DraftKings Inc. Q3 FY2026 earnings call

• Predictions Growth & Investment: DraftKings significantly increased its adjusted EBITDA investment in predictions to $650 million–$700 million for FY2026, driven by strong early returns and a projected ~20-month payback period for the 2026 cohort.
• Product Performance: The predictions offering became the number three exchange by volume, with annualized consumer volume reaching $10.1 billion in October (up nearly 3x from July). Retention and engagement levels are comparable to sportsbook benchmarks.
• Core Business Strength: Sportsbook hold rate eclipsed 11%, and parlay mix increased 300 basis points year-over-year. Handle share improved for the fourth consecutive quarter. iGaming saw a 76% year-over-year increase in customer acquisition, fueled by revamped offerings and exclusive content.
• Operational Efficiency: Adjusted operating expense declined year-over-year (excluding predictions). Management highlighted significant fixed cost efficiencies and AI-driven optimizations that allowed product expansion without major headcount increases.
• Strategic Positioning: The company maintains a strong cash position of approximately $1.1 billion. They view the predictions business as a strategic moat, noting that even if sports contracts end in July 2028, the 2026 cohort would be fully paid back via cross-sell into non-sports, lottery, and pick-six products.

Total revenue increased 16% year-over-year to $1.33 billion in Q3 2026. Sportsbook net revenue grew 36% year-over-year on 12% handle growth, with net revenue margin expanding approximately 120 basis points to 6.4%. iGaming gross revenue grew 7% year-over-year, while net revenue grew 2% due to heavy promotional investment for new customer acquisition. Adjusted operating expenses excluding predictions declined year-over-year. Predictions revenue was immaterial in Q3 2026 as new customer promotions offset gross revenue.

• FY2026 Revenue: Revised downward to $6.35 billion–$6.55 billion (previously $6.5 billion–$6.9 billion), primarily due to increased investments in predictions.
• FY2026 Adjusted EBITDA: Revised downward to $175 million–$275 million (previously $700 million–$900 million). Core business adjusted EBITDA is expected to be $875 million–$925 million.
• FY2026 Predictions Investment: Increased to $650 million–$700 million, with Q4 investment estimated at $175 million–$225 million.
• FY2027 Revenue: Introduced guidance of $7.35 billion–$7.75 billion, representing 17% growth at the midpoint.
• FY2027 Adjusted EBITDA: Guidance set at $800 million–$1 billion. Core business adjusted EBITDA is expected to reach $1.15 billion–$1.25 billion ($1.2 billion midpoint).
• FY2027 Predictions: Revenue expected to be $650 million–$750 million, with adjusted EBITDA investment stepping down to $250 million–$350 million ($300 million midpoint).

• Regulatory Uncertainty: A potential Supreme Court ruling could shut down sports event contracts in July 2028. Management models this 'worst-case' scenario but notes the 2026 cohort would still pay back within four years due to cross-sell opportunities.
• State-Level Regulatory Actions: Continued monitoring of state regulations, including recent exits from markets like Utah. CFTC guidance on geographic operations is being managed but not viewed as an immediate threat.
• Customer Acquisition Costs: High initial spend in predictions states to capture market share; however, management believes paybacks are justified by data showing strong retention and engagement.
• Outcome Dependency: Modestly negative sports outcomes impacted Q3 results, reducing core adjusted EBITDA expectations slightly.

Q: Analysts asked about the justification for increasing predictions spend given the risk of sports contracts ending in 2028 and how LTVs are modeled under binary regulatory outcomes. / A: Management explained that even if sports contracts end in July 2028, the 2026 cohort would pay back in ~20 months, and the 2027 cohort in ≤4 years. This is driven by strong cross-sell into non-sports, lottery, and pick-six products. They modeled both status quo and worst-case scenarios to ensure acceptable paybacks in either case.

Q: An analyst questioned whether rising marketing costs were diluting core margins and if competition was driving up acquisition costs compared to prior quarters. / A: CEO Jason Robins clarified that the high spend is targeted at new state launches for predictions, where early-day paybacks are historically best. He noted that despite higher absolute spend, the efficiency per acquired user remains strong, and core marketing spend is actually decreasing in FY2027 as states mature.

Q: Questions arose regarding the 'halo effect' of predictions marketing on the core sportsbook business and whether local vs. national spend impacts core metrics. / A: Management stated that the halo effect is minimal because most incremental predictions spend is local. However, there is significant cross-sell benefit, with many predictions customers also engaging in other verticals. Core performance remains strong, maintaining #1 or #2 market share despite the new investment.

Q: Analysts sought clarity on the iGaming strategy, specifically why customer acquisition surged 76% while net revenue growth lagged at 2%, and future return expectations. / A: CFO Alan Ellingson and CEO Jason Robins explained that the surge is due to a deliberate multi-quarter plan to accelerate iGaming via revamped products and aggressive new customer promotions. While net revenue is currently depressed by these promos, underlying engagement is strong (Oct active days +24%), and this investment is expected to drive accelerated revenue growth in FY2027.

Q: An analyst asked about the long-term 2028 outlook, specifically if the 'EBITDA tailwind' comes from revenue growth or reduced investment. / A: Management indicated that 2028 will be a harvest phase. Significant gross profit (>$1B) will flow from the 2026/2027 cohorts. While some investment will continue to maintain market position, the primary driver of the tailwind is the maturation of previous cohorts and optimized acquisition spend, making predictions a net positive contributor to corporate EBITDA.