Q1 2024 Draftkings Inc Earnings Call

Participants

Alan Ellingson; CFO; DraftKings Inc.

Jason D. Robins; Co-Founder, Chairman & CEO; DraftKings Inc.

R. Stanton Dodge; Chief Legal Officer & Secretary; DraftKings Holdings Inc.

Barry Jonathan Jonas; Gaming Analyst; Truist Securities, Inc., Research Division

Benjamin Harold Miller; Research Analyst; Goldman Sachs Group, Inc., Research Division

Benjamin Nicolas Chaiken; Executive Director; Mizuho Securities USA LLC, Research Division

Bernard Jerome McTernan; Senior Research Analyst; Needham & Company, LLC, Research Division

Brandt Antoine Montour; Research Analyst; Barclays Bank PLC, Research Division

Carlo Santarelli; Research Analyst; Deutsche Bank AG, Research Division

Chad C. Beynon; Head of US Consumer, SVP and Senior Analyst; Macquarie Research

Daniel Brian Politzer; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Jed Kelly; Director & Senior Analyst; Oppenheimer & Co. Inc., Research Division

Jeffrey Austin Stantial; Director of Equity Research; Stifel, Nicolaus & Company, Incorporated, Research Division

Jordan Maxwell Bender; Director & Equity Research Analyst; JMP Securities LLC, Research Division

Joseph Richard Greff; MD; JPMorgan Chase & Co, Research Division

Joseph Robert Stauff; Credit Analyst; Susquehanna Financial Group, LLLP, Research Division

Michael Patrick Graham; MD, Co-Head of US Research & Senior Equity Analyst; Canaccord Genuity Corp., Research Division

Robert S. Fishman; Analyst; MoffettNathanson LLC

Robin Margaret Farley; MD and Research Analyst; UBS Investment Bank, Research Division

Ryan Ronald Sigdahl; Partner & Senior Research Analyst of Institutional Research; Craig-Hallum Capital Group LLC, Research Division

Shaun Clisby Kelley; MD in Americas Equity Research & Research Analyst; BofA Securities, Research Division

Stephen White Grambling; Equity Analyst; Morgan Stanley, Research Division

Unidentified Analyst

William Lampen; Director and Digital Gaming Analyst; BTIG, LLC, Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to DraftKings First Quarter 2024 Earnings Call.(Operator Instructions) Please be advised today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Stanton Dodge, Chief Legal Officer. Please go ahead.

R. Stanton Dodge

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 as discussed further in our SEC filings that could cause our actual results to differ materially from our historical results or from our 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 useful 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 and presentation, which can be found on our website and in our quarterly report on Form 10-Q filed with the SEC.
Hosting the call today, we have Jason Robins, Co-Founder and Chief Executive Officer of DraftKings, who will share some opening remarks and an update on our business; and Alan Ellingson, Chief Financial Officer of DraftKings, who 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

Good morning, and thank you all for joining. DraftKings is off to an outstanding start in 2024, and we're excited to be raising our outlook for the year. There are 5 important takeaways as we reflect on our first quarter results and the rest of the year.
First, our revenue growth is strong as we continue to efficiently acquire new customers, deepen our engagement with existing customers, improve our structural Sportsbook hold percentage and optimize promotional deployment. Revenue grew 53% year-over-year in the first quarter, and our increased revenue guidance midpoint implies 34% year-over-year growth for fiscal year 2024.
Secondly, we delivered successful Sportsbook launches in Vermont and North Carolina. We acquired customers efficiently and a population penetration rates consistent with prior launches. We expect both states to contribute positively to adjusted EBITDA for the second half of 2024.
Third, we continue to focus on driving product innovation and customer centricity. Our platform and overall customer experience are rapidly improving. And as a result, we are achieving excellent customer retention and participation across sports and games.
Fourth, we continue to focus on driving operational efficiency across the organization. We expect adjusted EBITDA flow-through percentage of 53% for fiscal year 2024 due to our largely at scale fixed cost structure and our continued optimization of marketing and promotions.
Fifth, we are continuing to explore capital allocation options given the strong trajectory of our free cash flow. Beyond our financial highlights, there are 2 important topics I'd also like to briefly discuss.
The first is responsible gaming. There have been several recent headlines on responsible gaming, a topic that has always been very important to DraftKings. Building products that our customers can enjoy responsibly is rooted in our DNA. And we believe that we are at the forefront of responsible gaming initiatives, including technology, processes, industry affiliations and internal leadership. We will continue to drive these initiatives in conjunction with our regulatory partners and industry participants to responsibly grow this industry to its full potential.
Second, we continue to innovate on our products while focusing differentially on proprietary technology solutions. In Sportsbook, we made substantial progress on our efforts to shift our highest impact content into our in-house technology and modeling platforms, while also expanding unique offerings like our Progressive Parlay products across all states and all major sports. We are also launching a cash out for Same Game Parlay, which is a critical addition to our offering.
In iGaming, with the completion of the migration of the GNOG platform onto our in-house technology stack, we achieved important milestone touching both content and technology expansion. We launched Must Hit By Jackpots, another popular variant powered by our proprietary Jackpots platform. And we also continued to expand our homegrown casino games portfolio with the launch of 8 new unique to DraftKings titles in the first quarter of 2024, including Rocket 2, the sequel to our popular original Rocket game. In closing, 2024 is shaping up to be another fantastic year for DraftKings.
With that, I will turn it over to Alan Ellingson.

Alan Ellingson

Thank you, Jason. I'll hit the highlights including our first quarter 2024 performance and our updated guidance for the year. Please note that all income statement measures discussed except for revenue, are on a non-GAAP adjusted EBITDA basis. As Jason mentioned, we are off to an outstanding start to the year.
In the first quarter, we generated $1.175 billion of revenue, representing 53% year-over-year growth and $22 million of adjusted EBITDA, representing adjusted EBITDA flow through percentage of 60%. We achieved strong results across our core value drivers, customer acquisition, retention and engagement were excellent and resulted in higher-than-expected handle in the first quarter.
Our structural Sportsbook hold percentage was slightly ahead of expectations at 9.8% and increased approximately 150 basis points year-over-year. Promotional reinvestment for OSB and iGaming continue to become more efficient year-over-year and improved by more than 700 basis points as a percentage of GGR. Adjusted gross margin increased more than 550 basis points year-over-year to 44% in the first quarter as a result of higher structural Sportsbook hold and improved promotional efficiency.
Sales and marketing declined 11% on a year-over-year basis and was consistent with our expectations, both products and technology as well as general and administrative expenses were consistent with our expectations. As you are all aware, we are continuing to exert cost discipline across the organization while simultaneously increasing revenue on a year-over-year basis.
Moving to our full year 2024 guidance, we are poised for a rapid increase in adjusted EBITDA due to continued strong revenue growth, coupled with our efficient fixed cost structure. On February 15, 2024, we guided fiscal year 2024 revenue of $4.65 billion to $4.9 billion and adjusted EBITDA of $410 million to $510 million. Today, we are improving our fiscal year 2024 revenue guidance to a range of $4.8 billion to $5 billion and our fiscal year 2024 adjusted EBITDA guidance to a range of $460 million to $540 million.
Importantly, the midpoints of our updated 2024 revenue and adjusted EBITDA guidance ranges implies a year-over-year adjusted EBITDA flow-through percentage of 53%. This attractive flow-through percentage is based on continued excellent performance across our core value drivers as we rapidly expand our gross margin and exert discipline on our cost structure, while simultaneously investing in promotion and marketing in accordance with our LTV to CAC targets.
We will continue to focus on our dual goals of improving our financial expectations while also investing in customer acquisition and our product and technology capabilities. The $125 million improvement in our fiscal year 2024 revenue guidance midpoint and $40 million improvement in our adjusted EBITDA guidance midpoint breakdown as follows: customer acquisition, retention and engagement continue to exceed expectations due to marketing optimization initiatives and product advancements. These trends account for $165 million of the revenue improvement and $68 million of the adjusted EBITDA improvement. Structural Sportsbook hold percentage is increasing primarily as a result of momentum into our same game parlay offering. We now expect our structural Sportsbook hold percentage to approach 10.5% in fiscal year 2024, which accounts for $20 million of the revenue improvement and $14 million of the adjusted EBITDA improvement.
Customer-friendly outcomes in late March and April were a headwind of $60 million and $42 million to our fiscal year 2024 revenue and adjusted EBITDA guidance, respectively. We continue to expect our adjusted gross margin to be in the range of 45% to 47% for the year, an improvement of 350 basis points at the midpoint compared to fiscal year 2023. We also continue to expect adjusted sales and marketing expense to decline modestly in fiscal year 2024. We.
Finally, we expect to generate approximately $400 million in free cash flow in fiscal year 2024 based on approximately $120 million of annual capitalized expenditures and capitalized software development costs, as well as a modest source of cash from changes in net working capital combined with interest income. As a result, we expect our year-end 2024 cash and cash equivalents will be approximately $1.6 billion before our expected use of approximately $413 million in cash to fund our proposed acquisition of Jackpocket upon closing.
That concludes our remarks. We will now open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Shaun Kelley with BofA.

Shaun Clisby Kelley

Jason or Alan, either, just wanted to see if we could dig in on the hold side a little bit. Obviously, a couple of puts and takes both in the quarter and just for, I think, relative to investor expectations out there. So Jason, if you could talk about like the evolution of kind of your theoretical hold, you actually said that overall, I think it came in a little bit better than management's expectations. So what's driving that? And how do you think about the product evolution maybe both this year and in the out years, what's sort of a good baseline for investors to think about improvement as we get out into 2025 and beyond?

Jason D. Robins

Yes. I think this has been obviously a big topic for a few years now, and our understanding of it is better than ever. So first, just to explain, when we say we think that structural hold is XYZ, that is based on expected hold and then any differences are bet mix driven. So what that really means is that our bet mix came in better than we expected as it relates to projected hold. As far as how we're thinking about it going forward, I think we continue to believe that there's a lot of upside here. I know everybody wants to know what's the ceiling. I think the answer is we don't know.
We continue to monitor metrics and all customer behavior, handle per active rates all look healthy as we continue to drive increased parlay mix and average leg count. So I think that will continue to be the focus as long as we continue to see healthy customer metrics and get positive feedback that our customers are enjoying the products we're putting out there. So we'll see how far we can get it. But right now, we do believe there's a good bit of upside still remaining.

Operator

Our next question comes from Stephen Grambling of Morgan Stanley.

Stephen White Grambling

I guess, one of the big debates seems to be around flow through versus some of your peers. So I'd love to hear your thoughts on where the company is capturing marketing efficiencies in the first quarter. And then where the biggest opportunities are longer term and whether your philosophy around marketing channels or even national versus local has changed?

Jason D. Robins

Yes. I mean we had an unbelievably efficient first quarter and it really continued into April. In fact, April, we had a 40% -- roughly 40% year-over-year decrease in our CAC. So I think it's just optimized performance and also really strong growth in the TAM and addressable market. So I think all of that is contributing to a really healthy and efficient marketing. And I give the team a lot of credit. They've worked hard over the last year or 2 to optimize. And if anything, I think we see maybe some opportunities now to invest a bit deeper. So really excited about the work that's been done there.

Operator

Our next question comes from Joe Greff with JPMorgan.

Joseph Richard Greff

Jason, I was hoping you can update us with your views on M&A from here. Obviously, you have Jackpocket pending and closing in short order here. One, how do you think about M&A? Is it still more domestically focused versus international? And then could you do multiple M&A simultaneously. My question is kind of generated by -- within the quarter. There were some industry chatter with regard to one publicly traded iCasino operator.

Jason D. Robins

Yes. So first, we hope have been very consistent in saying that we have a very high bar for M&A. We understand there's a lot of ways that we can deploy capital to return value to shareholders. And M&A and going on an M&A spree is not something that we're like, hey, this is all we can do with our capital. I do think that M&A will be a lever for us, but we're also practical about, one, how much to your question, we can write off at a time. I do think it is obviously a question of size, but to do materially sized transactions simultaneously, would be very challenging. So that's certainly something that we weigh in our mind.
And I think secondly, we feel like our organic growth path is really strong right now. So we don't really feel particularly compelled to do M&A as a source of growth, anything -- we understand that the integration and other work required with M&A is actually a distraction from that organic growth. So I think a long way of saying, bar will continue to be high, never say never, but I think 2 at exactly at the same time of size would be challenging. And I think for us, really, we look at capital allocation as a broader question as well as resource and time allocation. And we don't just look at it as, hey, M&A is the answer on that. It's also what are all the other things, whether it's organic investments we can be making or other methods of returning capital and creating value for our shareholders. So that's something that we're mindful of as well.

Operator

Our next question comes from Ben Miller with Goldman Sachs.

Benjamin Harold Miller

I'm curious how you think about the playbook around iGaming cross-sell the OSB users over time as we potentially see more states go live with iGaming that currently have OSB. Are there any updated views on how to think about any incremental investments needed in that scenario? And how you think about reinvestment of likely better LTVs and share of wallet into faster customer acquisition versus the flow-through to incremental margins?

Jason D. Robins

Yes, it's a great question. I mean, first, anytime we have multiple products in a market, it's a huge boon to LTV. And the cost is -- you already acquired the customer. So there might be a promo or something associated with getting them to adopt a new product. But it's really a fraction of what it costs to acquire the customer on the platform. Once you've already acquired them, cross-selling is incredibly effective. And very fast payback means of increasing not only LTV, but also short-term gross profit as well.
The main funnel we're seeing is really sports to iGaming. We do see some iGaming to sports cross-sell be effective. And of course, we are cross-selling between all of our products. But really, when we find markets have both iGaming and sports, the much more effective funnel is to acquire them on sports and cross-sell them to iGaming. And actually, what I'm really excited about, once we close Jackpocket, is I think that will be a really effective funnel as well, really efficient funnel acquiring on lottery and cross-selling into OSB and iGaming. So very excited about that one. But the short answer is we try to cross-sell between all of our products, and it doesn't cost that much more once you've acquired the customer onto the platform to get them to try new products.

Operator

Our next question comes from Robin Farley with UBS.

Robin Margaret Farley

I was originally going to ask how you balance your thoughts about capital allocation with M&A, but it sounds like you already sort of clarified that M&A is kind of not a major priority right now. So I wonder if you could talk a little bit about capital allocation options and what types of things you're considering.

Alan Ellingson

Yes, Robin, I'll speak to that. I think in the last few months, we've developed a lot more confidence than ever in our free cash flow trajectory for 2024 and beyond. To add some color, we recently kicked off our multiyear planning process. This is an exercise that touches all the functions verticals of the organization. And as part of this, we do evaluate potential uses of cash within our core business. We reevaluated the growth trends of the business and we look to maximize shareholder value. That does include potentially returning capital to our shareholders. So we anticipate we'll be able to share more specific details with you in the next quarter. But we're very comfortable with where we're at right now.

Operator

Our next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli

If you guys look out over kind of 2024 or 2025, what are kind of the key focal points or items that you're looking at from a legislative perspective, where you think -- whether it's iGaming or sports [betting] you think it will be kind of worth the efforts from your end to kind of make a push? And what are maybe the focused states and/or focused opportunities in your view?

Jason D. Robins

Yes. I think it's a great question. Obviously, having gotten up and running in 50% of the country population-wise, also roughly 50% of the states in only a little over 5 years is fast. And so I think, naturally, you're going to see a little bit of a slowdown on the sports side and also when you consider the fact that about a little less than half of the remaining population resides in 3 states, that will kind of give you a sense of where the focus is. There's a lot of states left for sure, but there's only a handful of really big ones.
And when you kind of extend beyond the top 3 into like 5, 6, 7 states, you're going to capture a lot of that. So obviously, we made a push in Georgia this year, came up a little short in several other states as well. I do think you'll see a couple of bills done later in the year on OSB. But as far as thinking out into 2025, I think the big focus will be on Texas. Texas, I think, has a real shot. It got through 1 chamber last year. And as you may know, the Texas legislature doesn't meet in 2024, so we're really gearing up for 2025.
Also, I think that if you shift over to iGaming, that's probably where there's going to be a little bit more rapid once I think you start to see some momentum legislation because still just a lot of untapped population there. We're still only live in about 11% of the population. So I think that once the states that in certain regions start moving on iGaming more, you'll see a more rapid succession of them. And I also think that the need for tax revenues is going to increase. I think there's a little bit of a delay in that with some of the COVID-relief money that was sent to state. So I do expect to see some momentum pick up in iGaming.
And I think that's where you might see the next kind of wave of states really quickly. And then as I noted, I think the focus in sports betting will be on a handful of large states. Obviously, we'll try to get bills pass wherever we can. But the real needle movers will be not just the top 3 I mentioned, but states like Georgia that are also very large states population-wise.
And then I guess the last thing I'd note is, obviously, as you know, we're in the process of completing our Jackpocket transaction. And I think there's a ton of state expansion opportunity there. And the vast majority of it doesn't have to be legislative. It's done without legislative action. So really excited about the prospects of getting that business up and running in a lot of different states. And I think you will see some additional states come -- get up and running for Jackpocket before the end of the year.

Operator

Our next question comes from Clark Lampen with BTIG.

William Lampen

I wanted to come back to marketing efficiency, especially since Jason, you noted that there's -- it seems like now there's an opportunity to invest a little bit deeper. Can you help us understand what's sort of driving some of the improvements that you noted in the shareholder letter. And I guess, maybe more importantly, whether what we're seeing now is indicative of ongoing improvements you guys think you can draw? I guess if I look at the numbers for the year, it seems like the OpEx guidance went up a little bit. And I'm wondering, specifically, are you guys seeing better payback periods right now that are leading you to lean in a little bit more aggressively on marketing? Appreciate it.

Jason D. Robins

You nailed it. I mean I think I mentioned earlier, the CAC for April was roughly 40% lower year-over-year. I mean we are seeing as efficient marketing as we've seen since, I think, basically launching sportsbook. So really, really excited about that. I don't -- I mean, just to be clear, we're not going to have a massive increase. I think this is like optimization around the edges where we see an opportunity, maybe invest a little bit deeper in a couple of areas. But this isn't going to be like a major shift in strategy by any means. I think we're going to focus on as markets mature, seeing lower and lower external marketing spend. And at the same time, it's not going to be a straight line.
There will be periods where we find good solid things that we can cut or just natural kind of market conditions lead to us cutting certain spend. And then there will be other times we identify windows where we can increase. And I think given some of the efficiency we've been seeing, we think there's an opportunity maybe for a little bit of a deeper investment. But like I said, it's a little bit. As you mentioned, it was not a huge move. It was just a slight increase in OpEx versus where we were before. And I think that's a sign of the strong revenue growth and unbelievable CACs that we're seeing.

Operator

Our next question comes from Joel Stauff with Susquehanna.

Joseph Robert Stauff

I wanted to ask maybe Jason, if you can discuss like your more recent customer acquisitions or cohorts versus, say, a year ago or whatever kind of time period to go? And the lifetime value or the LTVs that you calculate for those, are you seeing an improvement largely because of marketing efficiency? Or are the economics or the spending levels for the more recently acquired customers similar to, say, a year ago. I was wondering if you could discuss that.

Jason D. Robins

It's really both sides of the LTV and CAC equation. As I noted a moment ago, we had a really sharp decrease, about 40% better CAC in April this year than last year. And a continuation of really strong CACs through Q4 and Q1. And at the same time, we've also made a tremendous number of improvements to our product, to our CRM to our customer experience overall, which has led to stickier customers, our activity rates are higher than ever, and our handle and spend per customer is up. So I think we're just in a period of industry growth and still very early stage of the industry where a lot of things are just out there to be optimized and improved upon. And where I think the team is executing really well against both sides of the LTV and CAC equation right now.

Operator

Our next question comes from Robert Fishman with MoffettNathanson.

Robert S. Fishman

Jason, on media right partnerships, I'm wondering if you can talk about your Amazon relationship and how that's helped drive incremental opportunities for Thursday Night Football. And then really, any early thoughts on how that partnership can be expanded if they're able to secure a big NBA package or maybe any other comments you want to make on NBA's new media deal and how that could impact DraftKing. And then just separately, if I can add, wondering if you could just speak to Jason Parks new role and how you could characterize the biggest near-term versus longer-term opportunities with that?

Jason D. Robins

Great question. So on the first one, Amazon has been a great partner of ours. We've really gotten a lot of value, and I think they have too out of the relationship and if there's ways we can expand it depending on what their future plans are, then that's certainly a discussion we would welcome. And I'd also note we have great relationships with a number of different parties that are rumored to be involved in the bidding. So wherever it lands, I look forward to hopefully finding ways to build relationships and bring great content to customers and partner with other great organizations. So we'll have to see how that plays out.
And then in terms of Jason Parks role, as you may know, Jason actually just turned the reins over to Alan officially, I think, like a day or 2 ago. So he's been working hard on the queue and on everything else just like the rest of us. And I think where he's had some spare bandwidth, he's really dove into the Jackpocket integration, which obviously is a very immediate term thing that we need to really make sure we do a good job with. So that's been his immediate-term focus. I think as he rolls off this CFO role and Alan rolls in, I think you'll see him start to have more time free up. And my expectation is that areas like payments and AI will be a major focus for him in the next 6 to 12 months. So more to come there, but really, I think, looking at things that, hence the title can be more medium- to long-term transformational for DraftKings as well as obviously making sure given how important the Jackpocket integration is that we do a great job there.

Operator

Our next question comes from Dave Katz with Jefferies.

Unidentified Analyst

This is [Ara Mattias] for David Katz. Congrats on the quarter. I wanted to ask how you're thinking about AI, maybe high level, but in terms of range of uses and responsible gaming.

Jason D. Robins

Yes. I'm excited you asked that. This is one of the areas that I know a lot of companies are talking about, and we certainly agree can really be impactful in a significant and transformational way to DraftKings in the future. So we're all in on it. I think some of the early momentum we've gotten and really the focus for us is utilizing best-in-class third-party applications. Right now, we're using multiple tools from about 5 to 10 vendors. And we're testing a variety of different use cases across the company, things that improve our product like rapid prototyping and sprint metrics supporting and also initiatives that improve efficiency like code refactoring, code review and marketing asset creation.
And then obviously, being customer-centric, customer experience is at the center of our AI initiatives, including using AI to help model and detect signs of problem gaming. So that we can properly fag things for our player intervention team to go and investigate. So lots of really good stuff there. And I think we're just scratching the surface. It's super early, but our focus is not on trying to build proprietary tech as much as it is. I mean we may build some on top of it, but it's really getting in there and using best-in-class third-party tools and figuring out the proper applications to drive value for DraftKings.

Operator

Your next question comes from Michael Graham with Canaccord Genuity.

Michael Patrick Graham

I wanted to help -- ask you to help us think through the platform becoming more of a mass-market entertainment product in some of your more mature states like New Jersey, are you seeing penetration slow down there? Is it hitting a J-curve type of dynamic? And could you also address what's going on with GGR concentration at the top end of the customer base? Is it becoming a little more spread out or more concentrated? Just hit on some of those dynamics.

Jason D. Robins

Yes, it's a great question. I mean, all of our older states, and you have to remember, there's still even New Jersey, it's still only 5.5 years in. So they're all still really growing nicely. In fact, if you take sort of a same-store view of our 2018 to 2022 states, we grew net revenue about 40% year-over-year in Q1. So really healthy growth in our existing states. And I think we'll continue to see that as we improve product and also just as the industry develops and the TAM increases.
As far as the concentration, we're seeing it actually trend a little bit away from that. So definitely, as with any industry, there is a cohort of customers that spend a lot. And that drives a decent amount of the revenue. But I think especially relative to other companies in the industry, we're much more diversified. And the trend we're seeing is more and more casual is coming to the market, particularly as you noted, in older states, I think as more people come into the market, that percentage of casual increases. So definitely something that we're seeing trend in that direction.

Operator

Our next question comes from Ben Chaiken with Mizuho.

Benjamin Nicolas Chaiken

You mentioned promo expense was down over 700 basis points year-over-year, which is clearly generating a lot of operating leverage on net revenue. I would love to hear your thoughts around maybe what's driving the improvement? Is it just the natural evolution of the existing customers who are happy to use the product? Is DraftKings becoming more accurate and efficient how you target? Or is it a function of just kind of entering less states? It'd be good to hear any color on what you think the biggest drivers are of the traction and then the largest opportunities going forward?

Jason D. Robins

Yes. I mean I think the biggest thing is the natural evolution and you mentioned this in your last point. A lot of that comes from entering some new states. So last year, in Q1, we launched Ohio and Massachusetts. This year, we launched North Carolina, Vermont, which are still 2 big states, but populations -- combined population in North Carolina and Vermont is definitely lower than Massachusetts and Ohio. Secondly, just as the customer base matures, we're seeing an increase in the ratio of existing customer volume to new customer volume, which is naturally bringing down the promo rate.
So a lot. In fact, the majority of it is just the natural maturity of states. And as you noted, having a lower percentage of the population launched in Q1 this year than last year. Secondly, we always are working to optimize, and the team has done a fantastic job over the last year really finding ways to lean in, in places that are working and cut in places that aren't. And I think that's made a lot of improvement also in the year-over-year drop. And there's still a ton of opportunity there. I mean we're just scratching the surface on some of this stuff. And I think the level at which we can kind of personalize the experiences will also help us increase return and optimize promo and we're just scratching the surface there, too. So there's a lot of upside on that line item.

Operator

Our next question comes from Brandt Montour with Barclays.

Brandt Antoine Montour

So the iGaming market accelerated in the 1Q growth rate for the overall market, you guys accelerated your iGaming growth rate. Jason, I'm wondering if you have any thoughts on what was driving that at the market level if it was you and your peers, better marketing, better cross-sell and if you think you saw more -- or you guys at least did you saw more acceleration on the MAU side or the ARPMUP side?

Jason D. Robins

Yes, it's a great question. I think that a lot of it is just momentum of the industry, and we're seeing it in sports, too. Just a lot of new customers coming in and a lot of people that are crossing over from sports into iGaming. I also do think that some of it has been product driven. We've made a lot of improvements to our product, many of which we noted on our earnings call earlier, on the scripted part of the earnings call earlier. So definitely a combination of those things. And then I think, certainly, on the marketing side, we've improved as well. That's definitely been a little more recent. So I don't know how much of that's driven the industry growth. But I think we found some wins in the recent days that have helped us acquire customers more efficiently as well.

Operator

Our next question comes from Barry Jonas with Truist.

Barry Jonathan Jonas

First off, congrats, Alan, on the new role. I wanted to ask about technology. Smaller competitors talk about narrowing the gap. And we know you're not standing still, but are there more specific parts of the product you think you'll be able to maintain your competitive edge over time better than others?

Jason D. Robins

Absolutely. I mean, first, sports, in particular, but really all online gaming products are incredibly complicated. There's a ton going on. I think, first and foremost, having a lot of scale and a very wide customer base gives us an advantage because we have more data and more data points to model and to improve personalization and make other decisions off of. Secondly, as you noted, we continue to invest and being at scale gives us a much larger revenue base to invest in product and engineering. And so we continue to lean in there. And I think that there's a ton we can do to improve the product that will hopefully be revenue additive and certainly will be competitively differentiated.
The other thing that I would say is that a lot of what we're focused on now. Yes, we continue to focus on customer-facing features, but a lot of what we're focused on now are kind of behind the curtain type of things that help us optimize hold rate and trading, things that help us personalize experiences that retain and create stickier customers. Those things are harder to copy because it's not an obvious consumer-facing feature that somebody can say, "Oh, yes, I'm just going to figure out how to do that." Oftentimes, it's invisible to the front end. So I think there's a lot of advantage that can be maintained long term and those sorts of things as well as sort of just the inherent advantages of scale and robustness of data size and size and efficacy of product and engineering team.

Operator

Our next question comes from Dan Politzer with Wells Fargo.

Daniel Brian Politzer

I want to touch a bit on iGaming again. One of your closest competitors in that market seems to be gaining some share momentum. Could you maybe talk about the promotional environment and how you think about kind of the share outlook for yourselves as we look forward?

Jason D. Robins

Yes. I mean I think what you're seeing, which probably isn't surprising, it's the same dynamic emerging in iGaming as in OSB. So on the one hand, I think that, that gives a lot of sort of clarity in terms of investors of what long-term market structure could look like, which is good. And I think for us, we just continue to focus on trying to deliver the best customer experience. And I think if we do that, we'll maximize our long-term share of the pie. But I do want to note that share is not the only metric. Obviously, everybody follows that, and that's a lot of questions. But we're focused on being the most profitable company in the space and making the most money. So I think that's ultimately how we define share of the space, not GGR share. Obviously, GGR share is a helpful metric to look at, but bottom line share is the most important thing.

Daniel Brian Politzer

And then just one quick housekeeping. Did you guys give an actual hold for the first quarter? I know you gave the structural, but if you could provide actual , that would be helpful.

Jason D. Robins

Yes, I think we've said about 9.5%.

Operator

Our next question comes from Jed Kelly with Oppenheimer.

Jed Kelly

Great. Just can you talk about MAU trends? I thought it was down in the first quarter, realized you were comping some state launches. But can you speak to that? And then just as a follow-up, you're launching your new Pick6 product. Can you talk about how that can help you build your database in states where sports betting is not yet legal.

Jason D. Robins

So on the first one, are you talking about like versus consensus because we were up on MUPs year over...

Jed Kelly

No, I just I'm talking -- it was down sequentially...

Jason D. Robins

From last quarter.

Jed Kelly

Yes. So first quarter...

Jason D. Robins

That's just seasonality. Yes, that's just seasonality. That typically happens. And I think the biggest thing also that drove that was the state launches actually probably even more than seasonality, to be honest, that's what you're seeing there is the state launches. We had Ohio and Massachusetts launch in Q1 of last year. So that drove a lot of MAU in that quarter. So I don't -- there's nothing kind of other than that going on there. And then sorry, what was your second question?

Jed Kelly

Just on how does your Pick6 product help you build up your databases in states where sports betting is not yet legal?

Jason D. Robins

Yes, it's a great question. I mean, Pick6 is our latest fantasy product. I think we're pretty excited about it. We think it's something that could definitely as all of our fantasy products have helped us build the database in states that aren't yet legal. And also just create additional revenue and new ways to engage with our customers. So you nailed it, that's kind of the goal there. And I think we haven't done a lot to innovate in fantasy until the last year or so. And I think the team is energized and focused on getting back to innovation in the fantasy space as well, and this is a great example of that.

Operator

Our next question comes from Bernie McTernan with Needham & Company.

Bernard Jerome McTernan

Jason, given the increased news flow this year about state tax rates potentially going higher in some areas, if there was an existing or relatively mature state increased taxes, what would the impact be? And then what levers would you have to offset that and over what time frame?

Jason D. Robins

Yes. So first, I do think states understand that there is still a very large illegal market. That's not going away. And in order for us to continue to be able to be competitive and not drive customers back to that market and also continue to take customers out of that market because there's still quite a few even in the most mature states that they need to keep tax rates at a reasonable level. So I do expect that, that will be the case. But we're prepared either way. I mean in the end, the cost has to get absorbed by the consumer if the government raises taxes.
So there's various levers to do that. Also, we could lower external marketing, which I think will be also partially just driven by the fact that if taxes go up, we're going to have to create better margins and that will be a lever that we'll have to pull as well. But like I said, I think that states do understand that any sort of negative impacts to the consumer offering that companies would have to take where tax rates increase would really be counter to the notion that we're trying to drive activity from the illegal market to the legal market, which has enormous number of benefits, only one of which is generating taxes.
So I think states get that, and I expect that maybe there'll be 1 or 2 here and there that look to do that, but I don't think many of them will. And I even think the ones that are getting a lot more information now. And my expectation is that we'll be able to convince them that it's not a good policy decision.

Operator

Our next question comes from Jordan Bender with Citizens JMP.

Jordan Maxwell Bender

Going off at Jason Park's new role in the payment processing, how should we be speaking about what that looks like to bring your payment costs more in line with your long-term goal. Is it coming through initiatives like bringing down the interchange rate that you're paying or more strategic like bringing some or all of that technology in-house?
And then, Jason, I just have a follow-up. In your prepared remarks, I think you said the new state launch should add to EBITDA in the back half of the year, is that to say that the paybacks are just way ahead of any states that have been launched in the past?

Jason D. Robins

Yes. So on the first question, it's still early, so I don't have a lot of specifics, but I think the types of things that Jason will be looking at are consumer-facing optimizations, like are there ways that we can motivate consumers to use lower-cost payment methods as well as other sorts of medium- to longer-term solutions like in-housing of certain pieces. So really don't know where it's going to go because it's very much an exploratory. And as I noted earlier, he just turned over the reins to Alan in the last day or 2. So I haven't really had a chance. He hasn't really had a chance to dig in there yet. But I do expect there's a lot of opportunity there.
And just to clarify one thing, you mentioned in order to reach our long-term levels. Right now, we are tracking to where we have set expectations long term as far as payment costs go. I think this is really looking for opportunities for upside above and beyond that. We feel like already we're based on the trajectory of our current business, and this isn't just for payment processing, it's across all the different metrics of the KPIs that we have, we feel good about that trajectory. So this is really about looking for additional upside above and beyond what we shared at Investor Day last year.
And then I'm sorry, what was the second question?

Jordan Maxwell Bender

Yes. Just a follow-up. In your prepared remarks, I thought you said that the 2 new spaces that were just launched should add to EBITDA in the back half of the year. Just -- is that -- did I hear that correctly?

Jason D. Robins

You did. Yes. So that is baked into our guide. And you're right. I think the last -- it's really been a trend not just with these 2, but with the last year or 2 of states. Last year, we noted Ohio and Massachusetts, both contributed positively by Q4. I think this year, our expectation is that the 2 that we launched, North Carolina and Vermont will actually contribute possibly to the entire back half of the year. So I think it's just another example of how we continue to get better and better at optimizing our state launch playbook, we're able to capture a tremendous amount of value in a much shorter period of time with a much more efficient level of investment than we did, say, 3, 4 years ago.

Operator

Our next question comes from Chad Beynon with Macquarie.

Chad C. Beynon

Jason, I wanted to ask really what gave you the confidence to raise the structural hold to 10.5%. Obviously, it's early in the year. Is that just kind of a combination of what you're seeing with pre-match, legs of parlays, in play, et cetera? Any color around that would be helpful.

Jason D. Robins

That's exactly right. It's really a function of some of the product enhancements we've made in what we're seeing that due to our parlay mix and average leg count. Progressive parlay as an example, is a much higher average leg count than a typical parlay. So that's been one of the many examples of contributors. We also are right now in the process of rolling out across states cash out for SGP, which is another lever, I think. So it's really a testament to the work the team has done to drive that mix and average leg count.

Operator

Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group.

Ryan Ronald Sigdahl

How do you think about pricing going forward? Our checks indicated DraftKings offers the most competitive or best odds for consumers while also generating industry plus hold due to the bet mix. So kind of a win-win there. But how much of a competitive advantage do you think that is as it relates to customer retention?

Jason D. Robins

Yes. I think for most markets, the price is the price. So I think when it comes to like being able to have optimal pricing for, say, some of the lesser bet markets, there are some customers that may line shop. I don't think it's the majority of them, but some do. And then there's other bet types that tend to have more line shopping like futures bets. But most of the mainstream bets, the player props, the game lines, the over unders are typically fairly comparable.
That said, we always make sure that we're competitive. And so we're not trying to win on price, but we're also not trying to have worse pricing than anyone else out there. And I think you noted this, but the real sweet spot is if you have great models and your pricing is tight, you can actually hold better and continue to be super competitive on the pricing side. Those things are not at odds at all.
And the other thing I would mention is -- and this is also a really important part about having great models and tight pricing, the market uptime can be much higher, which I think particularly for live betting is a significant advantage if customers are trying to live that and can't get through, then they're going to go somewhere else. So that's another real advantage to having tight pricing and strong models.

Operator

Our next question comes from Jeff Stantial with Stifel.

Jeffrey Austin Stantial

Jason, it's been several quarters now of pretty meaningful upside from user acquisition retention and monetization trends. As time goes on, are you seeing sort of the relative impact for each of those individual drivers shift around? In other words, are you seeing user acquisition surprise to the upside more so than monetization relative to trends last year or the inverse or is the relative contribution of each state mostly constant.

Jason D. Robins

At any point in time, there's definitely something that you're more like, wow, that is just crushing what we expected. But I will say last few years, really, the last 2 years in particular, it's been across the board. I mean this last sort of quarter and particularly in April, it's been customer acquisition, for sure, which I think was true for Q4 and Q1, but I also -- I've seen significant increases to LTVs made over that period of time, too, our player activity and retention levels have been higher than ever. So I think as we improve the product and also as we just get more data and continue to do the analysis, continue to optimize, continue to build better tools that allow the teams to trade and also tools on the marketing side that allow the teams to get data to optimize the marketing better. Same thing with promos.
We're just -- again, we're at that stage, I think, the industry or the company where there's just so much that's obvious that we can do, and it's just cranking through all of it, and it's really moving metrics across the entire value chain. So I can't point to any one thing overall, but you are correct that at any point in time, you might be like, wow, we had a great quarter from a customer acquisition standpoint. But often that comes with a great quarter from a retention standpoint, too, because a lot of times the same things that you're doing to drive acquisition also drive great activation and retention.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Jason Robins for any closing remarks.

Jason D. Robins

Thank you all for joining us on today's call. As you can see, DraftKing is off to a fantastic start for 2024, and we're really excited about the rest of this year and beyond. I look forward to speaking with you over the coming weeks and hope you all stay safe and well. Thank you.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.