DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

All right, everyone. We will break from the lunch break here and just keep things rolling. Do believe this is going to be our best attended session likely of the day. That's because who I have sitting next to me. So it's my pleasure to welcome Jason Robins, Co-Founder and Chief Executive Officer of DraftKings. Jason welcome.

Thanks for having me.

So I think also in the audience or throughout the day, we have your new Chief Financial Officer, Alan Ellingson. So somebody is lucky enough to be staying next to him. No secret questions on the side, I guess. So what we would love to do, Jason, is just get a run-up, I mean, it couldn't possibly be a better day for us to be starting this. And I know you might be thinking a little differently. It depends on how much caffeine we have going on. But you still have a few hours ahead of you. And then tonight is obviously the kickoff of all things NFL. So maybe just give us a softball to start, how do you feel and what are you excited about going into football season tonight?

Well, I mean, this is the equivalent for us of like our holiday season. It's where we get a ton of new customers. We reactivate a lot of customers. Usually, it's a great time for us to really get a sense of like what the next year is going to look like. I almost wish we started our fiscal year at the beginning of NFL season. But it's definitely very exciting but also a very important and high stress in some ways, time for the company, too. We're shipping a lot of product. Over the last week, we basically shipped more product than we probably did in the last couple of months because so much of what we do is planning for what we want to launch right before NFL season at the beginning stages of NFL season. Obviously, we're very focused on making sure we compete and do well against our competition. So everyone is looking at the metrics, tracking how many new customers, how much handles coming in. We're getting moment-by-moment updates from the team on this. So there's a lot of excitement, but also a lot of like nervousness. I hope everything comes in better than we thought or at least as well as we thought. So overall, I'm feeling great, though. I think our product is in the best place it's ever been. Overall, I just think the company is in the best place we've ever been from a customer and competitive perspective. So feeling really good, but a lot of it is going to come down to execution as always. We have a great plan for this NFL season, and we just need to execute it.

All right. Well, give us a little insight into the war room. How often do you actually get updates on what's going on in terms of how frequently can you find out new customer adds, new FTDs, like what do you actually just tracking and seeing?

So I have stuff that I just pull up and look at for the basic metrics like how many new customers. That is pretty close to real time. It's refreshing every 30 seconds or so. So that I haven't been able to because I've been in meetings here, but the second I get out of here, I'll be checking it every 5 minutes for rest of the day. It's most like watching the stock ticker like it's a little addictive, but also really important to know how we're doing. And then the more nuanced stuff, I get to message updates from the team. So more of the color behind how they're feeling about how things are tracking in terms of the overall projections? How we feel like we're doing against the competitors, things like that. And that's just also throughout the day and a day like today. I'll probably get 50 text messages or more from people on the team telling me on the numbers we are tracking and even more on Sunday. So -- but it's fun. Like I said, this is kind of like the time of the year when everything goes up. So it's fun to watch the numbers right now.

So product was the place probably to start. So let's just keep going down that path a little bit. You talked about shipping product, what type of features, what things are going to be new to betters to the DraftKings audience for the fall? What are you most excited about for football?

So I think one of the big things that we're doing is launching BetVision, which is the low latency NFL feed, and that will be alongside an improved interface for the live betting experience for NFL. So that's a big area of focus. It's just driving live betting for us. And I think that having that BetVision integration will really help. There's also a lot of back-end stuff we've done to just improve the overall experience. We made significant upgrades to things like page load time, crash rate reductions. We've also increased our market uptime and availability on cash out and on all of our live markets to, I think, what is clearly now best in industry in terms of those metrics. Those are things that are harder for the customer in the immediate term to see, but really matter if you're going and trying to make a bet and it's not available or you want to cash out and it's not there for a particular market or it's not available. Those are things that, at worst, will cost you volume, but could potentially lead customers to go to other products, too. So over time, I think it matters, but it's not the same as being able to say, we launched this new feature or something like that. But I mentioned those things because our team puts a lot of focus on it. And I think everyone wants to talk about what's the consumer-facing feature, but so much of what makes the product so complex and makes these things so important. There's just so many moving parts. Think about live betting. Somebody was actually asking me earlier today, why don't you have more parlays and live betting that you prepack. We're working on it. But there's a tech constraint because you have to literally recalculate all the odds like every second to show a live bet like that's, different than a pre-match parlay. So there's all this complicated back-end technical stuff that goes into ultimately creating a smooth hustler experience. And I think a lot of our focus has been on those journeys and on making sure that when people want to have things to bet on, they're there, and we have the best availability in the industry.

So let's rewind a little bit, right? 2023 was an exceptional year for DraftKings.

Thank you.

I felt like, product-wise, you narrowed the gap, you hit exit velocity as it relates to profitability, flow-throughs accelerated. It kind of all these pieces came together. Momentum definitely felt like it continued through probably the tail end of football this year. And then in the second quarter, that -- maybe it was sport mix, maybe it was a little bit on the product road map, but some of those gains we were seeing at least relative to the market set, we're not quite the same for DraftKings. So walk us through, as we sit here today, do we think that some of that growth, some of that relative performance can reaccelerate? Is it going to be things like BetVision like some of these new products that are going to get us there? And maybe just in your own view, kind of how would you encapsulate the second quarter performance?

Yes. So I think here's how I would describe it. I think that some of it is just seasonality of the business. We typically do our best during NFL and also historically trailed our top competitor in NBA. So when NBA is kind of coming to the end and there's no NFL anymore, I think that shows up a little bit more in some of the numbers. And I think then there are a few things that we could have done better. I think that we took our eye off the ball a little bit on hold rate and parlay mix. We are focusing our early win and other types of things, which is good at driving activity, but we didn't have the right cocktail to drive up that parlay mix in the way that we are hoping to. So I think we've since course corrected that and are seeing excellent numbers to start off this, so far at least on the Thursday night game. Good numbers last week on college -- last weekend, excuse me. But I think in Q2, we probably could have done a little bit more there. And then there were some sport outcome stuff to happen in Q2 as well. So those are a number of things. But the big positive in Q2, which in some ways looks like a negative on the P&L but we're very excited about was the customer acquisition. We had over an 80% year-over-year increase in customer acquisition at something like a 40% or 50% lower cat, really exciting and should bode very well. [indiscernible] new customers usually are- because of the contra revenue coming from the new customer promos, usually are negative revenue and certainly negative EBITDA in the first several months that they're around. So when you have a big influx of new customers, it will suppress those numbers a little bit, but we look at it and say, okay, if I fast forward and look at what I expect these customers to do throughout the rest of the year and going into next year and beyond, that's a really good thing.

I'm going to dig in a little deeper in customer acquisition, but I want to stick with the product. You talked about the course correction a little bit. Can we just unpack that a little bit in terms of -- is this just the way in which bets were merchandised and kind of the right order? Was it the bet you to have? Like what is it?

No, its merchandising -- CRM and merchandising. We did -- some things that drove volume but were not accretive to hold that we have since adjusted.

And then I think big picture, we talked about the seasonality, but again, a year ago, it felt like it was actually the very same improvements in the non-football product that really drove this kind of like, wow, hey, DraftKings has figured something out. So how much of that is a focus for the company? Obviously, we're going to see the football results pretty real time, too, over the next calendar. So how much of that is a focus of yours? How much are you thinking about already starting to think about hedges?

How do we then segue in having really strong NBA traction and specific things. We've focused a lot on cross-sell, but probably less on how we just market and merchandise NBA more.

[indiscernible] Where you're at to the gap to the market leader narrow, if not entirely close that gap over time. Where do we sit on that today, confidence interval for kind of that mix? And what should -- again, outcomes are going to come and go, but what should investors know about mix during maybe football versus kind of non-football.

Yes. I mean I think what you're bringing up is the most obvious opportunity that I probably eat my words for saying this, but I think we feel almost a virtual certainty that we can achieve. Because we have a clear line of sight, and we know from looking at FanDuel what they've been able to get to. And we have a clear line of sight to achieve a pretty significant chunk of that just from the things that we know we need to do right now and feel good about executing on. So I do think that we have a lot of upside there, how quickly it will materialize. We're going to be careful with what we're promising. But I think we have a clear path and line of sight to what we need to do to get hold rate up by at least 100 or 200 basis points, if not more. And so that's point one. And then as far as sport mix and timing, definitely NFL is one of the sports that is very parlay-heavy, very player prop-heavy, so it's a great time to really drive that change embedding behavior amongst customers. Anytime you have a new sports season, it's sort of an opportunity to reset like behaviors and like the way that people are experiencing the product, because it's almost like a new NFL, I'll try that, right? It's like just a reason to sort of -- versus if you're in your rhythm already betting a certain way in NBA, it's harder to get that behavior changed mid-season. So we view these starts of seasons, including the start of NBA season as a really important time for us to get step function change and betting behavior in terms of parlays and other sorts of things. And then the other one, we're really going to be pushing more this year as live betting. So that we think will maybe take a little bit more time because we haven't quite tested as much around how to effectively market it. So I think a lot of the early stages will be just testing different things and figuring out what works. Whereas with the parlay mix stuff, we already have tested a lot to say we have a pretty good picture of what we can do. We just need to go out and roll it out during the most important time of the year.

We've kind of touched on it like a couple of different times here, but possibility of live or in-game parlay mix and then the live betting itself. All this leads back to an acquisition you just did, which is Simplebet. So congratulations on that.

Thank you.

But for those who aren't following it as closely, maybe can you give us a couple of the high points as to why this is the right acquisition and that balance of build versus buy? What does this probably speed up for DraftKings that you might have gotten otherwise, but maybe not as quickly?

So I think there's really two ways to look at it. So one was Simplebet was a vendor of ours that was providing micro markets, and still is. And they're also doing that for others in [indiscernible] company. And those we pay a revenue share on. So purely on the basis of the cost savings alone, this is a very attractive deal for us. But the upside is, can we really continue to enhance our live betting product to a point where we are heads and tails ahead of competition. I actually think currently live betting, we do have the best-in-class product. So I think we're starting from a position of being ahead here as opposed to when we are trying to catch up on same game parlay and all that stuff. So I think there's an opportunity to make it better, but also an opportunity this season to just lean in more to marketing and merchandising it more. We really have never focused on that. But we're sitting here saying, one, we think we actually have a competitive advantage in this area. We think our product is best-in-class. Two, we know from looking at the U.K. and other more mature markets that live betting could be a very meaningful growth lever and we know we're significantly as U.S. is significantly behind where the U.K. is now as an example in terms of how much revenue and how much volume is coming through live betting. So now it's a pretty good combo if we have high confidence, it's a growth driver and we're competitively advantaged in it. So we just need to lean into it a bit more, and I think you'll see us do that this NFL season.

Directionally, there's been numbers starting around maybe 40% to 50% of mix today in live betting versus overseas 70, 80 plus. Right ballpark kind of where we're at so it's still an attractive opportunity. And then...

And arguably, the sports because -- the U.K., I think something like 2/3 of betting comes on soccer. And obviously, in order to get to that high of live betting mix, you have to get a lot of soccer live betting. But I would argue that U.S. sports like NFL and baseball or even better built for live betting because there's so many more pauses during the game that give people betting opportunities.

Quick commercial break. But yes, we actually have a report where we analyze the downtime of American Sports, so we can quantify that for you. So let's go back to the customer acquisition environment you talked about. This was probably the biggest theme incrementally for investors that came out. You obviously raised your target, and it's this double-edged sword. On the one side, you mentioned, look, we had that many more employers to acquire. These are all going to new people who are betting with us consistently. There's an LTV attached to that. On the flip side, changes the J-curve math a little bit and there's an upfront investment in that. So what was just kind of different than you underwrote, let's thought going into the quarter? Like what changed? And then how is the expectation for that going to carry through, like the balance '24 -- asked about '25 separately?

Yes. So one, just on customer acquisition, as a total in the bridge we created of the old guide to the current, most of it wasn't that. Most of it was coming from Illinois increasing taxes, launching Washington, D.C. and Jackpocket. That said, there was, I think, about $20-ish million that came from that. And that was the net impact of the customer acquisition with also a lift on the retention and engagement side. So if you broke those apart, it would have been larger. So definitely a meaningful part of the story. But for us, I think it's a good thing. Obviously, there may be some investors out there that don't believe it or just don't care and aren't maybe thinking about it long term, who knows, and we can't control that. But what we can control is making good decisions that we think will drive future growth of the business. And so while on the one hand, yes, obviously, isn't something that we want to see having to take a guide down or anything like that. On the other hand, we have to do what we think is in the best long-term interest and what I think we need to do as a company and talk to the team of this just get a little bit more -- a little bit of art in it like get better at anticipating where some of these unexpected things that we might think of as actually good things are that -- and make sure we're building a little bit more cushion in. So that we understand if it happens that it's not going to have to cause us to reset. And that may happen at some point, but I would argue that if you do a good job of that, you should be able to always make good long-term decisions and continue to meet or exceed the numbers that you put out there. The other thing is that if you look at next year, we had enough incremental customer acquisition and engagement that we were seeing that offset the entire impact of the Illinois tax increase. So that was roughly $100 million. This is not a small number. So I mean, we view that as a positive message, but I don't know, maybe investors kind of are like, well, wait and see, it's hard to know, but we're pretty confident that we have great line of sight to being able to deliver on that.

So one of the questions that comes up a lot is for at this stage of the game, we're mostly in existing states, obviously, there's North Carolina. There's Vermont and few other places. But for the most part, we're mostly in existing states to see this level of new players. There's been this kind of natural balance between, but are these the highest quality players. So you talked about, obviously, your CPAs aren't the same either, but how is that formula working today? And are these -- I mean, these kind of theoretically have to be lower LTV customers. So not [indiscernible] and why not? Like why not at this stage, has that customer not been discovered?

Well, there's two things going on. One, the new states you mentioned greatly outperformed. So those are all their own category. But then -- which is what I think you're referencing the outperformance in all the rest of the states that were more mature. What we typically have seen is that with a pretty good degree of accuracy and precision and like the first interaction and with a really high degree of accuracy of precision after the first week, we can accurately forecast a cohort that's how we've been able to forecast the business. We do everything in a cohort level. So we are monitoring this stuff real time, and we have seen everything pointing towards these are the same or better quality as any customers we've ever been getting. Now what we've also seen in other states historically, which I think is the reasoning behind that is that, yes, in the first year or two, you definitely get a higher-quality customer, but then it kind of starts to assumed after 3-ish, 4-ish years and the quality sort of just levels out. And so I think that's sort of what we're seeing is that there are more casuals, but they're no different than the people we were getting 6 months earlier. It's just there's more of them. And yes, probably on a whole, they are certainly not as high quality as somebody we're getting in our first 6 months in North Carolina, but they're no worse quality than somebody we're getting in our third or fourth year in any other state.

And is there just any work survey data intelligence that gives you a sense of why they're coming on the platform now? Is this like a bit broad national awareness. I mean, early -- or first conversation, you mean our call, but I certainly do. National scale was this big tipping point. We're obviously there now, but it wasn't as obvious 4 years ago. Is it that -- what is it that's kind of -- is it comfort level and friends the social circles of it? Like what are your people telling you about who these people are that are coming in?

Yes, I think you just hit on the two most important things. There's general -- I'll start with the second. There's general momentum in the industry right now. People have more and more friends that are playing, more and more people are interested in trying it out. And then also, we are absolutely seeing the benefit of that national marketing and really started to kick in, I think around the start of last NFL season was when we were getting to a point where we said, okay, this is like pretty much roughly breakeven as each additional state has launched. Since then, it's just continued to be same dollars, bigger audience. And so what that then does is that has this sort of flywheel effect where our CACs go down. That brings our payback periods down, and we can invest a little bit deeper on top of that. It's still a really good ROI that meets our payback thresholds. And then also, like you said, I think it creates this halo of national awareness and just general momentum in the industry because people have been seeing these ads for longer and you go into NFL season and all of a sudden, maybe if you weren't a new state 3 years ago, you weren't seeing it. Now you've been seeing it for 2 years and state like North Carolina, just launched, maybe you jump in at a much -- I mean that's the big reason I think that we're seeing such faster penetration in new states as well.

And then going back to 2025 next year, you mentioned this $100 million in terms of this -- now these additional customers and -- helping you offset the vast majority of Illinois, if not all of it, in terms of a headwind. But overall, if there's one single pushback yet. I'm sure you feel at this as well. It's around sort of this kind of, let's call it, implied flow-through assumption for 2025, roll it 2024. What I'm really referring to is obviously that, that's expected to accelerate versus what you're actually seeing this year. Is that the right mental model? Or are we just off a little bit? Like walk us through the relationship between revenue growth and flow-through because maybe we're all just a little too financially overthinking this.

No, I don't think you are. It's -- the complication is where does the revenue growth come from. So when it's coming from pure handle increase, it's going to flow through at a lower rate and if it comes from hold increase and both of those flow through at a lower rate than if it comes from promotional increase -- or decrease, excuse me. So by the same token, if you have a period like we did in Q2 and like we are expecting to continue for the remainder of the year, where you have outperformance accelerating customer acquisition, you get the high negative flow-through of the incremental promo. So that's really when you unpack it, how to think about it. But if you look at it on like a state-by-state basis, what happens over time is promo comes down. we've been continuing to drive hold up and also marketing comes down. So all three of those levers are going to particularly the promo and marketing flow through at extraordinarily high rate marketing is 100% promos north of 90%. Hold is about 60%. Another thing I would mention is that we have quite a few states that are in the 2-, 3-plus year range that are already north of our long-term gross margin target. So we've seen in many states that, that exact story unfolds. But on a macro basis, if you have a quarter where you have really significant acquisition, it can swing the other way. But over time, it should certainly continue to trend in the way I've been describing.

And how much is the external environment, a factor here? And what I mean with that is there's obviously -- you're not operating in a -- I know a lot of your decisions are made based on your models, but the bottom line is it's still a broader competitive environment. and customers are able to shop across offers and across promotions and across apps. So with that in mind, if other competitors out there keep a reinvestment rate that's higher than what you might want in another world, how do you balance that? How do you kind of stay competitive within that framework?

Well, I think first, you have to break it down by new and existing customers. If you take existing customers and increase their investment rate by quite a bit, it's still going to be way, way below what the new customer reinvestment rate is. So no matter what as new customer mix continues to decline as a percentage of the total pie, you're going to see a decrease in promo rate. But coming back to your specific question, while you're right, we don't typically base decisions on that. I'm sure some factor and how people behave and ultimately coming back to if we're still making decisions on if this is ROI-positive, do it may affect that. We haven't typically really been able to tie it too much to that, if anything, I think that we've sort of felt like particularly on the customer acquisition side, the more marketing, more is happening in the overall industry, it actually benefits us, doesn't hurt us. But we haven't really seen much to say that the promo environment performance -- sorry, our promotional performance will increase or decrease based on what competitors are doing it. It tends to be way more, did this thing work to achieve the business metric we want. So I can't sit here and tell you that, that doesn't happen to some degree. It's just not something that we really typically have seen, and we don't have great quantitative evidence to suggest that we should be reacting competitively.

So the other big theme out of the second quarter, we've loaded to Illinois a little bit, was the tax surcharge IDN. I don't want to be this idea too much. But just I am interested that as an executive, this was an idea. You kind of floated it out there to the markets and sort of a creative and open-ended way, market kind of responded to any change. What did you kind of learn out of that? And what other angles might you have to kind of work on the idea of what I think the tax recharge was attempting to do, which is protect your -- some of your unit level economics, but balancing that with some of the forces that ultimately came in to make this particular proposal not work out.

Yes. I mean I think that there is something that maybe isn't exactly this that I think could be a solution. And the bottom line is, at some point, I do think that overall, there will be some -- I guess it depends on what happens in other states, but I don't think that in perpetuity, it will make sense for anybody to completely just eat any tax increase that happens anywhere. That said, clearly, this was something that our customers didn't -- they didn't like this type of solution. Our thinking behind it was, well, we can invest more in promo and even other things because we're going to be collecting more upfront, but we got feedback that people didn't like this particular solution. So we changed it. But there might be some other sort of solution ultimately that we pursue that it does get a more favorable response. And I think back to the original point you're making, we have to always, as a business, not be afraid to try things and throw things out there. I think the way that we did this was actually quite good because we should always do whatever we believe is the best in the long term -- in the best long-term interest in the business. So that's something we can't compromise on. At the same time, you have to be able to recognize that you can talk yourself into, "Oh, yes, we'll just make money on that later for a long time, and we've all seen that story, too." So you have to have some focus and discipline and understanding that can't just be an excuse to not make money and to not deliver some sort of reasonable flow-through. So we've really challenged our team to say our expectation is we do both. We think we should in 99% of cases, be able to do both without any sort of trade-off between the two, meaning drive growth and drive profitability. But where there is a trade-off such as this customer acquisition thing, we're going to do what we think is in the best long-term interest of the business. And we need to try to figure out how we anticipate those things that are investments that we should be making so that we don't have to change our guidance, but in absence of that, we still have to make the best long-term decision for the business. So it's really two things that I told my team. One is always make the best long-term decision for the business. Two, you still have to recognize that you need to focus some attention on both growth and profitability. And at 99% of the time, those things should be -- not only not in conflict, they should actually be complementary to each other, but just make sure when you have that 1%, 2% of the time where it's not, we're having a conversation about it and in the end philosophically, we should land on whatever is the best long-term interest. And then in terms of overall focus, you're asking a steering the ship, I think it's kind of -- it's a great question, and this is something I think about all the time, which is you can't have 50 messages out to your team at once. That doesn't tell them where to focus and prioritize. You have to really keep it simple and have 1, 2, maybe 3 messages tops out there. And at any point in time, that means you have to sort of shift the pendulum a little bit between how much emphasis you're putting on this particular thing versus this particular thing, and you always have to be tweaking and adjusting that for where you're at. So if I feel like in any moment, it is more important right now for us to say, let's go find the next 5% revenue growth. And if a little bit less of that than we want it drops to the bottom line, we still need to have a good chunk of it drops to bottom line, but if it's a little bit less. That is more important and a little bit less growth but more flow through, then you want that message out there. And it really has -- it's not just what's the environment, it's like looking at your own company and saying, do I feel like we've become a little too focused on A or B. And it's amazing how that happens, you hammer efficiency and profitability for a year. And at some point, people go too far on that. And you have to dial them back a little bit the other way, then you hammer growth for a while and people -- and so again, what we've tried to say is you can't look at those as two different things you have to do them together, but the truth of the matter is, if there is a trade-off, you have to always say, do the thing in the long term. And you also have to recognize that there will be -- they keep their people, and there's only so much you can sort of message to people at once and have them be able to really understand how you want them to behave and act.

So we've talked a lot about sports product, the competitive environment. Let's hit on gaming for a minute. This was -- has been -- look, broadly for the industry, I think it's been one of the biggest upside surprises to date, right? It just continues to clip along same-state 20% to 25% growth year in and year out, quarter in, quarter out. So based on share statistics, though, I think what we see is others have accelerated a bit more. Last year, I think was your big year here. What's kind of going on here? Is the environment in that piece of the business stable? And kind of how does GNOG fit into your bigger plants, Golden Nugget for the -- as a possible second brand for how this fits into your plans right now?

Well, you're right, iGaming has been such a great story. The only thing that could make it better is if we have more states, which certainly, I think, is being worked very hard on, and I have -- I think there's a ton of upside there. I mean, it's still almost 90% of the country, we don't offer iGaming too. But it's been a great story on the same-state basis. Even New Jersey, which is more than a decade into the industry now, it's still growing north of 20%, which is absolutely incredible. So really, really great story. We've also done very well. We have the #1 position in an iGaming industry. And we feel from a product perspective, we're the leader of the pack there too. So we think we're planning from a great position of strength. And really, like I said, we just want to get more states. And I think there's also so much to do on the product side, still there. There's just a lot of things that you can do to really enhance the experience, make it more interactive, make it feel more like you're in a casino, particularly with the live dealer type stuff. So a ton of opportunity there on the product side as well. And then -- sorry, what was the last part of your question?

Golden Nugget, we sit with that deal...

That's another one, very exciting. I mean Golden Nugget has been a great story for us. We migrated them onto our casino platform about a quarter or two ago. And ever since then, it's been like -- I mean, we had the theory, so it was good, but it's always nice to see when it actually plays out, literally, as soon as we migrated them, the growth started to go up and it hasn't slowed down. Again, it shows you how important product is it's so important, same brand, same marketing strategy, same everything and just improving the product. has been really a great story for them. So we're trying to figure out how do we lean even more into growing that brand. And also now that we have Jackpocket on board. How do we maybe take that 2-brand strategy and say, Can we get more juice out of having this third brand? And I think certainly, the early New Jersey results have been interesting, and that's on somebody else's product platform until we haven't migrated them over to our online casino platform. But you would think that lottery customers cross-sell pretty nicely with iGaming. So we think that could be an interesting vertical to grow out the Jackpocket brand around as well.

It is still largely a cross-sell narrative moving from OSB or even DFS, OSB into the iGaming vertical? Or are you finding a home, and this is where the Golden Nugget piece comes along for iGaming first customer because this is probably the one place where we are starting to see a little cross-kind of overlap for more of the traditional gaming industry. I think Caesars is starting to put up some interesting numbers. Because this is the area that really that customer looks a lot -- it looks and feels a lot more like the brick-and-mortar customer that many of us have studied for a long period of time on the analyst side. So are you seeing more of that iGaming first customer? And what portal do they come through? Or is it still that cross-sell?

It is still. So yes, absolutely. We have seen an increase in direct customer acquisition. Still, of course, most of it comes from cross-sell just due to the sheer magnitude of it. But the trend is certainly more and more coming from direct casino first or casino-only customers. Golden Nugget has definitely been a big part of that story, but we're also seeing it on DraftKings brand, too. We're seeing both probably a little disproportionately higher on Golden Nugget. But I think as DraftKings reputation for having a great casino product that's out there, more and more people, I think, are thinking of us as not just a sports brand and we're having more and more success acquiring directly into iGaming on both brands right now.

And then you alluded to Jackpocket a little bit, obviously, a sizable acquisition at $750 million. This -- it felt to us a lot like this was sort of the DFS strategy for iGaming in a way, just providing some of those -- that existing state -- the new states before you know the proclivities are going to be, you're ready for that customer and then if the states open up. But barring that because the legislative road map is not very clear, what makes Jackpocket work stand-alone and what kind of integrations look like in the journey along the way, excluding a big hit on a new state?

Yes. So one, I think the lottery market itself is a big market. And they are still so low penetration. I mean they are less than 1% of total ticket sales. So ton of room there. They just launched scratchers in a few states. We haven't ramped that up. I think growing about 25% of the states that we're in for draw-based games. We also have scratches. So that absolutely can ramp up, that is a higher frequency product, and there's also a ton of room to improve that product. Right now, it takes about 10, 15 minutes after you buy a scratcher to actually be able to do it. We need to get that down to 30, 60 seconds, something like that. So I think a ton of room there, more coming back to what you were saying on the cross-sell and synergy piece, you're absolutely right that our initial thinking when we looked at it was this is similar to DFS for iGaming, as we unpacked it a bit, we saw that there was also a pretty strong cross-sell potential into sports betting. So I don't think it's just a iGaming story. Obviously, it could be very valuable there, too. But I think the sports betting cross-sell will be material as well. And we have to get a little lucky on this one, but we're getting close to $1 billion Jackpocket. I think we're in like the mid-700s now. And if it goes another week or two without hitting it should get there. If that happened, that would be absolutely perfect timing because what we see is there's this huge inflection in customer acquisition that occurs once you get north of $1 billion. It's like all this -- every local news station is talking about it. And it just becomes like a viral thing you probably remember these moments, everyone runs out and gets ticket then, right? So to have that happen in the first week or two of NFL will be awesome timing because we'd be able to bring all these new customers on the platform at the absolute perfect time to be able to cross-sell them into something. So I'm very optimistic there, but we will know a lot more in the next week or two. We closed that deal in the middle of the seasonally slow sports period. So a lot of the -- we hit or exceeded all the cross-sell metrics that we thought. My team is telling me, cross-sell is the thing they probably feel has even more upside than what we thought amongst all the different metrics for Jackpocket. That said, we haven't gone into NFL yet. And so I think the next week or two, we'll really see if that's playing out in the way we think it is.

I grew up in North Carolina and when the Jackpocket -- the jackpots got big enough, they didn't have lottery in North Carolina, you had -- so everybody will drive -- one fraternity brother would drive to anyone to do, right? Yes, from Chapel Hill, somebody who drive the Virginia border and buy a bunch of tickets like everybody throw in a few [indiscernible] Yes.

I love it. You and MJ.

Not bad company -- so we love the remaining time, just a couple on the financial targets and goals. I want to go back to Back in the day, there was an original bridge. I know this is a wildly dated as to be the indeed of update, but we used to talk about things like gross margins kind of in the mid-50s for the business and then EBITDA margins in the low 30s. Can you help us just think about any kind of updates we need to do given some of the tax shifts Illinois and New York is a much bigger piece of the pie at a different tax rate than probably contemplated back then. What are the net effects? And are there other offsets that maybe we're missing things like what you do on the supply side with a simple bet or customer access down the line. The market access along the line things that could help keep that -- keep a lot of that bridge still in check?

Yes. I mean I think that -- so a couple of things I'd say. One, you're right that Illinois was not built in the tax increase. And New York mostly was, but New York also has, you're right, been a little bit outperforming or has outperformed a little bit relative to other states. So that mix has shifted a bit from what we originally thought. But that wouldn't change it much. It would really be if more new states -- or sorry, more existing states raise taxes and then newer states had much higher than average taxes. That said, I do think that at some point, and obviously, you talked about this earlier, the surcharge in play. But at some point, have to figure out a way to mitigate that if that's happening. So we feel one way or another, we're going to get to that margin target. Well, in the short term, maybe there'd be some things if there are more state tax increases that hold it back that we got to figure out how to plug possibly. But I think that coming up with if it's not the surcharge or something like that, that we can implement, I think, will help us get there. It could be less promo. There's multiple levers that we can pull. But our objective is to get to that gross margin or better. And I think that outside of state taxes, we feel really good about doing that. But that is obviously the wildcard. I will say that there are quite a few states that are already well north of that. There are, in some cases, only 2, 3 years old, in other cases older. So we have a high degree of confidence that we can get there over the long term. But Obviously, we need to make sure that we're not, we need to make some adjustments if we see additional state tax increases.

And maybe on that, if we've been having this conversation 3 months ago, the only thing we've probably been talking about or tax increases, given the timing and the magnitude of what that meant. I mean if we fast forward, obviously, the legislative calendars tend to be different in the fall than in the spring. But what's kind of your early kind of calendar look like? How concerned should investors be about that next phase, more proposals, hey, the industry didn't push back on Illinois the way that we would have thought. So therefore, why can't other states do this? What's kind of what the real road map because I think some of us who study the industry do well know that Illinois is also a special case on the other side, even a very volatile tax regime. They need the money in a very different way than other states. So it may not be the best market to draw conclusions from.

Well, I think you just nailed that you summarized like I'm personally because anytime you see something that isn't within your control entirely. It's going to have that material an impact on your business, like that's not a great feeling. So I'm obviously concerned about it, but I also have heard arguments on the other side that, hey, this is probably going to only be confined a handful of states, maybe there'll be a few more, but really, there's not a long list of candidates of seats that we think are highly likely to raise taxes. So we'll have to see. But I do think that it works itself out one way or another. As I was saying earlier, if it doesn't become more and more states doing it, then great. And if it does, then there's going to have to be an adjustment of some kind that we make. Maybe it won't be exactly the way we proposed doing it earlier because customers didn't react as well as we had hoped to that. But at the same time, you can't just ignore it. So I think it will work itself out one way or another, but that is something that may create some headline risk for the industry in the next year or so. And as far as our game plan, one thing that's nice about any moment like that is it lights fire under people and it gets you thinking differently about like what could we have done in terms of lobbying, in terms of how we're positioning policy to not have this happen? What did we do wrong? What could we have done better? And I think there's been some notable adjustments behind the scenes. We lobby together with several other companies, including FanDuel, BetMGM and Fanatics. And all of us got together and said, okay, like this didn't go away we thought, let's take a look at why. Let's figure out how we can do better next time. So I think our playbook for combating these types of things is going to be significantly better this coming legislative season. I will also say we had three proposals, and we're able to -- we only had one that ended up passing. So obviously, it's things that it was one at all and especially it was a big state, but we're not starting from a bad place where we had dozens of proposals and 5 of them got, I mean, we're talking about 3 total throughout 25 states we're operating in, plus D.C. now and only one of them actually passed. So that would be the counterpoint to my concern that it might be a bigger issue. But like I said, you'll have to sort of see how it plays out in one way or another, I think it resolves itself.

And last question with our remaining time would be let's talk about M&A. This comes up on virtually every call, but obviously, the business inflecting the free cash flow positive changes your opportunity set in terms of, I think, the way you can think about some of these. But on the flip side, we've done Jackpocket. We've done Simplebet. And now -- and I think Sports IQ was a small one that was tucked in there as well. So where does that take us? I mean little bit on the B2C, actually a decent amount of kind of B2B and some things you're doing on the technology front, where are you thinking about allocating those dollars? And particularly, what would check the box for DraftKings?

Yes. I mean I would say M&A is not explicitly a focus of ours. It's more what are the business things that we need to address. And what is the best way to do it. And in some cases, that might be M&A, in some cases, it wouldn't. Take, for example, Simplebet and Sports IQ. Those were deals where we said we absolutely could build this stuff, but here's how much it would cost us and here's how long it would take, here is the other things we couldn't do. And here's the money we could save from any third-party fees in the interim, and that's how we backed into what it's worth to us. Those types of analyses, I think we can do a pretty easy on that type of deal. I think something like Jackpocket is a little bit more of a swing. It was a well-informed swing. We did tons of diligence. We researched the market. We did blind match between customer bases to estimate, cross-sell and overlap rates. So we did a ton of homework to feel really good about it. And we are performing at or better than virtually all of the KPIs that we set out to with Jackpocket. So it looks early on, like that underwriting case is going to be a good one. But that's something that's probably less of a slam dunk. It requires more work because it's a new product, new thing to integrate. So we're going to be super selective about doing anything like that in the future, and it's also going to be based more on what our strategy is. So coming back to what I say earlier, if you think about it, what are you trying to solve and receiving as an example and as we're doing it. If at some point, we say, hey, we really want to expand internationally. Then I think the question is, okay, is M&A the right way to do it and what markets, whatever. But you don't look at it the other way around. You don't look at it is like, should we go buy somebody and then it's more what is the right strategy for us? What is the right area of focus for us? And then what are the different routes there? They'll buy other sorts of things that you can look at. And if M&A ends up being the right route, then I think that's a good use of capital, but it not always. And the last point I'll make on this is M&A takes work to integrate to get the deals done. So we're also mindful of every time we do something like that, there's a cost in that our people have to spend some of their time and some of their mind share on how I'm integrating this thing, how I am making sure we hit our underwriting case, all that sort of stuff. And that is definitely factored in how we think about it. And you're right, we've done a few of these recently. There is definitely some merit to saying, look, if the perfect thing came along, we'd look at it for sure, but it wouldn't be the worst thing in the world if we had a little break from M&A while we integrate and see if we're getting the benefits of these things. It sort of like [indiscernible] we waited a while before we just went Jackpocket. And we were already starting to see some of the validation of the second brand online casinos, who we were able to have that in our underwriting case, which is very helpful.

Last question, Chiefs or Ravens.

Well, the money is on the Ravens right now, so I'm going to be written for the Chiefs unless that changes between now and kick off. It's funny enough, the money is on the Chiefs to win the Super Bowl. So go figure on that one.

And a lot of us are just rooting for DraftKings.

Yes, exactly.

Appreciate it. Thanks everyone.