DraftKings grabbed plenty of attention after the market closed Thursday, not for its earnings report but instead for an added tax on sports wagers in certain states.
The company announced it is going to implement a “gaming tax surcharge” beginning Jan. 1 in four states because of their tax rates above 20%:
DraftKings will have more specifics on its earnings call at 8:30 am Eastern Friday. The stock was down in after-hours trading after already falling 4% Thursday to close at $35.49.
DraftKings cuts EBITDA guidance
Fighting for the distinction of worst news in the earnings report is the fact that DraftKings cut its adjusted EBITDA guidance for 2024 to $380 million at the midpoint. That is down 24% from the prior midpoint of $500 million.
Revenue guidance, meanwhile, jumped to $5.15 billion at the midpoint from $4.9 billion.
DraftKings outlined the decrease in its earnings presentation:
- $50 million deduction from Illinois shifting its tax rate from 15% to a graduated 20% to 40% range.
- $35 million deduction for the Jackpocket acquisition and the launch in Washington, DC.
- $23 million on “stronger customer acquisition, retention and engagement.”
- $12 million deduction for unfavorable outcomes from April.
DraftKings explains surcharge reasoning
DraftKings used its quarterly shareholder letter to explain why it is choosing to implement the surcharge.
“As you know, many revenue-based taxes are passed along to the consumer. The online gaming industry has not pursued this approach in lower tax jurisdictions, but it has in higher tax jurisdictions such as Germany.
“We are planning to implement a gaming tax surcharge on a customer’s Net Winnings in any state with a tax rate above 20% that has multiple sports betting operators. The surcharge will be fairly nominal to the customer. 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.
“We plan to implement the surcharge in the four states that have multiple sports betting operators and tax rates above 20% starting January 1, 2025. DraftKings will still absorb taxes up to 20%, so customers will only be impacted above this level.”
Surcharge not immediately shown
Page 5 of DraftKings’ earnings presentation includes screenshots of how the surcharge would work. The company noted those are for “illustrative purposes only.”
The bet slip shows a $10 bet at +100 for a payout of $20. It is not until you place the bet, however, that the bettor sees the “Illinois Gaming Tax Surcharge” line.
In this example, the slip shows the bettor being charged $0.32 for a total payout of $19.68, or 1.6% of the payout.
Stock buyback approved
A positive piece of news for investors is the up to $1 billion buyback DraftKings approved.
“This inaugural authorization reflects our conviction in the strong trajectory of our business and our expectation that we will generate significant Free Cash Flow in the coming years,” the shareholder letter said.
