DraftKings Inc. (DKNG) Q3 2026 Earnings Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to the DraftKings third quarter 26 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. I will now hand the conference over to Matthew Rapaport, vice president of finance. Please go ahead.

Matthew Rappaport: Good morning, everyone, and thank you for joining us today. Certain statements we make during this call may constitute forward-looking statements that are subject to risks, uncertainties and other factors at this discussed further in our SEC filings, that could cause our actual results to differ materially from our historical results or forecast. We assume no responsibility to update forward-looking statements other than as required by law. During this call, management will also discuss certain non GAAP financial measures that we believe may be in evaluating DraftKings operating performance. These measures should not be considered in isolation or as a substitute for DraftKings' financial results prepared in accordance with GAAP. Reconciliations of these non GAAP measures to the most directly comparable GAAP measures are available in our earnings release, slide presentation and business update, which can be found on our website and in our quarterly report on Form Q filed with the SEC. Hosting the call today, we have Jason Robbins, Chief Executive Officer and cofounder of DraftKings. Who will share some opening remarks and an update on our business. Following Jason's remarks, our Chief Financial Officer, Alan Ellingson, will provide a review of our financials. We will then open the line to questions. I will now turn the call over to Jason Robins.

Jason D. Robins: Thank you, Matthew. Good morning, everyone, and thank you all for joining. We had a pivotal third quarter. We have been rapidly building our predictions offering to capture the significant opportunity we are seeing. In this quarter, that showed up in our results. More than 1.6 million customers have now engaged with our predictions offering year to date, which is already powering growth across the business. In the third quarter, monthly unique payers increased 13% year-over-year. In sports consumer volume increased 22% year-over-year. Driving total revenue growth of 16% year-over-year. Due to the compelling data and excellent returns we are seeing year to date, we have increased our 2026 adjusted EBITDA investment and predictions to $650 million to $700 million Our predictions customers are highly engaged, retaining at high levels and trading significant volume. In totality, we expect our 2026 cohort to pay back in approximately 20 months, well below our 2-year payback target. When we combine the ramp in our predictions business with our strong core business, we believe we are set up for an exceptional 2027. We expect total revenue to grow 17% at the midpoint of our guidance. Boosted by predictions revenue of $700 million at the midpoint. Predictions customers we are acquiring today should begin contributing meaningful gross profit going into next year. We expect the adjusted EBITDA investment predictions to step down to $300 million at the mid midpoint. In the core, we expect adjusted EBITDA to grow to $1.2 billion at the midpoint, powered by steady sportsbook growth accelerating iGaming growth from this year's investments, and strong operating leverage. At the midpoint, adjusted EBITDA margin in the core business expands approximately 370 basis points in 2026 and another approximately 360 basis points in 2027 to approximately 18%. And we are focused on continuing that expansion. Altogether, we expect fiscal year 27 adjusted EBITDA of $800 million to $1 billion. Let me start with predictions and why we are investing more. Across our business, we follow the data and underwrite the strict payback periods, and we lean in when we see strong returns. Our 2026 predictions cohort is outperforming the 2-year paybacks we targeted and is already run-rating to approximately $350 million in annualized gross profit. We are seeing retention and engagement of newly acquired predictions customers in line with sports levels. Additionally, we are observing attractive take rates of approximately 11.1% on trades on DKX across brokerage, exchange and market making in September and October. We captured approximately 2 thirds of that gross revenue, third party market makers capturing the rest. The results have been remarkable. In just a few months, we have become the clear number 3 predictions exchanged by total volume. In October, annualized consumer volume reached $10.1 billion up nearly 3x from July. And annualized total volume traded reached $56.8 billion up over 5x from July, as combos grow as a share of our volume. The growth of our predictions offering has followed the same playbook that made our sportsbook offering number 1 in the industry: an easy-to-use interface powered by vertically integrated technology and our proprietary trading and sports data infrastructure. Our sports predictions offering is now best in class anchored by a content library that is unmatched in the space. This translates to the depth of our customer experience. As DKX lists more than 3x as many game level markets as our nearest competitor across our largest sports, including the NFL, NBA, and college football. Customers are responding to that depth. With combos reaching 27% of consumer volume in October and more than 70% of our customers trading combos in the month. Vertical integration is 1 of our key differentiators. We own the brokerage, the exchange, and the market maker. Which lets us control our offering road map, innovate faster, and capture more of the economics across the stack. It also strengthens the quality of our revenue. A substantial and growing portion of our predictions gross revenue now comes from maker and taker fees, a low volatility, high gross margin revenue stream. We are also increasingly excited about the emerging nonsports opportunity. Nearly 20% of our predictions customers already traded non sports markets. And non sports consumer volume per customer is on par with sports consumer volume per customer to date. Crypto is leading the way. Approaching double digit share of total consumer volume in recent weeks. And we expect it to grow as we migrate crypto markets to DKX. Which we are targeting to do over the next month. We are investing with discipline, and our balance sheet is strong. We have maintained our cash position at approximately $1.1 billion through this investment cycle. We expect to generate significant excess free cash flow in 2027, even after funding our predictions investment, and we expect predictions itself to generate free cash flow in 2028. Our returns are attractive across a wide range of outcomes, in part because we are driving strong cross-sell into our other offerings, such as Pick6, lottery, and non sports prediction. Even if sports contracts were to end in July 2028, we estimate our 2026 cohort will be fully paid back by that date. By then, our 2027 cohort will be more than 50% paid back. And we would expect that cohort to fully pay back within 4 years without sports contracts. Our recent performance reinforces our belief that we are in a win-win position no matter how any future court ruling plays out. Now turning to the core business. Sportsbook net revenue grew 36% year-over-year in the third quarter, with net revenue margin expanding approximately 120 basis points to 6.4%. Handle growth was also strong at 12%. And would likely have been even higher if not for the significant increase in sportsbook net revenue margin. The World Cup provided a boost, which was fully offset by 1 fewer week of college football and NFL. The 12% growth number is a true like-for-like comparison. We continue to see healthy handle on revenue growth, further substantiating our view that prediction market operators are having no discernible impact on our sportsbook business. Our sportsbook hold rate eclipsed 11%, and our parlay mix continues to grow rapidly, increasing 300 basis points year-over-year. For the fourth consecutive quarter, our handle share across sportsbook states improved year-over-year, and our GGR share also increased year-over-year. In the third quarter, iGaming customer acquisition grew 76% year-over-year and gross revenue growth accelerated to 7% year-over-year. Our net revenue grew 2% as we invest in promotions to welcome those new customers. That growth reflects a deliberate multi quarter plan to accelerate our iGaming business. We revamped our already top-rated app, debuted exclusive content such as the CashnGo franchise, and introduced new rewards and merchandise. Seeing strong early returns, we stepped up this effort in the third quarter and fourth quarter to date investing incrementally in marketing and new customer promotions. The trends are encouraging. Underlying engagement is strong. October paid active days or active customers multiplied by days engaged on the app. grew 24% year-over-year. And October gross revenue growth accelerated to 12%. As a result, we expect these investments to accelerate iGaming revenue growth in fiscal year 27. We also remain firmly focused on managing our cost structure. In the third quarter, adjusted operating expense declined year-over-year, excluding predictions. In 2027, we expect significant operating leverage in our core business driven by national marketing efficiencies as states mature and cost programs designed to optimize how we work. We have never had more ways to win. Super App brings sportsbook predictions, iGaming, and more together for customers across the country. We will continue to strengthen that advantage as we build out our offering and optimize our marketing and cross-sell. With the NFL and NBA seasons in full swing and the holiday tempo is ahead, we expect the fourth quarter to set us up to enter 2027 with strong momentum. As we look ahead, we will continue to be disciplined and data driven in how we deploy our capital to maximize long term shareholder returns. With that, I will turn it over to Alan Ellingson, our Chief Financial Officer.

Alan Ellingson: Thank you, Jason. I will hit the financial highlights including our third quarter performance and our fiscal year 2026 and 2027 guide. Please note that all income statement measures discussed except for revenue, are on a non GAAP adjusted EBITDA basis. As Jason mentioned, total revenue increased 16% year-over-year in the third quarter to $1.33 billion driven by continued healthy customer engagement and higher sportsbook net revenue margin. Monthly unique payers, or MUPs increased 13% year-over-year to 4.1 million average revenue per MUP increased 3% year-over-year to $109. This top-line strength was driven by robust demand across our offerings. Core consumer volumes increased 22% year-over-year. Sportsbook net revenue grew 36% year-over-year on 12% handle growth. Approximately 120 basis points of net revenue margin expansion to 6.4%, even as our parlay mix increased 300 basis points year-over-year. In iGaming, customer acquisition grew 76% year-over-year, gross revenue grew 7% year-over-year. While net revenue grew 2% as we invested in promotions to welcome these new customers. We also continue to operate with discipline on the cost side. As Jason mentioned, adjusted operating expense excluding predictions declined year-over-year in the third quarter. I want to reiterate that we will remain focused on improving the efficiency of our cost structure which should continue to drive margin expansion in our core business in 2027. Third quarter adjusted EBITDA was negative $317 million primarily reflecting the increased investment in predictions. Now we will touch on our fiscal year 2026 and 2027 guidance. Last quarter, we communicated fiscal year 2026 guidance of $6.5 billion to $6.9 billion in revenue, and $700 million to $900 million in adjusted EBITDA. With our core business on track to generate approximately $1 billion of adjusted EBITDA. Today, we are updating our fiscal year 2026 guidance to $6.35 billion to $6.55 billion in revenue, and an adjusted EBITDA loss of $175 million to $275 million in adjusted EBITDA. Primarily reflecting our increased adjusted EBITDA investment in predictions of $650 million to $700 million We expect adjusted EBITDA from the core business of $875 million to $925 million which reflects our decision to invest further in iGaming growth as well as the impact of modestly customer friendly sport outcomes. We expect adjusted EBITDA investments in predictions of a $175 million to $225 million in the fourth quarter, predictions revenue will be immaterial in fiscal year 26. As new customer promotions will offset the lion's share of the gross revenue generated. For fiscal year 27, we are introducing revenue guidance of $7.35 billion to $7.75 billion increase of 17% year-over-year at the midpoint. Adjusted EBITDA guidance of $800 million to $1 billion We expect revenue from the core business of $6.7 billion to $7 billion, up 4% to 9% year-over-year compared to the midpoint of fiscal year 26 guidance. And adjusted EBITDA from the core business of $1.15 billion to $1.25 billion or $1.2 billion at the midpoint, in 2027. Our core business is strong. Powered by steady sportsbook growth, accelerating iGaming growth, and significant operating leverage. That takes adjusted EBITDA margin in the core business to approximately 8% in 2027, up approximately 360 basis points from this year at the midpoint of guidance. We expect Prediction revenues of $650 million to $750 million and adjusted EBITDA investments in predictions of $250 million to $350 million stepping down to $300 million at the midpoint. As the customers we acquired this year contribute meaningful gross profit. We will continue to monitor regulatory developments related to sports predictions, and we will adjust our level of predictions investments accordingly. Regardless, we expect predictions to be a tailwind to adjusted EBITDA in 2028. As always, we remain disciplined in how we allocate capital. Our core business continues to generate significant free cash flow, which we are deploying to fund growth in our predictions business. At attractive payback periods. We have maintained our cash position at approximately $1.1 billion through the investment cycle, and we expect to generate significant excess free cash flows in 2027 even after funding our prediction investments. That concludes our remarks, and we will now open the line for questions.

Operator: We will now begin the question-and-answer session. We ask that you limit yourself to 1 question. If you would like to ask a question, at this time, please press *1 to raise your hand. To withdraw your question, please press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. And if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Shaun Kelley from Bank of America. Your line is open. Please go ahead.

Julie Hoover: Hi. Thank you for taking my question. Jason, can you just walk us through the decision to increase core predictions spend in 2027 relative to 2026? And how are you thinking about justifying LTVs when there is a material risk of sports event contracts going away in 2028?

Jason D. Robins: Great question. So we included some pages in the earnings presentation, which I would definitely encourage you and everyone to review basically showing the payback period. So, starting with 2026, we are going to get paybacks, we believe, in about 20 months Base case forecast is a midyear 2028 Supreme Court ruling, so we should have those customers fully paid back by then. Obviously, there is a chance that could accelerate and we weighed that. But even in that case, we will have very attractive paybacks there. In the 2027 cohort, we modeled out is also having very similar paybacks, probably better in the event that it is positive Supreme Court ruling or it gets delayed even further. But even if there is a ruling that shuts down sports predictions in July 2028, still think that cohort should pay back in 4 years or less. And that is because of the excellent cross-sell we are seeing onto other products we have, including the non sports prediction. So really feel like that was a good justification. Obviously, we typically target 3 year paybacks. And our core business, so it is a little bit longer than that. But that is in the case where sports contracts go away and the case where they do not. it is much faster than our core business. So kind of, you know, mid middle of the road would be in line with where our core business payback targets are.

Operator: Your next question comes from the line of Stephen Grambling from Morgan Stanley. Your line is open. Please go ahead.

Stephen Grambling: Thanks. Jason, I think 1 of the big questions that have been facing the whole industry is whether competition is driving up both cost to maintain the base and if customer acquisition costs are rising. Just looking at the recent quarter, sequentially or year-over-year, it looks like the increase in actives is most similar to the third quarter of 2024. Yet marketing per active is up. Materially versus that period. So how should investors reconcile those numbers versus the commentary on paybacks and the core margins?

Jason D. Robins: Yes. I think the way you have to look at it is really acquisition point of view. So, you know, obviously, we had a lot of states that for the very first time we were able to offer an NFL product for sports predictions. And we did not know how that was going to perform. We have seen, obviously, varying performance levels based on different states launching an OSB more recent states have ramped faster, earlier states ramp slower. We were not sure where on the curve that would be. But much like every new state story, we spend a level that get us some of the best paybacks that we are ever going to see. In those early days of a launch. So it really is the time to invest Obviously, there is the whole wrinkle here of the Supreme Court, and we weighed that in, and that is why we targeted shorter payback periods and we modeled out what happens if the court does rule negatively and do we look payback periods in those scenarios, but really felt like there was a time to even spend more than we did if, you know, we did not feel like we are already at a point that we are getting saturation. So really, I think it was based on pure data and if you look back to 2024, what you said Q4, I think, or Q3, I cannot remember, This is our best acquisition quarter since then too. So really, I think that you have to kinda look at it from the perspective of acquisition to payback period and less sort of in quarter what do the active counts look like.

Operator: Your next question comes from the line of David Katz from Jefferies. Your line is open. Please go ahead.

David Katz: Morning. Thanks for taking my question, and thanks for the commentary so far. I just want to sort of go down this road that I think you have started with the prior questions. Right? It sounds, Jason, as though you are sort of looking at the future predictions in a relatively binary way. Meaning, you know, supreme court yes, supreme court no, you know, is there, you know, contemplation for some middle ground you know, outcomes where, you know, this, you know, is still a business, but know, in some fashion, it is, you know, less economically, you know, compelling as 1 of those binary outcomes. Suggests. Right? Like, is that, you know, somewhere on the decision tree, you know, also? And how does that economically turn out? Yeah.

Jason D. Robins: I think you are bringing up a great point. there is obviously more than 1 or 2 outcomes that you could see There is a middle of the road outcome where maybe some of the sports contracts out there are no longer available, others are. I think that would be a better case in terms of payback. So the reason we kind of looked at the 2 outcomes and said there is this status quo today If everything sort of stays as is, what does that look like? What do we think these returns will look like? And then we took what we think is the most draconian likely scenario. Obviously, there is always even worse scenarios like all of event contracts, including financial markets go away. But I think if you look at the most likely of those scenarios, the probably most severe would be all sports contract go away. So if that is the case, then what do the paybacks look like So that is why we looked at those 2 as sort of like 2 ends of the spectrum. there is obviously a lot of in between things that could happen. there is delays that could drag it out and make litigation take longer. That would obviously extend out an end decision, which is a different set of math too. So those were all things that we weighed in, but we wanted to feel good that even in the case that probably the most significant, you know, rollback of all sports contracts that was likely an outcome, we wanted to feel good that even in that case we were getting paybacks that were acceptable to us.

David Katz: Perfect. Thank you.

Operator: Your next question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open. Please go ahead.

Eric Sheridan: Barry to keep pulling on the thread on the here on this, but maybe to think through another 1 of the probabilistic outcomes because obviously, as you said, slide 12 is sort of binary. How were you thinking through the elements of what might happen to the core business as an output of all of the input costs and marketing spend behind predictions in an end state where predictions went away and how much of a return profile should we be thinking about that coming or flowing back into the core business as something that might be the remainder consumer option come 2028? Just trying to think through all the various different outcomes here. Apologies. You asked 1 more time. Can you repeat that? Curious about the halo effect or residual effect of the investments you would make behind a dual go-to-market approach if 1 of those go-to-market approaches fell away because of the regulatory landscape, whether some of that effect of impacting customers or building your brand would come back to the core.

Jason D. Robins: I see. I do think that is a good point. there is obviously an effect for national spend, very much though the spend that we incrementally did in predictions was local spend. In states that we were seeing great returns in. And I do think there, there is a benefit because we do have other products in many of those states from pick 6 to non sports predictions to lottery. To daily fantasy sports. So we do have other products that we are able to engage customers on. We are seeing very strong cross-sell onto many of those products. So really I do think there is a halo effect in terms of the ongoing LTV of those customers. But in terms of the brand halo in states that have OSB and iGaming, it really probably had a minimal impact, if any, at all, because the vast majority of the incremental spend was done at a local level.

Operator: Your next question comes from the line of Daniel Politzer from JPMorgan. Your line is open. Please go ahead.

Daniel Politzer: Hey, good morning, everyone, and thanks for taking my question. I had a question on the core business, the flow through. I think in 2026 and 2027, it is about 7.08 thousand%. Obviously, that. that is quite a bit higher than where you have been, and I recognize there is some OpEx efficiencies there. But can you talk through the marketing, G&A and product technology spend for the core business and what that looks like, you know, this year and next year and maybe put some numbers around it? Thanks.

Jason D. Robins: Yeah. So overall next year, marketing spend for the entire business is coming down. That is despite the fact that we are actually increasing predictions a little bit. So core marketing spend is coming down. We have also seen quite a bit of efficiency on the fixed cost side. As you probably noticed, we have seen really good fixed cost this year, and I think that will continue into next year. And we have many initiatives lined up to continue to focus on cost all the way up and down the P&L. So I do think there is a lot of cost leverage there. And it is a huge focus of the business right now. We are very much focused on how we can continue to make it our cost structure as efficient and lean as possible, both in terms of fixed costs, but also how we think about the entire P&L and every dollar we spend.

Daniel Politzer: Thank you.

Operator: The next question comes from the line of Raymond Bowers from Wells Fargo. Line is open. Please go ahead.

Trey Bowers: Hey, guys. Thanks for the question. I think 1 thing that would be helpful is just a little bit of a better understanding of the PM level promotional component of the customer acquisition costs. Do you guys just give a sense in the numbers you provided us of what the kind of GGR to NGR bridge looks like this year and next? Just some feel for what kind of GGR levels we are talking about here. And then I guess part 2 of that would be just a better sense. You mentioned a lot of local kinda spend on customer acquisition that shows up more as an OpEx item. You just give a little more clarity of what that is? Is that lead gen? Is that more targeted kinda social media type advertising? I think we just love a little bit better feel for where all these dollars are going. Thanks.

Jason D. Robins: Yeah. I mean, on the latter, it is very much similar to how we would do an OSB state launch. We obviously spent it much lower levels because you would, you know, add up what we would have spent on an OSB state launch in all of these large state that would have been higher. it is the same type of approach, obviously, focusing on the most efficient channels since we do not spend as deeply or did not spend as deeply as we look for an OSV launch. On your first question, so to give you some perspective, we will do hundreds of millions of gross revenue and predictions this year. And net revenue is pretty close to zero And that is almost entirely 90% of that is due to customer new customer promotions. So next year, you are really going to see an inflection. Obviously, we are going to be acquiring a lot of customers next year too, so the gross revenue is even higher. Despite that, we are expecting net revenue of around $700 million next year and gross profit of around $5 billion which I think is a pretty strong ramp considering this was our first year. To be able to get there, and we will be, you know, ahead of that, obviously, on the gross revenue side. All of those numbers too are based on where we are currently run-rating. We are not assuming that we get additional monetization from product improvements or we get any more efficiency on customer acquisition than what we are seeing today. We are assuming status quo. The reality is that is probably not the case if I look back at OSB and iGaming 4 or 5 years ago. That was a period where it was so new, and we were still making so many improvements on the product. And figuring out so many things on the marketing side that we were just seeing continual benefit. To that. So, obviously, to build any of that into the guide, we are only looking at what we are running at now. But I do think it is more likely than not that we will find some wins next year that could give us some upside on the predictions numbers. So I am really bullish about that part of the business. I know everyone's a little surprised at how much we spent, and I wish you all could see every data point that we see. But I feel like that is a really strong story and it is going to be a really big number for us next year. And all of that I think if you compare it to we invested around, you know, $650 million to $700 million this year. We are going do that much in just revenue alone, 500 in gross profit alone next year. So really a great ramp on predictions, I think. And the core business is doing extremely well also. If you look at the core business, we are on track other than basically outcomes. We did invest a little bit more on some iGaming marketing, which is also going to give us some next year. We took up our iGaming numbers from what we had previously thought for 2027. But that was a minor part. Other than outcomes, we are pretty much on track for what we thought the core would be. And, you know, I will say we did all of this without any major increase in fixed cost. We invested a little more in predictions, but we have been able to do all of this including building out an unbelievable product for predictions with mostly the same headcount that we have today. I think that speaks to a lot of the efficiency we are seeing from AI and other automations of that we have been able to do. Thanks.

Operator: Your next question comes from the line of Barry Jonas from Truist Securities. Your line is open. Please go ahead.

Barry Jonas: Hey, guys. You recently exited the Utah market for sports and some other prediction markets. How should we think about risks for further exits At what point would that impact your guidance? And I guess complicating that is this new CFTC guidance around operating in each state. So curious if you can share any thoughts there too. Thank you.

Jason D. Robins: Yes. I mean, obviously, we are always monitoring anything in state regulatory side. We have managed to stay completely out of the litigation everywhere. And I generally think that most states are waiting to see what the courts decide before taking more severe action, but you never know. We will have to see. But, obviously, this is all gonna play out at the courts. it is not. In the courts at some point. So 1 way or another, it is going to resolve, and there will be clarity. As far as the CFTC thing, I would not make anything of that. there is I do not think that is going to affect anything for us. there is a process for demonstrating why you can only operate in certain geographies. So we have had a really good relationship with the CFTC, and I think that will be something that we can work through with them easily.

Barry Jonas: that is helpful. Thank you.

Operator: Your next question comes from the line of Brandt Montour from Barclays. Your line is open. Please go ahead. A kind reminder to unmute yourself locally if you are. I will move to the next analyst. Please rejoin the queue if you would like to ask a question. Your next question comes from the line of Robin Farley from UBS. Your line is open. Please go ahead.

Robin Farley: Great. Thank you. I have kind of a big picture question for Jason. Also just wondering if Alan can clarify that the predicted market losses specifically in Q3. I know you guided to it for Q4, but I do not think we have that number for Q3. Jason, my question is this. Looking at the scenario, when you talk about if it stops in the middle of 28, it would only be a 4-year payback period. That would assume that you get a year of the shorter payback period, so it looks like kind of non-sports has maybe a 6-year payback period and maybe not an investment you would make just in nonsports. I guess why, you know, why the need to be in this business if it is allowed to continue that would probably lead more states to legalize OSB So you would get that business anyway. Right? Like, you can see clearly that players prefer traditional OSB to prediction markets. So if prediction markets stick around and it leads states to legalize OSB, you get that business anyway without this sort of you know, $1 billion of losses between this year and next year. So why the need to be in the prediction market business if it actually. Like, in those 2 scenarios, if it stays or if it goes, it seems like the non sports is not a payback period you would wanna be in. And the sports, if it is allowed, you would get that business anyway through your OSB business.

Jason D. Robins: Well, let me start with the sports piece. I do not think we can count on every state suddenly legalizing sports betting. I think it could happen. It could also be states just take a while or do not do anything at all or decide to tax predictions. So this is something that is obviously addressing an audience that is very much our brand and our core audience, and I think it is important strategic for us and also could be a huge financial opportunity. So, I do not view it as something that we can just count on the state to all legalize sports betting, and we will get that business anyway. Even though I do agree with you, that we are seeing that the sports betting product is a better product and will attract customers and retain customers better. As far as the non-sports piece goes, I think it is so early days for that. But what I will say is we put basically no effort into it, and it is already approaching 10% of our sports volume. So I am pretty excited about that. We did not wanna model in and be like, oh, we are counting on this thing that is not even, you know, something that we focused any attention on that is you know, roughly 10% of our volume. We are counting on that to grow 3x, 4x, or 5x in order to pay back. We did not feel like that was since we were getting 4-year paybacks anyway. And I will remind you, it is not just the non sports. it is pick 6 and other products too that we are seeing cross-sell on. But I actually think there is a ton of upside from non sports. I think non sports could be you know, 25%, 30%, maybe even more of the size that sports is today. So, you know, we will have more to say on that once we have got time to devote a little attention, see what we can do from a product standpoint. But to me, that is sort of a hidden gem there that might be honestly, it was not what I was thinking when we got into this. I was thinking we have to defend our turf and win this market on sports. But now that we have seen some early signal, I am actually pretty excited about the nonsports piece, and I think we will have more to say about that in the coming quarters.

Operator: Your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open. Please go ahead.

Jed Kelly: Hey. Great. Great. Thanks for taking my call. Just going back on the core, you know, it does seem next year you are harvesting some margin. Although you do have some competitors still spending aggressively in those markets. So how do you. How should we know you are kind of not too focused on prediction markets and not taking your eye off the ball in the core segment? And you are okay in pulling back on this investment. You will not lose significant share in sports and iGaming. Thank you.

Jason D. Robins: Yeah. I do not think we are pulling back at all. We have hun. You know, hundreds of millions of promo cushions still built into next year in order to make sure that we have ammo if we find things that are worth investing in. So I do not think we are pulling back if you look at our performance, we are basically tied with FanDuel for number 1 in the industry on sports betting this quarter. So I think the fact that we have been doing so well, we have actually been able to have strong share performance, iGaming share we have gained now for 3 consecutive quarters. All while making the headway we have made in predictions, I mean, that really, to me, is a great story. How many companies are able to do that to really maintain the level of performance that we have and even grow our share in the core business while also rapidly creating the best predictions product in the market becoming a quick number 3 exchange in a nascent market that nobody thought we could compete in this quickly. So to me, it feels like an amazing amount of stellar execution by our team, and I do not think we are giving up an inch anywhere. We are laser focused on the core.

Jed Kelly: Thank you.

Operator: Your next question comes from the line of Brandt Montour from Barclays. Your line is open. Please go ahead.

Brandt Montour: Everybody, sorry about before. Can you hear me now?

Operator: Yes.

Brandt Montour: Okay. Great. So I wanna talk about iGaming. Your acquisitions were up 76% year-over-year, which is which is really, obviously, you know, compelling. Growth number. I am trying to reconcile that against the +7% GGR accelerated to 12% GGR. You know, I know this is comparing apples and oranges. But with this reacceleration of iGaming investment, are you changing your strategy toward you know, lower average value players, Is--how is retention looking? Anything around that to help us understand this strategy, just given you are investing more into a market that some of your peers have described as, you know, moving through the maturity curve here.

Jason D. Robins: Yeah. I would not say that we are investing that much more. I mean, really, the bulk of the investment came from just higher than expected new customer and new customer promos, which in past years, for those who have been following for a while, I have seen when new customers perform ahead of what you expect, you have more new customer promo, which in the given quarter will drive a little bit of bottom line softness, but ultimately leads to much better revenue and EBITDA in future quarters. So think that is what you are seeing here. We had a very strong quarter, as you noted, 76% year-over-year growth in customer acquisition. We were not expecting to do that well. As a result, we were able to confidently increase our outlook for not just the rest of this year but also going into 2027 for iGaming. So that part of why think we are going to do so well on the core next year is We are not. Again, we are not assuming iGaming accelerates any further from here. We are kind of taking where we are run-rating at. But I do think if you continue to see this type of acquisition performance, that is also something that could be a tailwind for a full-year 2027. We will be able to realize the benefits of those cohorts throughout the year and not just have that short term hit.

Brandt Montour: that is good color.

Operator: Your next question comes from the line of Jordan Bender from Citizens. Your line is open. Please go ahead.

Jordan Bender: So, clearly, we are seeing another wave of spending here across sports betting and iGaming industry, which tells us, you know, there is always more to be spent in this space. So the thing that we and investors kind of always weigh here is EBITDA at the bottom here. So is the investment number that you guys put out for the Prediction Market spend for next year kind of that absolute maximum you think it would take to achieve everything that you wanna get done.

Jason D. Robins: I will be surprised if we spend more in terms of total investment next year on predictions. We have a pretty healthy marketing budget in there. So I do not think that we will. Obviously, we will see what happens with the courts if there is some kind of early positive signal, then that is something we would have to weigh. And if there is an early negative signal, we might actually pull back on some of that investment. So that is something we will be closely monitoring. And plotting into our different scenarios. But I think based on sort of the baseline expectation, we feel pretty good about the budget for next year. This year going in, really did not know. I mean, is a brand new category where, like, it is gonna ramp more, like, a sports betting business. State, excuse me, that we would launch now? Is it going to look more like an early state that has slower ramp somewhere in between? Now we actually have really good data to be able to say this is the appropriate level of spend. We also before did not have any data on what these customers were retention rates, spend levels would look like in NFL. A little bit of World Cup data, but World Cup's a tough comp. Because, you know, we do not have a ton of sports betting data from World Cup either. So really getting some NFL data now and being able to compare and contrast the customers we are seeing and use the historical sports betting data that we had to be able to say, this is what we think these customers will perform at. it is given us a lot more conviction that we know the right level of spend. So long way of saying I do not think we will spend more barring any major regulatory development to the positive, and I do not think we will spend too much less either barring any major regulatory developments to the negative. I do think that there is top line upside though because as I noted earlier, we did not build in any kind of additional benefits from all the product work and other things that we are gonna be doing to optimize the engine next year. So that is 1 I feel really good about. On the core side, we have been able to grow adjusted EBITDA consistently every year. We are up again this year. it is been somewhere $2.3 billion of incremental adjusted EBITDA every year to the core. Next year, it will be the same. So we feel very good about the trajectory there. We are getting lots of operating leverage in that business. And it is following the playbook that we thought it would a few years ago when we laid out how states want they kind of both have that initial investment phase, just really inflect in terms of profitability because you get the benefit of continued revenue growth along with declining marketing costs. And also increasing operating leverage from not having to increase fixed costs either.

Jordan Bender: Helpful. Thank you.

Operator: Your next question comes from the line of Clark Lampin from BTIG. Your line is open. Please go ahead.

William Lampen: Thanks. Good morning. Maybe following on Jordan's here. If we assume that $1 billion combined, I guess, in sort of EBITDA losses between $26 billion and $27 billion is the right level of investment and there is sort of no fungibility. 1 of the things that I think we have not touched on that might be helpful as we think about the future value of that is where the investment is actually taking place. Know, the comments that you made earlier on products suggest the majority of this investment should be sports focused customer acquisition, if that is right. Is it broad based across your non OSB states right now? Is it concentrated in certain markets where you see a clear pathway to legalization, you know, in a few years? few years? And as we are thinking about this sort of national component, maybe this is for Alan, how does that sort of break down or how could that be ascribed to core versus prediction? Thanks, guys.

Jason D. Robins: So, I mean, these are great questions. I think first, the way that we are thinking about the states is purely on a return basis. However, following some of the election results earlier this week, we do think there are certain states that may have a clear path to legalization now, so we will weigh whether we wanna differentially spend in those states relative some others. But it had been very much treating all the states on the same basis in terms of expected returns. And looking at the actual sports predictions, revenue stream, not to layer in any likelihood of legalization, which arguably is conservative because hopefully we will get some legalization so there could be some upside there too. that is something else, by the way, when you think about the 4 year payback that we modeled on next year's cohort, that is not assuming any benefit from state legalization That is only with the products that we have today, minus sports prediction. So there you are right. There is some upside there, and I do think that is going to weigh in and how we allocate our local spend. But the vast majority of the incremental is local spend. We are allocating some of our national to predictions as well. But where we are incrementally spending is mostly on the local side. We obviously are spending some more on the national side too, but the majority of it is local. Am I right? Is that right? Barry, I just want to make sure that I caught right. You are saying the majority of the national is being allocated, I guess, sort of local and for core? Right now. Well, the way. I mean, this is a little bit in the weeds, but essentially, we are saying there is certain direct spend in local markets that is going to prediction states that is obviously getting 1% allocated to prediction. There is some local spend in sports betting states that is going 100% to sports betting. Then there is some national advertising that is advertising sports betting that is mostly getting allocated to sports betting and then some that is advertising a more broad sports offering that is getting allocated between the 2. Thanks a lot.

William Lampen: I appreciate the detail.

Operator: Your next question comes from the line of Benjamin Chaikin from Mizuho. Line is open. Please go ahead.

Benjamin Chaiken: Hey. Good morning. Maybe back to iGaming. Think it was to Brandt's question. You know, I think there was an implied cut, if I am not mistaken, in the 2026 numbers of around a $100 million to $150 million It sounds like some of that is hold on the OSB side, some of that is iGaming as you alluded to, Jason. Help us just better understand the moving parts and then your return expectations or goals for iGaming then how did you think about the iGaming contribution in 2027 in your guide? Obviously, know, you are analyzing a few new regions. I think you get Maine, etcetera. Thanks.

Jason D. Robins: Yeah. So, you know, Maine is small, so it is not really a needle mover next year. But we are obviously layering in the additional customer acquisition that seeing in iGaming into next year's guide. So we feel like we found some insights and some marketing that have allowed us to unlock better customer acquisition without having to increase spend as much. And so I do think that will give us tailwind and drive revenue growth next year. And then I am sorry, what was the first part of your question?

Benjamin Chaiken: I was just maybe looking for some clarity on the. I think the underlying 2026 has a EBITDA cut of around 24. If you are wondering some of the.

Jason D. Robins: Yeah. So most of that, about 60% of that, is sport outcomes. And the remainder is new customer acquisition in iGaming. So that is how I think about it.

Benjamin Chaiken: I guess, you judging kind of the return on that? Is it if you guys are accelerating share, or what is the what is kind of your goal??

Jason D. Robins: We are accelerating share, but, really, what we are looking at is just more customers coming in at more efficient CACs. So with that, you are going to get higher new customer promotion just from raw customer accounts. And so that is the bulk of it. There is some additional marketing spend too, but it is it is really mostly the new customer promotion. So that is going to pay off just by having more customers next year and also through the remainder of this year once they work through those promotions. But that is something we have much kind of historical data. I mean, these are not like new things. This is just more volume of the same thing we have been seeing for years. So we have a very good understanding of how those cohorts will model out.

Benjamin Chaiken: Thanks.

Operator: Your final question will come from the line of James Hardiman from Citi. Your line is open. Please go ahead.

James Hardiman: Hey. Good morning. Thanks for thanks for fitting me in. So really appreciate the clear framework 2026 and 2027 prediction investment. Obviously, given where we are, a lot less visibility on 2028 other than to say that predictions becomes an EBITDA tailwind So maybe how should investors be thinking about 2028? Is that the beginning of a harvest phase with meaningfully lower acquisition spend? Is that EBITDA tailwind more a function of higher revenues Or will we see lower investment than 2027? And how are you thinking about sort of your penetration of that predictions TAM as you exit 2027.

Jason D. Robins: Yes, it is a great question. So if you look at this year, the cohorts that we acquired are going to generate about $350 million of gross profit next year. And we are going to acquire even more players next year than we are acquiring this year. So, all in, we are going to be generating quite a bit of gross profit from the 2026/2027 cohort probably somewhere north of $1 billion in 2028, were we to see sports predictions stick around for the whole year. So a lot of it is coming from that. Obviously, as the market matures, we are going to optimize our customer acquisition spend too. So that will probably come down a little bit. But even if it stayed flat year-over-year, we would be generating significant free cash flow. Through that. The other scenario, of course, is sports predictions goes away, in which case we would significantly dial back the marketing and we would still be generating gross profit from the customers that we acquired on these other products that we have been able to cross-sell them to, including non sports, pick 6, lottery, and so on. So that is really the way to think about that is that just becomes a harvest period, but also really, you know, very little investment. The latter The latter becomes a harvest period, but in the former, we will probably continue to invest at some level just like we do in online sports betting and iGaming. Either way, it should be positive.

Operator: We have reached the end of the Q&A session. I will now turn the call back to Jason Robbins for closing remarks.

Jason D. Robins: Thank you all for joining us on today's call. We are excited and well positioned for our success in the future. Thank you for your continued support and look forward to seeing you all next quarter.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.