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The power of mobile betting Draft Kings Facebook Inc. is planning to impose a tax on consumers in states with the highest tax rates on sports betting, as the company looks to boost profits.
The company announced Thursday that starting next year it will impose a surcharge on winning bets in states with multiple betting operators where the tax rate is higher than 20%. That includes Illinois, New York, Pennsylvania and Vermont.
“We decided that the best course of action was to do what really every other industry does — whether it’s hotels or taxis — anything else you buy generally has some sort of tax on it,” Jason Robbins, CEO and co-founder of DraftKings, told CNBC.
The announcement came as the sports betting company reported its second-quarter earnings, which was the company’s first-ever profitable quarter as a public company. DraftKings reported revenue of $1.1 billion, roughly in line with consensus estimates, according to LSEG.
Concerns about higher taxes in the gaming industry have weighed on shares of DraftKings and other betting companies like fanduel Last May, Illinois approved a tax increase on sports betting revenue. The variable tax rate imposes a 40% tax on companies with the largest adjusted gross revenue. New York and New Hampshire maintain a 51% tax rate on sports betting companies.
In a letter to shareholders on Thursday, Robbins said the new surcharges would be nominal for the customer. In Illinois, for example, they would amount to a low to moderate percentage of net income.
“If you bet $10 to win $20, you’ll pay out about 30 cents,” Robbins said, citing an example.
An illustration of the DraftKings app, introducing new bonus fees for games.
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DraftKings is believed to be the first U.S. company to tax bettors’ winnings. Robbins said he is weighing the matter heavily and hopes it will prompt states to think twice about the tax rate.
“I think if countries start to realize that above a certain level, we’re not going to be able to invest in our products and customer experience the way we need to… that might make them think about it differently,” he added.
He is also studying customer reactions. “We’re not going to hide it,” Robbins said. “Obviously we could see some customers, and some players’ betting activity, drop off if they don’t like it.”
Robbins says DraftKings did not include the new tax in its guidance.
The company raised its revenue forecast to a range of $5.05 billion to $5.25 billion from a previous forecast of $4.80 billion to $5 billion. The updated forecast equates to annual growth of 38% to 43%.
But the sports betting giant lowered its guidance for adjusted EBITDA for 2024 to between $340 million and $420 million, down from previous guidance of between $460 million and $540 million.
The company reported a profit in the second quarter for the first time, reporting 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 of 1 cent per share 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 driven primarily by continued healthy customer engagement, expansion into new jurisdictions and the acquisition of lottery app Jackpocket.
“The outperformance we’re seeing with customer acquisition, the D.C. launch, our expectation that Jackpocket will be EBITDA positive next year, as well as the underlying trends with our existing customers and our performance on the transaction side, all of that should more than offset the Illinois tax increase next year,” Robbins said on the company’s earnings call. “So even if we don’t get any fee benefit, we’ll see $900 million to $1 billion in adjusted EBITDA next year.”
More than 30 states now allow some form of sports betting, and many allow mobile and online betting. DraftKings currently operates mobile sports betting in 25 states and Washington, D.C. The company’s iGaming business currently operates in five states.
So far this year, 10 other jurisdictions have either passed legislation to legalize mobile sports betting or introduced a bill that could lead to a referendum on mobile sports betting during the next election, the company said.
DraftKings also announced its first-ever $1 billion share buyback program. The company has a market cap of about $14 billion.
