DraftKings is planning to add a first-of-its-kind winning surcharge to users in high-tax states as part of the company’s plan to limit its exposure to state legislatures that may look to capture more of the money wagered within their borders.
The announcement came alongside the release of the gambling company’s second quarter earnings. DraftKings reported revenue of $1.1 billion in revenue, in line with consensus estimates, along with earnings per share of $0.12, which beat estimates of a $0.01 loss. This was the company’s first-ever profitable quarter as a public company.
Executives announced the “tax surcharge” in a letter to shareholders. For a few years, New York (51%) and Pennsylvania (36%) were the only two states with tax rates on revenue that exceeded 20%. But Illinois recently raised its rate to as high as 40%, and others are discussing the same. In response, sportsbooks like DraftKings have publicly expressed doubts about whether they can generate profits while paying those taxes.
DraftKings’ solution, the letter says, is a “gaming tax surcharge on a customer’s net winnings” in any state with a rate over 20% and multiple operators. That’s currently New York, Pennsylvania, Vermont and Illinois. The fee, which will vary by state and is not specifically defined in the letter, will only apply to winning bets, and will be treated as a separate transaction when paying out winnings. The surcharge will take effect on Jan. 1.
“The surcharge will be fairly nominal to the customer,” the shareholder letter says. “In Illinois, for example, it will amount to a low- to mid-single digit percentage of the Net Winnings a customer would previously have received, but we believe additional upside potential exists for DraftKings’ adjusted EBITDA in 2025 and beyond from this gaming tax surcharge.”
As it typically does each quarter, DraftKings slightly raised its guidance for 2024 full-year revenue, and lowered its adjusted EBITDA guidance, likely due in part to the raised tax environment and the company’s recent acquisition of Jackpocket, an online lottery app. It also announced that its board approved a $1 billion stock repurchase plan that will likely take tens of millions of shares out of the market and buoy the stock price. Overall, the stock (Nasdaq: DKNG) stayed flat in after-hours trading.
The company’s monthly average users for the quarter were 3.1 million, up 48% from 2023 (2.1 million) and more than double the number from 2022 (1.5 million). The average revenue per monthly user dropped to $117, down 15% from 2023 ($137) and up 14% from 2022 ($103).
The company’s marketing spend also jumped slightly. After 10 straight quarters of increased “sales and marketing” costs, DraftKings had three straight quarters of decreased spending. For the second quarter, the company reported $215 million in sales and marketing in the second quarter, up from $207.5 million in 2023. Those costs are closely watched by investors, because they play a big role in determining how expensive it is to acquire new customers.
The news comes amid a strong run for DraftKings stock, which is up about 14% in the past 12 months. In addition to growing its sports betting and iGaming businesses, the company closed its $750 million acquisition of Jackpocket in the second quarter. It’s also contracting in other ways. Earlier this week the company told users of its Reignmakers NFT product that it was shuttering the platform, effective immediately, “due to recent legal developments.” There is a class action suit that claims the digital goods were unregistered securities. The move appears to have had little impact on the stock.
