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DKNG reported 2Q20 earnings this morning. The company guided 2020 revenue to $500-540m, ahead of our recently raised $501m / cons $496m, and implying 2H rev growth of 22-37%. Mgmt noted revenue grew 20% in June, despite still lacking major sports leagues. 2Q20 EBITDA of $(60)m was generally in line with our $(62)m / cons $(59)m. Revenue came in at the high-end of DKNG’s pre-announced range of $70-75m. One place we were off with our preview was that avg revenue per monthly user was an impressive $63, up 51% y/y and vs. MSe $45, but monthly unique payers of 295k was down 35% y/y and below MSe 386k. This qtr was very difficult to predict given the lack of major sports but increase of iGaming, we expect things to normalize in 2H closer to 1Q when both grew double-digits. One negative was that DKNG’s fully diluted share count was 393m vs. MSe 375m, however, this is a function of greater warrant / option exercising and the company had >$1.2B of cash vs. MSe / cons $1.1-1.2B.

IRS memo not law. Yesterday afternoon a number of news reports highlighted that IRS had posted a memo stating that Daily Fantasy Sports (DFS) should be subject to the Federal Excise tax on wagering of 0.25% of handle, and a tax of 2% in states where DFS is not explicitly legal. This is just a memo and we expect DKNG and FLTR to fight the finding given numerous states have defined DFS as a game of skill not luck, and thus would not fall under the excise tax rule. If the rule does take effect, we estimate DFS is ~25% of DKNG’s revenue in 2020 but falling to <10% by 2025. Given half of ~40 states that the two operate in are explicitly legal for DFS, this only implies a ~$20-30m ongoing annual headwind for each operator in a worst case scenario, but there could be a larger 1x payment if enacted retroactively.