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The power of mobile betting DraftKings is planning a consumer tax in states with the highest tax rates on sports betting as the company looks to boost its profits.
The company announced Thursday that starting next year it will impose a surcharge on winning bets in states with multiple betting operators and where the tax rate is above 20%. These include Illinois, New York, Pennsylvania and Vermont.
“We decided that the best course of action is to do what every other industry actually does. [does] —Whether it's hotels, taxis, anything else you buy usually has some sort of tax on it,” DraftKings CEO and co-founder Jason Robins told CNBC.
The announcement came as the sportsbook operator released its second-quarter earnings, which marked the company’s first profitable quarter as a public company. DraftKings reported revenue of $1.1 billion, roughly in line with consensus estimates, according to LSEG.
Fears of tax increases on gambling pressured shares of DraftKings and other betting companies such as FanDuel In May, Illinois passed a tax increase on sports betting revenue. The variable tax rates impose 40% levies on companies with the highest adjusted gross revenue. New York and New Hampshire maintain 51% tax rates for sports betting companies.
In a letter to shareholders sent Thursday, Robins said the new surcharge will be nominal to the customer. In Illinois, for example, it will amount to a low- to mid-single-digit percentage of net profits.
“If you were to bet $10 to win $20, you'd pay about 30 cents,” Robins said, citing an example.
An illustration of the DraftKings app, which features a new per-play surcharge.
DraftKings
DraftKings is believed to be the first U.S. operator to impose a tax on gamblers' winnings. Robins said he has given it a lot of thought and hopes it will make states think twice about levying the tax rate.
“I think if states start to realize that above a certain level we can't invest in our product and customer experience as much as we should… that might make them think differently about it,” he added.
He's also considering customer response. “We're not going to hide it,” Robins said. “Obviously, we could see some customers leaving and there's gambling activity from players, if they don't like it.”
Robins says DraftKings is not including the new tax in its guidance.
The company raised its revenue guidance to a range of $5.05 billion to $5.25 billion, up from a previous forecast of $4.8 billion to $5 billion. The updated guidance equates to year-over-year growth of 38% to 43%.
But the sports betting giant lowered its 2024 adjusted EBITDA estimate to between $340 million and $420 million, down from its previous estimate of $460 million to $540 million.
The company reported a profit during the second quarter for the first time, posting net income for the three-month period ended June 30 of $63.8 million, or 10 cents per share, compared with a net loss of $77.3 million, or 17 cents per share, a year earlier.
Analysts polled by LSEG had expected a loss per share of 1 cent for the period.
Revenue rose to $1.1 billion, up 26% from $874.9 million a year earlier. The company said the revenue increase was primarily due to continued healthy customer engagement, expansion into new jurisdictions and the acquisition of lottery app Jackpocket.
“The outperformance we're seeing with customer acquisition, the Washington DC launch, our expectation that Jackpocket will generate positive EBITDA next year, as well as underlying trends with our existing customers and our performance on the handle side, should all offset the Illinois tax increase next year,” Robins said on the company's earnings call. “So even if we don't get any benefit from the tariff, we'll still see $900 million to $1 billion in adjusted EBITDA next year.”
Currently, more than 30 states allow some form of sports betting, and many of them allow mobile and online betting. DraftKings is available with mobile sports betting in 25 states and Washington, DC. The company’s iGaming division is available in five states.
The company said that so far this year, 10 more jurisdictions have introduced legislation to legalize mobile sports betting or have introduced a bill that may result in a referendum on mobile sports betting during the next election.
DraftKings also announced its first share buyback program worth $1 billion. The company's market capitalization is about $14 billion.
