DraftKings plans to tax winning bets in some states to boost profits

A mobile betting powerhouse DraftKings In an effort to boost profits, the company plans to tax consumers in states with the highest taxes on sports betting.

The company said Thursday that starting next year it will impose gambling taxes on winning bets in states with multiple gambling operators and tax rates above 20 percent, including Illinois, New York, Pennsylvania and Vermont.

“We decided the best thing to do was to do what other industries are actually doing. [does] “Whether you’re buying a hotel, a taxi, whatever, there’s generally some sort of tax on it,” DraftKings CEO and co-founder Jason Robbins told CNBC.

The announcement came as the sports betting operator reported its second-quarter results, its first profitable quarter as a public company. LSEG said DraftKings generated revenue of $1.1 billion, roughly in line with market expectations.

Concerns over higher gambling taxes have affected DraftKings stock price and FanDuel Illinois in May approved a tax increase on sports betting revenue. The sliding scale tax would impose a 40% tax on the companies with the highest adjusted gross revenue. New York and New Hampshire are keeping their tax rates on sports betting companies at 51% each.

Robbins said in a letter to shareholders Thursday that the new surcharge would be a small amount for customers. In Illinois, for example, the amount would be a low- to mid-single-digit percentage of net income.

“If you bet $10 to win $20, you’re probably paying about 30 cents,” Robbins said, giving an example.

DraftKings is believed to be the first operator in the U.S. to tax gamblers’ winnings. Robbins said he takes the case seriously and hopes it will prompt states to rethink their tax rates.

“I think that as states start to realize that beyond a certain point, they’re not going to be able to make the investments they need in product and customer experience, that might change the mindset,” he added.

He’s also considering customer reaction. “We’re not going to hide that,” Robbins said. “Obviously, it could potentially drive some customers away and reduce player betting activity.”

Robbins said DraftKings did not include the new taxes in its guidance.

The company raised its revenue guidance to a range of $5.05 billion to $5.25 billion, up from a previous outlook of $4.8 billion to $5.0 billion. The updated outlook represents year-over-year growth of 38% to 43%.

However, the sports betting giant lowered its 2024 adjusted EBITDA guidance to $340 million to $420 million, down from $460 million to $540 million previously.

The company reported its first profit in the second quarter, with net income of $63.8 million, or 10 cents a share, for the three months ended June 30. This comes after a net loss of $77.3 million, or 17 cents a share, in the same period a year ago.

Analysts surveyed by LSEG had expected a loss per share of 1 cent for the quarter.

Revenue reached $1.1 billion, up 26% from $874.9 million in the same period last year. The company attributed the revenue increase primarily to continued healthy customer engagement, expansion into new jurisdictions, and the acquisition of lottery app Jackpocket.

“Customer acquisition, the Washington DC opening, our expectation that Jackpocket will be EBITDA positive next year, underlying trends for existing customers and volume performance should all offset the Illinois tax increase next year,” Robbins said in the company’s earnings call. “As a result, adjusted EBITDA should be in the $900 million to $1 billion range next year, even without fee benefits.”

More than 30 states currently allow some form of sports betting, and many of them allow mobile and online betting. DraftKings offers mobile sports betting in 25 states and Washington, D.C. The company’s iGaming division operates in five states.

The company said so far this year, more than 10 jurisdictions have introduced bills to legalize mobile sports betting or have introduced bills that could lead to mobile sports betting referendums in upcoming elections.

DraftKings also announced its first-ever share repurchase program, worth $1 billion, giving the company a market capitalization of about $14 billion.