homegrown games. As of today, over half our wagers are placed on the homegrown games that we've created. We continue to have a robust product road map to launch many more of our own games and many much more of our own content. Finally, for all these products, they are all built on our proprietary platform that enables us to have one account, one wallet and a seamless experience across all our products and jurisdictions. This enables us to launch early in markets and have a stable, safe and consistent experience. So let me dive into how we think about our road map and the investments we're going to make in the DraftKings product strategy. Here are what we call the 4 Cs of the DraftKings consumer product strategy. Number one is control. We are a product and technology company at heart, as both Jason and I mentioned earlier. And DraftKings will really work to control its own destiny across every consumer product that we operate by owning and operating our core technology platform. We continue to invest in our teams, both the consumer-facing teams and our platform teams, with a focus on being a technology leader and an innovator in the North American market. Second, we believe that content is extremely important. This is essentially why people love to come play and interact with our products. We are going to aim to offer the broadest possible suite of content across all our real money gaming platforms. This is in daily fantasy, sports betting and iGaming. Third is connectivity. Within our product, it is really important to be able to leverage our seamless platform, seamless experience and the data to make it easy for customers to jump between daily fantasy, sports betting and iGaming. I'll illustrate a little bit more on the connectivity in a later slide. We will work to create an integrated ecosystem of consumer experiences that will all be powered by our proprietary data and marketing technology. And finally, we have to have the best customer experience. As I mentioned earlier, we have the top-rated apps, and we always aim to create fun, exciting and personalized experience by making the products that anticipate and respond to our customers' behavior. Ultimately, we believe if we're not innovating, someone else will get ahead of us. This is why data science and AI are so core to the foundation to the way we operate now and going forward. Internally, we are never satisfied with our product and always strive to make it better. So we talk a lot about our connectivity and data platform experience, but I wanted to take a moment just to briefly talk about what this looks like and how does this actually get implemented in the DraftKings ecosystem. Here's an example. This example doesn't show all the data that we collect, but this is some of what the stuff that we look at as we show our recommended contest, conversions, marketing platforms, et cetera. So as we see, there's a user. We track things like preferred leagues that they play on, the preferred types of teams, what players they like to bet on, do they like tournaments, do they like single games, what is their favorite iGaming game, do they like table games or slots. All this information is consumed by our data science platform and our data environment and is fed to all of our collective products, both the ones that you see, which is Daily Fantasy, Sportsbook and iGaming; as well as the ones you don't see, which is a marketing technology platform that Matt talked about earlier. The way that this gets implemented is that for DFS, Sportsbook and iGaming, you see that everyone has the same balance as I have in my account. That money is used, and DraftKings takes the complexity and makes it really easy to play across any product you like. If you're in Daily Fantasy Sports, this player, for example, likes UFC, we'll recommend contest around UFC. Since they have $20 in their account, we will show a $3 contest because we know that they may be -- that may be the one that they would like to enter. Additionally, because this person is in New Jersey, we will identify that they also have Sportsbook and iGaming available in their state. So we will engage them with an offer that says McGregor first-round knockout because we know that this person, Paul in this case, likes UFC and is more likely to bet on that and other particular products. For casino conversion, they like NFL, we have a Football Blackjack game that we'll offer to see if we can engage them in that product. If they were in our Sportsbook product, we would show them the recommended bets like UFC or we would show them things like a DFS conversion offer of the $100,000 UFC contest that we talked about earlier. And right inside our Sportsbook app, they can play Football Blackjack. They don't need to leave and download a new app to play. Similarly, in iGaming, we would have the same links. Finally, our marketing platform understands all this data both internally and with our CRM tools. We'll be able to present offers, maybe like a deposit bonus because this person has a lower balance or a McGregor win bonus on Facebook because we know that this person likes UFC. All of this is highly automated and happens every single day across millions of different permutations and segments. It's this platform that we think makes for a seamless user experience that will ultimately be very important in differentiating us and winning in this industry. One of the areas that we've had substantial success in also is, going back to the 4 Cs, is creating our own content as well as creating a great consumer experience. It's integrating our gaming product into our Sportsbook platform as well as a new stand-alone app that we created. We have developed over 26 homegrown games since the last Analyst Day that customers can engage. These games have the best-in-class graphics, a fast, seamless experience and are very easy to use and fun to play. Here are 3 examples of games that we've been able to innovate on. Number one is Slider Blackjack. Slider Blackjack is a game that's only in our embedded Sportsbook product, which allows you to bet on sports while, at the same time, playing a blackjack hand. Imagine watching an NFL game, and there's a commercial. You can slide up a blackjack hand, play a few hands, slide it back down and engage with your Sportsbook experience. We have seen that Slider Blackjack increases engagement substantially within our Sportsbook product. Another example is March Mania Roulette. Given our strong base of sports customers, we have created new and innovative offerings that engage customers in the games that they love but make it more themed around sports. We know that our customers love new and exciting games over the different sporting seasons. We've been able to launch new content that will engage them and make for a fun experience. And finally, launching new games like Baccarat. We were the first to launch a Baccarat version with side bets that makes the game more exciting. This is a version that is loved in the casinos but not available online before we launched it. We believe that further expansion of our original gaming content will be monumental to the success of our iGaming product. While we also continue to integrate new games from innovative creators, we will focus on developing games that will either differentiate our product or replace games that consume a lot of our revenue or have substantial cost. Those are really the 2 vectors that we will use to prioritize our content over the coming year. We're excited for the future growth of this product. Lastly, a quick update on the migration to our own platform. We have been working over the past year and have begun the process of migrating to our own platform. We are currently in beta mode. And over the coming months, we will move over to our platform and expect to be complete with this by the end of Q3. As a reminder, when we move over to our own platform, we believe we will have full control over the entire experience in sports betting. This means we will own our own technology, trading tools and experience and be completely vertically integrated in the industry. As a technology company, we're excited to have full control of our product and the opportunities for innovation that this will unlock. However, we are mindful that this is going to take some time. We're in the first inning with our Sportsbook product, and it will be a multiyear journey for us to launch all of the amazing features we plan on building. Sports betting is a pretty complicated product, and right now, we're developing what we believe to be the strongest foundation for our future. Going forward, I expect our pace of innovation to only accelerate as we complete this migration. With that, I'd like to hand it over to our CFO, Jason Park.

Thank you so much for that, Paul, and good morning, everyone. For this next section, we are excited to share an update on our state playbook and what we are seeing on the core elements of LTV and CAC. Overall, we have more conviction than ever on our state playbook. This summary page outlines our view of the 5 core elements of LTV and CAC. First, on promotions, we will talk about how our promotional investment will decline within a unit as we shift out of new customer acquisition mode and into existing customer retention mode. Second, we now have line of sight into 58% gross margins in typical OSB and iGaming states, up from 50% last year. This improvement is not only due to the upcoming migration to our own bet engine but also because of initiatives we have in place across other elements of our COGS structure. Third, we are excited to provide new visibility into our customer and revenue retention. Fourth, on CAC, we will update you on the continued success we are having in cross-selling our existing DFS players into OSB. And finally, we want to reiterate how we see national marketing efficiencies accruing to scale operators like ourselves. And in conclusion, we will show you the payback period for some of our early cohorts and why we are on track to being contribution profit positive within 2 to 3 years in any given unit. This page is a purely illustrative page to give you a sense on why promotional investment will naturally decline within a state over time. On the left-hand side, you can see an illustrative depiction of the higher promotional investment for a new customer versus an existing customer. And on the right-hand side, you can see that as a state mixes out of new customers and into existing customers, the overall promotional investment decreases. Next, I want to update you on gross margin rate. Last year, we talked about our outlook for New Jersey in 5 years. And this year, we are using more data. As you can see, we now estimate that a typical OSB and iGaming state will have an approximately 58% gross margin rate after 5 years. On taxes, when we take the straight average of our estimated taxes as a percentage of net revenue in 5 years, we are at 24%. Notably, this calculation includes Pennsylvania, which is north of 40% for both OSB and iGaming. On platform, the big thing is that we are removing the cost of our current third-party bet engine provider based on the confidence in our migration plan, which will be complete by the end of Q3 2021. The remaining portion of our platform costs include AWS and a handful of other third-party suppliers. On payment processing, we are seeing early success in not only renegotiating better terms with our payment providers but also encouraging our players to use lower-cost payment methods that are also more convenient for them. And on revenue share, as we continue to solidify our leadership position, we find ourselves getting better and better deals on market access as states open up. For the first time, we want to provide insight into real data on customer and revenue retention. First off, a bit on the methodology. Since Q3 2018, we have had 40 state quarter cohorts. Indiana in Q4 2019 is a state quarter cohort, for example, or Colorado in Q3 2020. For 10 of these 40 state quarter cohorts, we have 4 full quarters of data after the acquisition quarter. And for 2 of these 10, we have 8 full quarters of data after the acquisition quarter. And for these 10 state quarter cohorts on the left-hand side, you can see that 82% of our players continue to engage with us over their first 4 quarters. And for the 2 state quarter cohorts, where we have 8 quarters of data, 87% continue to engage with us over their second 4 quarters. And for revenue retention, we can only analyze the 2 state quarter cohorts. And you can see that these cohorts experienced 108% revenue retention in their second 12 months relative to their first 12 months, outstanding results. Notably, these results include no adjustment for the COVID-impacted periods in 2020, so it is reasonable to believe that results could be better on a go-forward basis. In conclusion, we are extremely proud of these results and think the results are a testament not only to the natural stickiness of this product category but also of our unique data-driven and differentiated customer engagement and retention capabilities. With that, now Jason is going to speak a bit about what we're seeing in DFS cross-sell as well as the advantages of national marketing scale.

As we noted earlier, our Daily Fantasy user base is a big advantage for DraftKings as customers look to engage in online sports betting in new states. It's not just a great source of new customers, we also have a tremendous amount of data on favorite sports, favorite players and other preferences of the customer. We know when people like to engage with our products, whether they respond to certain types of push notifications. We have safe payment methods for many of our customers and more. In most states, we are converting in the 60% plus range. Pennsylvania, we are a little bit lower. The reason we are lower in Pennsylvania is we haven't invested as much in that state due to the higher tax regime. Also, we believe there's upside to these numbers. The reason that we believe that is that there are still some issues with the industry that are causing the numbers to be lower, such as many payment methods not working and customers that want to engage on these products actually not being able to get through. We think that, that will be something that improves over time as more and more issuing banks consider the right way at the right limits to allow customers to engage with online sports betting. Additionally, there is more friction in getting somebody to engage with online sports betting versus Daily Fantasy Sports as they're required to input more information such as their last 4 digits of social. And sometimes they're required to do document uploads and things like that as well. So hopefully, those are things that we'll be able to improve with better UX over time as well, and we think there's upside to these numbers. But already, we're converting at a very nice rate. Earlier, we noted that we think that marketing efficiency will improve as more states launch sports betting. There are a number of reasons for this. First, there are certain channels such as buying on television, where the cost per impression is actually about 3x higher to buy locally versus nationally. Secondly, there are currently things we are doing, such as our integrations into programming like The match, which are national since there's no local feed of those broadcast. As more and more customers become eligible to sign up for sports betting, those same integrations will improve in performance over time. Thirdly, even digital channels where we are always going to target specific states, such as Facebook and Google, at higher scale, you get better cost per clicks and better cost per impressions as you are competing against a better universe on the betting front. Lastly, we also believe that there will be regional benefits, too. An example of that is, when New Jersey opened up, we were buying in the South New Jersey DMA for television. That also spans Philadelphia. Once Philadelphia, as the whole state of Pennsylvania, had customers that were eligible to China for sports betting, those same television ads performed better as we did not need to increase, although sometimes we will increase because with better efficiency, we can spend deeper.

Thank you, Jason. We have said in the past that we expect our cohorts to pay back in 2 to 3 years, and we are well on our way to achieving that. When you look at the 10 state quarter cohorts, you can see that after just 4 quarters, they have generated gross margin dollars equal to 70% of their acquisition costs. And when you look at the 2 state quarter cohorts, you can see that they have generated gross margin dollars equal to 254% of their acquisition costs. As a result, when you stack these quarterly and annual cohorts on top of each other, the result is that a unit will turn contribution profit positive in year 2 or 3 after launch. You can see here that we generated $8 million of contribution profit in New Jersey in 2020 despite the impact of COVID. We had a very unique customer acquisition environment in the back half of 2020, which allowed us to invest heavier into customer acquisition. These investments impacted our contribution profit in 2020. However, as you can see from our projected 2021 numbers, we expect to realize substantial benefit for this investment. And finally, we expect our state playbook to pay large dividends in 2021 with approximately $65 million of contribution profit this year. So with that, I'd like to turn it back to Jason Robins to discuss our updated view of EBITDA at maturity.

As a reminder, we have increased our TAM estimate for both online sports betting and iGaming as well as included Canada in our long-term projections. We did not change our assumption around legalization in the U.S. for either online sports betting or iGaming, and we did not change our market share assumption on online sports betting. We did tighten our range for iGaming. All of that comes together to a forecast of $1.7 billion as a very achievable and perhaps conservative long-term EBITDA target. This also, as I remind you, did not include 70% of the U.S. for iGaming, 35% of the U.S. for online sports betting, 36% of Canada for its online sports betting and iGaming, nor does it include any other international expansion or any expansion into new products.

So the final page in our presentation today is just a reminder that we have roughly 428 million shares outstanding today on a fully diluted basis and that we estimate that by the end of the year, we would have approximately 432 million shares outstanding on a fully diluted basis. With that, we'll take a short 15-minute break and come back for open questions and answers. [Break]

Thank you for joining, everyone. We appreciate it. I'm going to turn it over to Joe now to start the Q&A session.

Thanks, Jason. We'll begin with a handful of questions on TAM. So the first question is, could you give a time frame on when you expect to reach 65% and 30% of the OSB and iGaming populations in the U.S. being legalized?

We haven't, at this time, shared a time line on that. It's very tricky because, essentially, we'd be predicting a pace at which state legislatures and governments move, and that's not something that we feel that we can do. It's not within our control. So we feel confident that, that's an achievable target. We think there might even be some upside to that. However, we don't really feel confident in being able to give a projection of exactly what the timing will be.

Our next question is, is 2020 really a fair year to base your iGaming TAM off of given the stay-at-home nature of COVID?

I think that's a great question. We actually accounted for that and how we are thinking about it. So what we did to get to the iGaming TAM is we took the 2020 number, and then we assumed a 5% CAGR from '21 through '23, which is clearly much lower than it's been going at. And we didn't assume any growth at all after 2023. So we kind of counterbalanced what was probably some pull forward of growth in 2020 with a much more conservative than otherwise would have been assumption of only 3 years of growth at 5% after that.

Next question is, why do you think the U.S. OSB market could be as big as the U.K. and/or Australia at maturity?

Well, we think that the OSB market in the U.S. could be larger. I assume that's a question asked on a population basis. Really, there's a number of data points we looked at. We looked at U.K., Australia. We also looked at where New Jersey was run rating. We looked at adjusting by population as well as adjusting by relative GDP size. That gave us 6 different outputs, and we actually took the most -- the lowest of those 6 outputs at $22 billion. So hopefully, there's some upside there, but we felt like $22 billion was safe given 6 different methodologies, and that was the lowest number that was produced by all 6.

For your OSB TAM, what are you assuming for in-game betting?

We're not actually separately breaking out in-game betting in the OSB TAM. We're using the market-level approach, which -- a great point there is that New Jersey still is very much at the infancy stages in terms of OSB in-game betting. If you look at the U.K., it's roughly 75% of online and mobile revenue made up by in-game betting. We're much lower than that in the U.S. So New Jersey being the proxy that we use could actually have some upside with the adoption of in-game betting, and we didn't actually factor that in separately.

How much is New Hampshire benefiting from online sports betting not being legal in Massachusetts?

That's a great question. We do think that in various parts of the country where there's large neighboring states, that could be a benefit. However, it's really impossible to tell exactly how much. Certainly, we look at proxies like how many people who have addresses in Massachusetts, how many people that are playing Daily Fantasy in Massachusetts that are driving over the border to make bets. We have good geo location data. But it's really hard to know exactly where it would net out. And I think that there is certainly some benefit there, that's for sure.

At maturity, do you have a view on how many users you would have underlying your TAM assumptions for OSB and iGaming?

We haven't forecasted the number of users and shared that publicly. Actually, I should say we have an internal forecast, but we have not disclosed publicly a user count there. We've used top-down metrics around what we think the participation in the market will be, which sort of implies a number of users in the market, but we haven't actually said what we think DraftKings' user count will be.

Do you have any comment on what's happening in New York at this time?

Well, New York, it's very exciting and encouraging to see that there's some momentum behind legalizing online sportsbook. Certainly, we've hoped in the last few years that we would see that happen, and it seems like the momentum has increased this year, which is great. Obviously, with any legislative process, especially in a big state like New York, there are going to be lots of different conversations and debates about the best way to do it. And much like I said earlier, that's not really within our control, but we're excited to be hopefully able to participate regardless of how New York decides to do it. And we believe that DraftKings will be an important part of helping New York reach its goal for generating tax revenue. So we're excited to engage with legislative and executive branch leaders at the right times when they ask us to. And we're here to help with that and certainly hope that New York will be a market that progresses this year.

Can you provide an update on Maryland and Louisiana. You mentioned these states on your Q3 call but not on your Q4 call.

Maryland and Louisiana both passed ballot initiatives in the fall that really create a legislative path that must follow. And of course, that's followed by regulations, licensing and everything else. So right now, that's on process. The legislative process is underway, and we hope that, that will result in some legislation being passed in both states this year. And we're excited at those 2 states as an opportunity for DraftKings and hopeful that, that will happen this year.

Looking at your OSB market projection, is 20% the right growth rate to extrapolate the New Jersey market at over the next 3 years to arrive at your TAM estimate given the growth in the state over the past year?

Well, it's certainly lower than it's been growing. Jason Park, do you want to maybe comment on why we chose 20%?

Yes. I mean when we look back at historical growth rates of iGaming, that was an important data point as we thought about what's the right percentage to use for further extrapolation. And again, we felt like that was a prudent number from which to grow from. And going back to the earlier point on the COVID impact from 2020 and normalizing for that, we just felt 20% was very prudent.

Moving on to questions on market share and product. Can you comment on the convergence of media and sports betting? Is that a threat or an opportunity for DraftKings?

I think that's a very exciting opportunity for DraftKings. As you've seen, certainly, over the last year, we've established a number of partnerships with media companies. And we think that, that could be a great route for us. Those relationships are really important part of how we see the integration happening. We've also recently established a relationship with DISH, and that's something that I think could pave the way for an exciting new way for these 2 things to converge. We also have a small investment that we've made, that we're considering whether or not to ramp up in our own content creation. And that's something that I think will be very complementary to some of the key relationships that we've established.

How do you plan to differentiate your products over time to stand out from your competition?

Well, this is what I think we do best. We're, at our heart, a product and technology company. We're also very customer-centric. So I think we have a good idea of the short-term road map. We're going to be migrating over to our proprietary technology and trading stack in the fall. And then I think from there, there's probably a focus pretty heavily on in-game betting. I think on the online -- on the iGaming side, we're going to continue to focus on launching our own games. That's been a very successful strategy for us. It allowed us to become the #1 brand in iGaming in America. That's really come to, I think, fruition in some of these new states, particularly in Michigan, where we saw over 75% of the revenue -- excuse me, of the handle generated in Michigan come on our own iGaming content. From there, I think we're really going to focus on listening to the customer. As I said, we're a very customer-centric company. So both between kind of looking at the data and understanding how customers engage as well as having strong feedback loops with our customers, do things like market research, focus groups, feedback from our player reps, our customer service and experience teams, that all informs where we want to take the product in. Sometimes, you don't find out until the next phase of evolution happens where it makes sense to go from there. So we certainly have a good short-term product road map meeting for the next year or 2, but I'm excited to listen to our customers and really understand where they would like to see us innovate. And that will really inform the go-forward road map beyond that.

Given your strong market share in OSB and iGaming in Q4 of 2020, what would be the reason or reasons that share could decline toward the midpoint of your long-term targets?

I don't know that it will. I think we just wanted to be prudent in that and not assume that everything will go 100% according to plan. I think there's reasons why we might be able to increase share, particularly the investment that we plan on making in product. And that's really going to start with this migration. And then ultimately, we think we have years and years ahead that we'll be able to continue to innovate and put distance between our product and competitor products. So I think there's reasons to believe there's upside, but also, there's reasons to believe that there might be increased competition and things like that, too. So we just felt it was prudent to say that we're not counting on everything going 100% according to plan. And even if it doesn't, even if we did decline a little bit, we think that this is still a very attractive opportunity. It doesn't mean we think that's what's going to happen, we just wanted to show that is like, hey, even if we go down a bit in market share, we think that we're actually going to still have a really attractive business at maturity.

Is being first to market a sustainable competitive advantage or way you differentiate against competitors?

It's certainly helpful. I think New Jersey iGaming is a great example of that. Now while we steadily gained share in New Jersey iGaming, it's our lowest share market right now relative to Pennsylvania, Michigan and West Virginia. And I attribute that to the fact that we joined that market over 5 years after iGaming had already been established in New Jersey. Do I think we'll be able to continue gaining share there? I think so. We've done that, and we, I think, will continue to do that. But obviously, it's tougher when you're starting several years behind the competition. So we continue to believe that there is an early-mover advantage here. These are inherently sticky products. Obviously, you have to give a great experience to the customer, you have to keep innovating. But if you do that and they really enjoy what they're doing, there's not a whole lot of reason to think they're going to leave. So I think getting the customers engaged with your products early and then being able to continue to innovate and take that customer-centric approach is something we believe will provide an advantage for us over time.

Why do you think your brand cut on quickly in iGaming? It looks like share has gone up a little bit over the course of 2020.

That's something we're really excited about. We didn't even launch an iGaming product until a little over 2 years ago. So we're still relatively new here. And really, it's been ironically a place we've been able to invest more as we migrate our online sports betting platform. We've actually been able to invest and innovate more on the iGaming side since a lot of the homegrown content we've developed has happened over the last 18 months or so. I think really, to answer the question, it starts with the product. Providing a better product to customers really gets people talking and creates buzz. I think also the fact that we've done such a successful job cross-selling our sports betting and DFS customers. We also launched a stand-alone app, which we've begun to acquire new customers onto. So I think all those things together have really helped us generate a lot of brand momentum and a lot of market share momentum in the iGaming market.

Can you talk about your DFS business? How is it performing? Are there any additional product innovations you are considering over the next year?

DFS had a really good year this past year in 2020, particularly in the back half of the year. Super Bowl was also a huge year-over-year growth event for us on the DFS side. I think where we see innovation continuing to happen is in launching new sports, adding more social features or leagues product, which allows people to create private leagues with their friends, has really been successful, continuing to focus on growing that. And then also just continuing to innovate on the types of marketing that we do. For example, our pools product has really been a helpful product for acquiring customers onto DFS nationally, and it's a sort of different version. It's free to play usually, but it's a different version of what ultimately people see as betting in DFS. So I think that, that's something that's an example of where we've been able to mesh products together and cross-sell very effectively on a national basis.

Can you make any additional comments on your announcement with DISH last week? Is this something that can be replicated with other providers?

That's the hope. We are really excited about this. It's something that we think sort of if it goes well, it could be groundbreaking, a feel to the user like they're able to place a bet directly from their TV. Now in reality, it will be a communication between the streaming device and the iPhone or other -- whatever other -- Android, whatever other smartphone that they have the DraftKings app on. So it's not actually going to the TV, but it will feel that way to the user. So we don't know how different users like to -- will prefer to engage with us. Some will actually just say, "Hey, I got a phone. Why do I need to do that?" Others will say, "Well, if I can watch the streaming and make bets in the same place, that feels a whole lot more convenient." And what we really want to do is be there for any user in any way that they want to engage and give people the most options, the most convenience, the most engaging products. And I think it's also an example, as I mentioned earlier, where media and gaming can start to converge as well, being able to, in this case, watch the same thing -- watch, excuse me, and bet -- or at least feel like you're watching and betting on the same device. As far as what it could do with other relationships, I think that there will be others that once they see this in action, they're going to be interested. And we're certainly open to pursuing those discussions.

How do you think market structure will evolve over the next few years? Will the market become more concentrated or more fragmented?

I think you're seeing right now in the last day or 2 to launch more concentration. Michigan is a great example where Michigan was the most competitive launch of any state so far. They actually made sure they launched all 9 providers on the same date that's different than what some other states have done, where when DraftKings or other companies were ready, they just let you out the door. In this case, we were ready a little earlier, and they said, no, we actually want to launch everybody at the same time. So that's an example of what I think some states will do. Others will prefer to just get people out as they come. But where it netted out as Michigan was the most competitive launch of any state yet with 9 different providers going at the same time, yet market share was more concentrated at the top and more -- the long tail was much less market share than virtually any other state where outside of the top 4, there were only a couple of points, maybe a few points of market share made up amongst the other 5 that launched. So I think you're going to see more consolidation at the top. And I think what will happen is you're going to see also that as we move from local to national marketing, as we have more of a national presence, there will be also an advantage to having more and more states and DraftKings currently is present in more states online than any other provider. So that should also help with that top end consolidation.

I'm interested in your thoughts on the following products. First with eSports, you mentioned it earlier in the year, but we haven't heard much about it. And then what are your thoughts on the poker markets and/or the horseracing markets?

Well, eSports was a huge grower during the pandemic when there were no traditional sports being played. We saw eSports. We've kind of been waiting for that moment. Everybody every year was like, is this the year that eSports really takes off. And it happened. And what's been cool to see is that while other substitute products have kind of lost some momentum, eSports has really kept it. We're still running very large eSports pools, much larger than we were running before the pandemic, and that's with all traditional sports having come back. So that's been really great to see. Right now, it's been a little bit more of a focus on the DFS side because a lot of states still are not allowing betting on eSports. That's something that we hope evolves over time. And we're excited to continue to innovate in the eSports place. As far as poker and horseracing, those are 2 products we've looked at. And we're just balancing those things across our product road map with other things that we could be doing. But obviously, our goal is to ultimately have every type of product that the customer wants and to be able to engage people on all key events and at all times. So I think that those are things that we will take a look at.

Next group of questions, Jason, is on SBTech. Can you comment on how the internal beta testing is going for the migration?

Right now, we feel we're really well on track. Everything is kind of on schedule. Obviously, there's a bunch of internal steps that we haven't publicly commented on, so I'm not going to talk about that. But I think what we will see is that we will be on track for that end of Q3 migration day, and we're excited to hit that. And we're also excited for all the innovation that will occur after that. Remember, that's really not the end. That's the beginning. Once we have our own proprietary technology and trading stack, that sets the stage for many, many years of future innovation that we're very excited about.

Will we be able to know once you've migrated over in certain states?

Well, we'll talk about it. I think you'll see us discuss it at some point. As far as will you be able to know, I think the goal is actually to make it pretty hard to tell. I think Stage 1 is to make it completely seamless to customers. Maybe you'll see a couple of new things, but really, the less disruptive approach, the better. And if customers don't even notice, and it's not as visible from the outside, it just looks like we're continuing to innovate on product in a way we normally would. I think that's really the goal. So I think it will probably be harder to tell than not, but we'll, at some point, be talking about it.

Can you comment on the recent news that the Oregon scoreboard app is moving to the DraftKings platform?

Well, we've certainly read those rumors. We're not going to comment on that at this time. We've had a great relationship with Oregon. We look forward to growing that relationship. And if and when there is something more to announce, then we'll be excited to talk about it. But right now, we have nothing to comment on there.

What are your plans for overseas expansion? Is there anything we should be thinking about in that realm?

Well, we definitely have ambitions to be a global company. That's something that we think is a really important part of our future. Right now, our primary focus is on the U.S., but at some point, we will look to expand overseas. And when we do, we think we'll bring the same innovation, the same customer-centric approach that we do in the U.S. So that's something that we think is absolutely a part of our future. And when we have more to say on that, we'll certainly be talking about it.

Moving on to unit economics for the next group of questions. IDFA will likely have an impact on your CAC. Can you talk about what the impact may or may not be on DraftKings as well as other competitors?

Well, what's interesting, I think, is that even though, yes, we'll have some impact on DraftKings, some adverse impact on our ability to target, we have such a wide variety of channels, and we don't really rely on anyone in particular. So actually, what I hope it happens and I think there's good reason to believe it will is that while there may be some adverse impact on targeting, that will be offset and maybe even more than offset by the fact that other types of categories, such as mobile games, social casinos that rely almost entirely on this type of marketing for their customer acquisition, they're going to have to drop a lot of their spend dramatically. It's not going to work as well anymore, and that may lead to softening pricing in a market which could be a big opportunity for DraftKings. Hard to say where it will net out, but I think you could see a scenario where it actually becomes a net positive for us.

How do you think your customer retention compares to peers? Will the switch over to SBTech impact this?

We don't really know exactly where we compare to all peers. I know some have put out data on it and those that have, we think we stack up quite favorably against. I do think that it will only improve over time, both at the migration point, but really with the future years of innovation. The better product -- the better the product is, the better the retention will be. The better the customer experience is, the better the retention will be. So we're really focused on listening to the customers, having the greatest -- having the best product in market and having the greatest customer experience. And I think if we continue to innovate well and do those things, our customer retention metrics should improve over time.

What are the CAC and LTV trends for newer cohort players in existing states relative to some of the early adopters?

Well, from a CAC perspective, we've actually seen CAC go down that may be because of industry momentum, it may be because of some of the things that we figured out and optimized on. But probably some of it, as we've said on other calls, like our earnings call, has come from the fact that there was a real benefit of the stay-at-home nature of the pandemic. And we're not counting on that continuing forever. That's why we're investing aggressively now. As we've said internally and externally, we fish when the fish are biting. So right now, we're seeing incredible performance, much better than expected on the CAC side at higher levels of spend. On the LTV side, certainly, and we saw this in DFS, when you kind of get through the first few years, you do see some dropping in LTV. The initial golden cohort, as they call it, is usually the best cohort. But what we saw in DFS, and we have no reason to believe it will be different here, is it pretty quickly asymptotes. And I think that there's like that initial wave of customers that can't wait to get on and then everybody else is pretty similar. And the other thing that could be interesting here is we've seen a lot of data through the research that we've done that we actually haven't converted a ton of people over from the illegal market yet. And those are arguably the most valuable players. So you could actually see, once the illegal market players start to migrate -- start to convert on DraftKings, you actually might see a lift in LTV. I don't know when that will happen, but I think eventually it will.

In your presentation today, you stated that your revenue retention is 108%. Can you talk a bit more about the ramp in spend from customers? Are customers starting with their favorite sport and then branching out to others or into iGaming, for example?

Well, that's really not driven by iGaming per se. It's more the former as well as adoption of new types of bets. Obviously, over time, we're also getting more and more conversion onto the iGaming product, so it's not a nonfactor. But this is consistent with what we saw for years in daily fantasy sports, as players get more comfortable with the platform, as they get more engaged, they try new sports, they try new types of games. Also, our techniques, both in terms of the products that we roll out as well as the things that we do to engage customers are constantly getting optimized and improving over time as well. So it's been a very consistent trend, not just in the -- I know we only showed sort of recent sports betting and iGaming data, but it's actually been a very consistent trend since pretty much the beginning of the company's history on the daily fantasy sports side as well.

Are your other states tracking similarly to New Jersey?

Right now -- let me actually flash to that slide. Right now, we would say yes. And this slide, I think, is -- it's hard because these launched different times a year. So we tried the best we could to do the closest thing possible to an apples-to-apples comparison. This is taking the first consecutive September to December, which is, of course, peak season of a state after it launched. And what you see here is that the median state actually is our average. I'm not sure if this is average or median. Do you know, Jason, if this is the average or median?

Straight average.

This is average. So the average state outside of New Jersey is actually a little bit higher from a gross revenue per adult standpoint. Obviously, it varies. That said, some of these, such as D.C. and Rhode Island are states we aren't even in. Iowa for the 1st September to December did not have mobile registration. So we think Iowa will go up as well and has gone up even in the short period of time since January 1 when mobile registration has been available. So we really do believe that New Jersey is potentially even a conservative proxy, but certainly a fair proxy to use as you look at what other states could do.

Do you still have conviction in your promotional rate at maturity being in the low 20% range?

We do. One of the things that -- and this is not specific -- this does not show specific numbers. We just want to be sensitive that showing our exact promotional spend rates is a very competitively sensitive thing. But this is kind of an illustrative example. So the way it works is existing users have a much lower rate of revenue being invested in promotions than new users, the most aggressive offers or the new user offers. As a result, in these early customer acquisition days, you're seeing a high blended rate of promotion on -- as a percentage of revenue, and that will naturally decline as we mature and the existing customer base becomes a larger percentage. Now you might have fluctuations as big states, potentially like New York or a California launch that's obviously going to be a big influx of new customers, but this will be the steady state trend as things kind of get to more of a normalized place. So everything we've kind of looked at analytically in terms of just these natural tailwinds and everything else we're doing to optimize suggests that we -- a low 20% rate of promotion at maturity is very achievable, and perhaps it could even be a little bit lower, but we think it's certainly very achievable.

Aren't you already doing national advertising? Does this page exaggerate the potential efficiencies?

Well, I think that reason is precisely one of the reasons that we do think there's efficiencies. When we -- I'm just going to flip to that slide. We are doing national advertising, namely the integrations that we have in things like the match or UFC. Those are national advertising right now because there's no local feed of those events, it's all national. But that's actually one of the key reasons why we will see efficiencies because right now, a very low percentage, only 25% of customers seeing those integrations are able to go sign up for the Sportsbook and play. As we get more and more states, those same integrations will perform better because there'll be a larger base of eligible customers able to use these products. So that's one of the reasons we noted why we actually do believe in this. The fact that we're doing national advertising now and only reaching 1/4 of the population is a big opportunity.

On the gross margin bridge in your presentation, why did taxes go up compared to your prior Investor Day?

Jason, do you want to speak to that?

Yes. So last year, when we really -- we showed this chart only for New Jersey. So we were using the New Jersey data. Now that we're live in so many more states, we felt like a better representation to our investor community with talk -- with real data. So that 24% now represents the straight average of the states that we are in. And as I mentioned earlier, notably, that includes Pennsylvania, which is north of 40%.

Yes, Pennsylvania is an outlier relative to what we've seen in other states. So if you take that out, it would actually come down, but Jason is right that this includes all that, and for that reason, it's gone up a little bit.

Is there any contribution or mix shift to iGaming that's contributing to the increase in gross margin on the gross margin bridge page?

That's always part of the equation, but it's not really the main driver here. The state that we actually have the highest iGaming as a percentage of total revenue is Michigan, albeit that's early, that's the highest right now in terms of the ratio of iGaming to online sports betting. And Michigan has a lower tax rate than this. So I think it's a mix of a number of different things, but the primary driver is simply the inclusion of new states that weren't in here last year.

And I would add quickly. When you look at these 4 gray bars that are the 4 buckets of COGS, 3 of the 4 are very similar across OSB and iGaming. It's only the platform part. And on the platform part for OSB, we're obviously going to be bringing in that bet engine, cost of goods sold, we're bringing that in-house, so that goes away. And on the iGaming side, as we've mentioned, we're moving more and more of our revenue to those DraftKings' homegrown games, which improve your platform COGS on that side. So in terms of levers to improve, very similar for both OSB and iGaming.

Can you provide any more color on your CAC? What are you seeing at least from a trend perspective? Is it increasing or decreasing in new and/or existing states?

Well, what we're seeing at least, again, with the caveat that last year is a tough year to use for any sort of future comparisons, last year, we saw CAC go down. In fact, we ramped our spend more and more and CAC still went down despite the fact that, usually, it goes the other way. When you spend more, CAC goes up. But we've been seeing such strong performance, particularly in the back half of the year where we made our biggest investments in 2020, and that's really continued into Q1. We've continued to see incredibly strong performance. So CAC has actually gone down. We think we're being prudent in assuming in the back half of 2021 that those trends may reverse. Hard to say that you believe that, that was driven by some of the stay-at-home nature of the pandemic and not say when things start to open up again that it won't go the other way. So hard to say where that nets out, but we think we've been quite cautious in assuming that it goes the other direction in the back half of the year.

One of your slides, you said you retained 82% of your customers in year 1 and 87% in year 2. Can you elaborate on your methodology?

Jason, can you answer that one?

Sure. We're proud to have been able to pull this together. We've got 40 of these state quarter cohorts. We have 10 that actually have year-over-year data, and 2 of the 10 have 2 years of data, so 8 quarters subsequent to the acquisition quarter. So that 82% is a measure of how many of the players that we acquired in the acquisition quarter continued to engage with us over the subsequent 4 quarters, and the 87% measures what percentage of the 82% stayed with us for the second batch of 4 quarters.

The next group of questions is on enterprise profitability. It looks like your long-term adjusted EBITDA margin percentage is about flat compared to your last update from early last year. Why is it not higher?

Well, what we did here and, again, we're trying to kind of exercise caution and not overpromise anything, is we assume that with a larger TAM, we will be making deeper investment into products. So most of the increased cost here is increased product and engineering investment. That certainly, we think, may happen, maybe not. But also, we think that, that investment would make sense in a scenario like this because this still assumes 70% of the U.S. does not have iGaming, 35% do not have sports betting online, also doesn't have any consideration of international expansion beyond Canada. So I think at this stage of the business with those upsides still out there, we assume we would still be investing pretty heavily in growing our product in tech and that doesn't mean that future revenue won't come in at a higher-margin rate. We just didn't want to make that assumption in this case.

What is behind the significant increase in your long-term SG&A expenses?

Well, it's exactly what I just said. I think we're -- in this case, we're assuming that we will continue to invest deeply in product and technology as we ramp into that higher TAM. That's a very controllable cost for us. We can choose to do it or not. It's not a variable cost by any means. So we -- none of the product in tech and SG&A is variable, of course. So our thought is that if we see a larger TAM opportunity, if we see increased momentum on potentially getting more states allowing online sports betting, iGaming, if we see an opportunity to expand internationally, those investments will make a whole lot of sense. And if we don't, then we may pare them back a little bit. But our assumption in this case is that it will be the former, not the latter that happens.

It looks like you increased your long-term forecast for your DFS business. What's behind that increase?

Well, part of it is we saw incredible growth this year. I don't think we increased it by much. Jason, do you remember what it was last year?

Yes. I think we've taken it up by roughly $100 million.

Yes. So we saw incredible growth in DFS this year. We did not, just like with our other assumptions of the overall market, assume that the back half of this year will continue at that rate. But given how many new customers we were able to acquire on DFS, that made sense to us. The other thing is in the initial days of New Jersey, we saw meaningful cannibalization. We've actually seen that subside. A lot of customers have come back and started playing more DFS even if they do continue to use Sportsbook. So that's something else that's been a bit of a change since last year.

Yes. I would just reiterate that point. A year ago, when we were looking at the cannibalization of DFS when OSB launched, DFS was still growthful, but now that we have more data, we really have further conviction that DFS has a unique value proposition. Certainly, a similar customer segment, but it really stands on its own. And you combine that with our continued investment in that product, we feel better about the outlook.

It looks like you took down your forecast for the SBTech business compared to last year. Can you provide any comment on that?

Well, this is always an evolving thing. And what we've seen is with a much larger than what we previously thought TAM opportunity on the B2C side, we just believe that the place that we will likely be directing investment is more on the B2C side. It doesn't mean that we don't think we'll have a nice B2B business. This is still growth over where we are right now. We just think from a relative investment standpoint, it's hard to say. We think the TAM is bigger here. And we're going to invest more and not have it come at somewhat of the expense of B2B. So that's really the rationale behind it. We didn't want to count on being able to have hyper-growth on B2C side and have really strong growth on the B2B side. And we thought it made sense to be a bit more cautious about what we should expect from B2B.

Is there any additional color that you can provide on the buckets of SG&A and your long-term projections? In other words, what would be the relative growth rates, for example, of SG&A versus product and technology and G&A?

Well, I'll let JP comment a little bit more on this, but product and technology is the biggest area of investment on SG&A. So that's a place we feel like we will win and continue to have our strongest advantage in long term. Obviously, there's other things. You see healthy marketing spend. We took that up a little bit as well. But really where we think the heart and soul of ultimately retaining and growing our customer base and growing revenues will be from the product and technology investments. Jason, do you want to add anything to that?

Yes, I would just add to something that you mentioned, which is, this is not variable cost. We have a very good pulse -- finger on the pulse of what's variable, and this is really just driven by choices that we can make in spend, primarily in product and tech.

Could the synergies in your long-term EBITDA bridge be larger than $200 million?

Well, what we've assumed here is it's kind of a straight calculation off of the size of the online sports betting revenue projection as well as what we believe the margins that we will be -- I probably misspoke on a previous call when I said most of that goes to the bottom line -- sorry, all of that goes to the bottom line. Most of it does. But there is some cost of operating our own proprietary technology and trading platform. So this is actually the net of that. This is both the savings on the revenue share side minus the cost of actually operating it ourselves. Could it be larger? I mean there's always a chance that you can do things with more efficiency. There's also always a chance that the OSB number is actually larger, which would, of course, drive up the synergy size. I think given this level of OSB market size though and given the assumptions we made around where our piece of the revenue pie will be, I don't think there's a ton of upside there.

How should we think about your EBITDA losses potentially in 2021 versus 2020? What about the seasonality of EBITDA this year on a quarterly basis?

Well, as we've said in the past, we're a very data-driven company. And most of the investment that we're making in -- or all of, excuse me, the investments that we're making in marketing is driven by what the data is telling us. So as I noted this year -- or this past year, I should say, we saw incredibly efficient performance. Our CAC was lower than what we expected. So we just kept investing deeper, and that got better in the back half of the year as more sports returned -- more traditional sports, I should say, returned from the COVID hiatus. So that's really what caused it. As far as how it will look in future years, I think, generally, you'll always see Q3 and Q4 be a bigger area of EBITDA loss for us at least in this growth phase as we spend more in marketing. And obviously, Q3 even more substantial than Q4 on most years. So with the caveat that we'll always direct spend based on what the data is saying and, therefore, there's always some natural variance just based on how things are performing, I think the general trend will be Q3 is going to be -- in these growth years where we are operating at a loss, Q3 will be the greater losses, Q4 next and Q1 probably following that. Did I get that right, Jason?

Yes. I think that's exactly right. And I would just reiterate that the complexion of the different states where we are live and the different maturity of those states is really the underlying driver of our adjusted EBITDA by quarter. As we show the unit profitability over time, the more states that you have pushing into that second, third or fourth year, offset by whatever legalization scenario unfolds over the coming years, the balance of those 2 is driving the EBITDA for the entire enterprise.

That's a great point. So to sort of give an example, if all of a sudden California went live in Q1 that would cause us to ramp up investment and that would have nothing to do with sort of what steady state trends are, that would just be a huge state launched in a particular time of year, and we see great opportunity to invest in acquiring customers. Also, there are things even within states. So for example, this year, Illinois issued an executive order that suspended the in-person registration requirement that kept getting extended, and we just kept seeing better and better performance in Illinois. I believe Illinois is actually our largest online sports betting state now. So that also caused us to keep investing. We had assumed initially that it would not get extended because we didn't want to count on something that wasn't within our control to make our top line numbers. But once it got extended and we saw such a tremendous performance on the customer acquisition side in Illinois, we just continued to invest there.

We've gotten a few more questions in during the Q&A session, Jason. Of the large states from an OSB perspective, are you assuming that the 65% legalization estimate for OSB includes California, Texas, Florida and/or New York?

We haven't specified particular states. We've just said 65%. I think to get to 65%, you probably have to assume some subset of larger states does get included. It will be pretty hard without any of the top 4 or 5 states. I think -- so California is the biggest by population in Texas and Florida than New York. I believe Illinois is fifth, but it might be Pennsylvania. So either way, we have the fifth and sixth already. So the top 4 do constitute quite a bit. I think it's like roughly 30% of population or somewhere thereabouts, maybe -- yes, it's about right. So could you get to 65% without them? Yes. Is it likely that you're going to need at least 1 or 2 of them? Probably more likely only 1 or 2 of them, but we haven't really predicted which ones.

What impact do you expect from Android users being able to download your Sportsbook and iGaming apps directly from the Google Play Store?

Well, that should be a huge positive for us. We've done our best through side-loading to try to get people to download the app, but it's not a great customer experience by any means. It's clunky. There's weird messages that you get when that happens. And it also doesn't allow us to advertise in the Google Play Store being that we don't have an app there. So for all those reasons, we think that should have a very positive impact on driving both customer acquisition as well as adoption of our app by existing Android users.

What do the demographics look like on your stand-alone casino app? Is the user base shifting to a more casino-first customer?

No, not really. I mean we still -- I mean a little bit yes, but we still continue to get the vast majority of our iGaming customers through cross-sell from Sportsbook. I actually think that's an opportunity. We're very much, as I've said, data-driven, and we're testing our way into the iGaming side. And I think we've learned a lot over the last few months, but it's still a very new product. We only launched it about 8 months ago, so -- maybe 9 months ago. So we're still learning a lot. And really, the focus during that heavy sports -- return to sports time of year in the back half of last year coming through Q1 has been on acquiring on to sports and crossing over into iGaming in states that allow it. So I see that as a big opportunity. And we're exploring different ways that we can expand our reach within some of the demos that we're not penetrating as well as we should be right now.

Do you have a sense for how many apps your players use and/or what the wallet share would be for your typical customer?

From what we've seen, they're not using a ton of apps. They do, and this is something I've seen people on average have X number of apps on their phone in the U.K. That probably will be the case over the long term here. But I think one thing that will be quite different is you won't necessarily have as many players in the market as you do in a country like the U.K. Also, even though in the U.K., people have, I think, it's 2.9 apps on their phone. They still concentrate the majority of their play with 1 app. So really, it's a little bit different to say you have multiple apps on your phone, and you're actually actively using multiple apps. So from everything we've seen, we believe wallet share will be concentrated to a preferred brand, particularly on the sports side, but I think on the iGaming side, it might be a little bit more fragmented. But hard to say. It's obviously still very early days and we're studying this and watching it and learning more by the day.

How do you think about M&A? With SBTech, do you have a full product suite or other areas you may look to do some bolt-ons?

I think bolt-on is a good way of describing one of the categories we're looking at. I think international expansion is another area that might be of interest. I think media is another area that might be of interest. So those are all categories that we're looking at. Capabilities for some small tuck-ins are also things we're looking at. Right now, we feel like there's nothing we need. The one thing we really felt we needed was our own proprietary sports betting platform that we got with the business combination with SBTech last year and Diamond Eagle. So we feel like in the need category, we're all set. A lot of what remains is kind of what's interesting out there that might be an opportunity. There's a lot of build versus buy analysis. So it's more opportunistic than anything else. And if we see good opportunities emerge, we're going to go after them. But we're also going to stay very disciplined and only do deals if they're the right ones because we really don't feel like we need anything at this point.

It looks like SBTech's revenue fell in 2020. Is it fair to say that SBTech's primary focus will be on powering DraftKings in the future or external clients?

Well, I certainly think it's fair to say that the reason we bought them was to power DraftKings and to allow us to innovate on our own product. And that's something that I don't think we've been shy about sharing. That said, I think as we do innovate on our own product, it will be attractive for the right relationships and the right places around the world. There's a couple of reasons why it fell. The primary one was we didn't have sports for a few months of the year. And I think SBTech, like everybody else, certainly suffered for that. DraftKings' core revenues would have been higher if we had a full calendar of sports -- DraftKings' B2C, I should say, revenues would have been higher if we had a full calendar of sports. So our B2B revenues were no different. And then also, there were some relationships that made sense to transition from as we sort of normalized what that B2B business looks like. So I think that was something we expected, and it's really, like you said, the focus and the reason for buying it, while we certainly think will have a very attractive, high-margin B2B business. And that's something that we're excited about. The primary reason is to power DraftKings' B2C products.

Can you provide any color on the mix of your customers in terms of VIPs versus casual? For example, how much of your revenue do VIPs account for?

Well, we are not disclosing any exact percentages of revenue. That said, I think we probably view ourselves as having a larger base of casual users than most competition in the market given how mainstream our brand is. Like every business, whether it's gaming or nongaming, we do have VIP customers. We do see them as a very important and meaningful part of our business. So we think we're actually playing very well in both segments, the VIP segment and casual segment. But if I had to guess, I would say, relative to most competition, we're more casual heavy because we have such a broad and large customer base.

Can you talk about the timing and process around renegotiating revenue share agreements with skin partners?

Each contract is different. Some of them are very long term. Some of them are shorter term. Some of them have things like opt-outs in them. I think in general, we feel like our position will continue to improve. We've really established ourselves as a major player that's here to stay. So I think as more consolidation happens in the market of revenue, not necessarily M&A-driven, but just more and more consolidation happens, as you saw on that initial launch of Michigan, there's going to be a select group of partners that are key relationships for any skin or any license holder to have. And I think that, that will have a positive impact on our ability to negotiate really good deals. I also think you're seeing more and more states do direct licensing. We saw that in Virginia. That's something that we think -- we saw in Tennessee. That's something that we think also might end up being a little bit more than we thought. So we'll have to see how it plays out, but certainly we think our position will continue to improve.

Are there any other states besides New Jersey that came close to contribution profitability exiting 2020? If not, do you expect your older, more mature states like West Virginia or Indiana to be positive in 2021?

Do you want to speak to that, Jason?

Yes. I would just reiterate that we underwrite each new state entry on that cohort-driven 2- to 3-year payback, which results in unit economics turning positive. I would add that to the extent that a state is only a 2-product state, DFS and OSB, we adjust the LTVs accordingly, and that impacts how we think about our CAC within each of those units.

Yes. And so the only other state that's had sports betting 2 years plus has been West Virginia. I actually don't think it's even quite 2 years plus yet, so I may have misspoken on that. It's about 1.5 years. So we'll consider sometime in the next few quarters having an update on West Virginia. Indiana this fall will have hit the 2-year mark. So those will be some things we'll talk about. But as Jason said, we actually haven't seen any states that are even in that window that we've predicted 2 to 3 years to reach profit -- contribution profitability in a state.

Do you expect advertising to ever be a significant contributor to revenue? Is this a business that you can grow in the future?

We think it will be something that we do. Right now, we do have advertising on some of our content on our free games. We have premium advertisers, such as Netflix, Amazon, Budweiser, Pepsi, others that have been seeing great results. We have chosen and will continue to choose not to on our paid sports betting product, on our paid DFS app to take ads. We do have a little bit on our website, but that's not where most of the customers are engaging right now. So yes, we will probably continue to do that. But I think if it does become more meaningful, it will be because we make a more significant foray into the content space. And I think that's really, if anywhere, where we will go. We actually are seeing more demand from advertisers than we have inventory right now. We've had to turn advertising dollars down, so it could be a bigger line item if we are willing to actually put ads into our paid products, which outside of the website for DFS we have not been and do not intend to. So I think it will really be, can we grow inventory through more free-to-play, can we grow inventory through a deeper content investment? And if so, I think you'll see an increase in ad revenues.

Is DraftKings open to utilizing cryptocurrencies?

It's something we've certainly explored. We know that it's popular with many of our customers. I think that being in a regulated industry, there obviously has to be a conversation with regulators around whether they're comfortable with that. And right now they're not. So we haven't really been able to move in that direction. But it's something we're keeping a close eye on. And I think should the opportunity arise, we would have to consider it strongly.

Why haven't we seen more of the illegal OSB market migrate to legal?

I think it's just stickiness. This comes back to the point we made earlier that early mover matters. People get comfortable with a particular product, a brand, a UI, and they just don't want to change. And I think that, that's a good sign for the longevity of our customer. Obviously, you would think that most people would prefer going on to a legal app, but the reality is that the reason there's so many people that are doing it in the illegal market now is they were already comfortable with it. So I think that, that's something that outside of seeing significant enforcement action taking will just take time. And again, I think it's a positive. It shows that it's such a sticky experience that even people using an illegal provider are inclined to stick with what they are doing currently than immediately jump ship to the newest and latest thing.

And I would add. I think the acceleration from -- of those players onto the regulated platforms is going to be partially driven by our own innovation. As we bring offerings to our regulated app that illegal offerings cannot provide, I think that, that will act as a catalyst to bring some people to the regulated offerings.

Great point.

How do you think fans returning in full stadiums will impact your business and your marketing expense?

Well, that's an interesting question. I think that more people going to games means more engagement with sports, which should be a good thing. That said, we've been saying the stay-at-home nature of the pandemic has been a positive benefit for us. I think the larger impact is going to be if people are returning to stadiums, as they are also returning to other activities like travel and leisure, dining out, those are the big categories of spend that we think some portion of has shifted in the direction of online offerings such as DraftKings. So I think that's probably more, meaning, fans in stands is more of a proxy for other sorts of behaviors, [ in itself ] a direct impact. I think in and of itself, it's probably neutral plus or minus slightly one way or another, but not really a significant thing.

Are you concerned that legislation could compromise your TAM estimates, whether that be a higher tax rate in a newly legalized state or potentially single operator models in other states?

Well, I think if legislation doesn't happen in the right way, it certainly could impact the TAM. Higher tax rates, for example, mean that it's harder for us to compete with the illegal market. Even if we have more innovative products, if we have to give worse odds or we can't invest as much because we're having a bigger piece taken out in taxes, that's going to make it harder to compete with the illegal market, and that could ultimately -- I guess the TAM will still be potentially larger. It will just be more of it staying and coming on to the illegal market. So I think it's really important that legislation and regulation happens in the right way. And if it does, we think that this is a huge TAM, but that's certainly one of the things that we're keeping an eye on.

How should we think about incremental margins should you exceed the $5.4 billion in revenue assumed in your long-term EBITDA margin bridge? In other words, what does EBITDA look like if you were at the top end or above that revenue number?

Well, I think really, it's discretionary, as we talked about earlier. It's how much do we want to roll back into investment in the product and technology. And that's something that really will be driven by what we think future upside is. If we think the market is reaching a true maturity level, this is sort of like pseudo-maturity, where this still doesn't have 70% of the U.S. for iGaming, 35% of the U.S. for online sports betting, 36% of Canada for online sports betting, no international beyond Canada. So we've kind of assumed, in this case, there's still growth and upside here. Once we reach true maturity, then we're going to start taking more margin just like any other business at that stage of the life cycle. So this is kind of that in-between place. And for that reason, I think if we were to go above this, it would really be driven by do we see big future growth opportunity? And if not, we would start to take more profit.

Are there better economics for casual players or for your VIPs?

It really -- it varies. The -- I assume you're talking about unit economics. So actually, let me reframe that. I was going to say VIPs obviously generate more revenue. But from a unit economic standpoint, the casual player is a little bit better. They aren't as, I think, savvy in terms of shopping around for things like odds and promotions. VIPs are a very small percentage of our players though. So most customers really don't do that. And it also depends on the VIP. Some VIPs are just really not as much of odd shoppers or anything like that either. So it kind of depends, but overall, the casual customer has a little bit better unit economics.

Jason, our last question today before wrapping up the Q&A session is, how important is streaming for betting for long-term player engagement, monetization and retention?

I think the most important thing is that people can watch it somewhere. We've seen great impact of streaming around having streaming integrated for things that people can't watch in the U.S., when we, for example, rolled out streaming on some international soccer or on ping pong. Those are examples where we couldn't actually -- people couldn't find places to watch it. I think as long as people can watch it, it's going to be -- that's going to be the predominant factor. One other thing I'd add, though, is that -- and this is a big opportunity, I think. Right now due to latency in the broadcast, there's actually a disconnect where the data on the smart device for DraftKings updates faster than the action on screen, which isn't a great customer experience. So I think, as you see, leagues consider lower latency products and they may consider doing that in an integrated fashion through us. We certainly hope so. That could actually be a big opportunity, simply from improving the customer experience. But I think the important thing is that you can watch it somewhere, that it's synced up between the data on the phone and the data -- and the action on the screen. And as long as that's the case, it could be directly through us. It could be through partners that are doing streaming, really doesn't matter. I think it's just important that people have access to a good experience.

That's all the time we have today for Q&A. We want to thank everyone for spending some time with us this morning. We certainly look forward to doing this in person next time. And hope you have a great rest of your day.

Thank you.

Thanks, everyone.