Rush Street Interactive, Inc. (NYSE:RSI) Q3 2023 Earnings Call Transcript

Rush Street Interactive, Inc. (NYSE:RSI) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rush Street Interactive Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note that this conference call is being recorded today, November 1, 2023. I’ll now turn the call over to Kyle Sauers, Chief Financial Officer. Please go ahead.

Kyle Sauers: Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2023 earnings release. It can be found under the heading Financials Quarterly Results in the Investors section of the RSI website at rustreetinteractive.com. Some of our comments will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not statement historical fact and are usually identified by the use of words such as will, expect, should or other similar phrases and are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We assume no responsibility for updating any forward-looking statements.

Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2023 earnings release and our investor deck, which is available on the Investors section of the RSI website at rushstreeteinteractive.com. With me on the call today, we have Richard Schwartz, Chief Executive Officer, who first provide some opening remarks and then open the call to questions.

With that, I’ll turn the call over to Richard.

Richard Schwartz: Thanks, Kyle. Good afternoon, and thank you for joining us today as we discuss our third quarter 2023 results. We have spent more than a decade building and continuously refining and operationalizing our technology platform to support our product suite and operate frictionless experience for customers. Our goal from the beginning has been to develop an experience that retains customers. In today’s landscape, we are unique, a digital-first operator with an iCasino customer-centric approach. We’ve consistently maintained that as the industry grows and matures. Consumers will naturally gravitate toward the best products. As a playing field levels with a tide of marketing and aggressive bonus in dollars slowly washing away, that is what we are seeing.

Consumers are being more discerning and deciding where they want to play based on product and user experience. Our third quarter results offer further evidence that we continue to grow in very competitive markets with a remarkable success and resilience. Revenue for the quarter was $170 million, up 15% versus the prior year quarter. We are seeing that growth come from both increasing handle across products and higher sports hold due largely to our ability to innovate, which I will get to shortly. We’re also growing our revenue much more efficiently as our adjusted marketing spend was 24% lower compared to the same quarter last year. The result is we were increasingly profitable on an adjusted EBITDA basis and significantly improved compared to a year ago.

In fact, for the 9 months year-to-date, we’ve improved our adjusted EBITDA by over $70 million compared to last year. The majority of which was driven by revenue growth and improving operations. Given our outperformance during each of the 3 quarters of this year, we now expect to be adjusted EBITDA positive for the entire year well ahead of our original plans. We will continue to innovate and leverage our insights to develop and offer our customers differentiated and fun experiences that appeal to them while continuing to achieve sustainable growth and profitability. Our customer-centric focus is working. We maintain market-leading ROIs, driven by industry-leading unit economics. With growth opportunities via access to future iCasino markets in North America, combined with our leading Latin American business and additional opportunities in new markets in the region, we remain excited for what lies ahead.

There are a handful of large population countries in the region who have legalized or are in the process of legalizing online gaming. So we’re glad to be in the right place at the right time. We continue to see growth across our markets, demonstrating that our approach to building a platform and business with an unrelenting focus on the player experience is working. For those of you that track the publicly available state casino data, the trends are evident. While we focus on profitable growth as a priority of our market share, it’s nice despite our marketing spend decreases. We’ve continued to grow market share in a meaningful number of U.S. markets. Our quarterly online casino share in the states of New Jersey and Michigan are higher than any time over the past year.

And our online casino share in West Virginia is at the highest level since we launched 2.5 years ago. We are also seeing similar trends in 8 of our online sportsbook market this quarter. For example, our shares in the states of Michigan, Virginia, New York, Maryland and Ohio, are all at the highest level since launch. With the first 3 of those launching roughly 2 to 3 years ago. In addition, our shares in the states of Pennsylvania and Indiana are the highest they’ve been in 1.5 years. The end result, this quarter is the first time in the company’s history that our sportsbook only markets are profitable. This sets us up well when iCasino gets added and supports our plans for long-term sustainable profitability. It is interesting to note that we continue to experience success in very competitive markets.

Markets that were launched in periods of heightened competition with a rational promotional spend as those unsustainable spending levels abate and product and customer experience have begun dictating where people play or which online gaming operator that choose to spend the largest share of their wallet with. We have been faring increasingly well. Markets launched after 2020, along with our international markets grew approximately 40% year-over-year during the quarter. Domestically, as the U.S. markets mature, we are very pleased with the balance we are achieving in our top line growth and the efficiency of the marketing investment required to maintain that growth and retain customers. We are seeing improved efficiencies that will set us up well for 2024 and beyond to grow revenue and further expand profitability.

I’ll share just a few highlights. West Virginia continues to be a great story for us. It’s a market where we launched later than our competitors and without any starting database, our meaningful brand awareness. But we’ve been able to build to over 14% market share in iCasino during the third quarter. This is our third market where we’ve accomplished this in addition to Colombia and Pennsylvania. In fact, our West Virginia year-over-year revenue was up over 100% during the quarter, and this follows year-over-year growth of 98% during the second quarter. In Ontario, we are proud of our performance in a highly competitive market. Year-over-year growth continues to be very high, around 60%. Our brand and customer experience are resonating well.

As we’ve seen in the prior quarters from earlier in the year, we are maintaining a significantly higher ARPMAU versus the competition. This is in a market that is roughly 3 quarters weighted to iCasino, which plays to our strength. In New Jersey, we posted our second highest level of quarterly revenue since launch in 2018 as the results reflect the benefits of our rebranding efforts in the state. The year-over-year growth in this quarter was the highest level we’ve achieved since introducing the Bet Rivers brand in New Jersey last summer. And our U.S. online sports bit-only markets, we are continuing to see double-digit year-over-year growth and market share growth in many of those states, despite coming up against more difficult comparisons in the prior year and reduced marketing by RSI in those markets.

In Latin America, we continued to perform well, with revenue contribution now over 11% of total revenues. In Colombia, we continue to expand at a rapid pace. Revenue grew 41% compared to last year. In Mexico, we remain on schedule with our ramp as we started to be more assertive during the quarter. Of course, we are beginning with a small base, very similar to what Colombia looked like several years ago. Thus, the sequential growth this quarter was very high, near 90% compared to the June quarter. As we’ve conveyed prior, the approach in Mexico takes the playbook from Colombia. We’re over a several year period. We cultivated the Rush Bet brand by consistently localizing the platform and creating a great player experience that consistently improved.

As a comparison, Mexico has generated more than 2x the revenue of Colombia when measured from launch state. Needless to say, we remain bullish on the Mexican opportunity for RSI. Looking ahead, expanding our footprint. We announced some very exciting news in August. We shared with the market that we were selected by a Delaware Lottery as their exclusive online provider. We are targeting to launch by early winter. For those who are not familiar with Delaware, we will be the sole and online sports platform in a state, powering online casino and sports betting for each of the state’s 3 casinos. We are very excited for this opportunity as we see Delaware as a market that plays to our iCasino strength. The results from Delaware’s online casinos are publicly available.

As it stands today, before we launch, we see a market that is doing a little above $13 million annually of GGR, of which over 80% of that is online slot revenues. These levels did not include any online sports betting, which has never been offered in this market. In addition to adding online sportsbook, another change will be how the digital business will be marketed. Our agreement with the lottery provides for an earmarked digital marketing budget which is different compared to how the market has operated historically. We believe this will help us grow the market. Additionally, when customers log into the apps and sites, we expect them to find a leading online casino experience. We think we will be able to showcase our ability to deliver a unique and differentiated iCasino experience by bringing new functionality and features not previously available to online players in Delaware.

We are also planning to bring a wider selection of vendors and a greater variety of content to the market. Thus, when we consider the capital results of other iCasino markets, combined with how we expect to approach the market, we are very excited to partner with Delaware and grow its iCasino and online sportsbook businesses. We think it can become a meaningful contributor for us, both in terms of revenue and adjusted EBITDA. We’ll continue to keep the market posted as we launch. Shifting gears from a legislative standpoint, as we move into 2024, we will begin to see the legislative sessions around the country reconvened. There are a host of states on our radar that we will be watching closely. Most recently, a center in New York has indicated plans to reintroduce legislation for online casinos in 2024.

Additionally, there continues to be activity in additional provinces in Canada Alberta. At the same time, we have several jurisdictions we are following closely in Latin America. There is no shortage of near- and long-term opportunities in our universe. We remain confident over the long term given the potential economics to government budgets, especially as compared to inflows from online sports betting. That expansion in iCasino legislation is increasingly a question of when, not if. And our focus on customer engagement and retention, we have made tremendous progress on the product and technology front, recently in both iCasino and sports betting. We spent time in the past referencing our unique approach to the online casino player experience, whereby we build bespoke and gamified features on top of the core game library supplied to us by third-party game studios.

Over the past 10 years, we continually developed a wide range of casino innovations to offer our players unique ways to play, have fun and win when they play with us. Whether it’s our unique to the industry community features for our flagship casino promotional engine, our goal has always remained constant. To increase ARPU of retention by offering players fun and unexpected best-in-class experiences developed in-house by our talented product and engineering teams. While our understanding of casino player mindsets and motivations are important, so too is our ability to leverage our experience and expertise to develop these new-to-the-world experiences. Together, this is a big reason why we have and continue to achieve success in the online casino vertical.

However, I’d also like to point out that strong execution on game integrations and launches also matters for players. Execution in terms of offering a great breadth and quality of content for our players have a leading selection of content to play and can easily find the games they prefer to play based on our recommendations. In the third quarter alone, we launched more than 1,000 new slot titles. We were first to market with many important titles, demonstrating the seamless way we work with game providers integrate games quickly but in a way that also optimizes a consistent and fast user experience. We are the first in market with a differentiated authentic live dealer table is in Michigan which is exciting for us as we continue to focus on expanding the live dealer selection for our customers.

In sports betting, we kicked off the football field launch of PROP CENTRAL to offer our customers an easy-to-reach menu to access a wide range of player prop, wagering options in a single location. Historically, for merchandising of popular props betting content was decentralized throughout the app. A customer had to go through the relevant sports event to access probes. With PROP CENTRAL, we have entirely changed how we merchandise these props. Now there is a central hub for all player props across all major sports and it is presented in an easy-to-use and uncluttered format. The results have been very positive thus far. With a year-over-year increase in propped handle of 87%. That is not all that we’ve added to the sportsbook. We continue to leverage the success of our bespoke squares game.

Starting with the season, we have made squares available on every NFL game at most college football games. We are giving customers more chances to win bonuses and achieved profit business. We’ve even added a bad beet mechanic to square to drive increased engagement with sports betters. We feel really good about where we are positioned. As we’ve been saying from the beginning, and our view product and experience will win the day. As we continue to successfully retain customers and reactivate customers efficiently, we continue to expect to deliver profitable growth. We remain well capital as we advance our platform. We maintain the fiscal and operational discipline to be able to keep growing our profitability over time. With that, I’ll turn the call over to Kyle.

Kyle Sauers: Thanks, Richard. Third quarter revenue was $169.9 million, up 15% year-over-year, once again, with well-balanced growth across the business. We continue to see strength across the board in iCasino, sports in both our U.S. Canadian and LatAm markets, all of which grew double digits during the quarter. We posted our second consecutive quarter of positive adjusted EBITDA with the third quarter number coming in at just over $4 million. As Richard mentioned, we’re much improved compared to last year as our adjusted EBITDA for the first 9 months of this year is up by over $70 million. We now expect to be adjusted EBITDA positive for the full year 2023. While we remain true to our approach of allocating more resources to those markets that include iCasino, the good news is we have been gaining share in most sportsbook only markets with a greatly improved product, which positions us extremely well when these markets add iCasino.

In fact, while we continue to see strong profitability from our iCasino markets, as Richard pointed out, this marks the first quarter we were profitable in our sportsbook only markets and looked at as a whole. This is a trend we’ve been talking about in recent quarters and sets us up well going forward. We continue to see high-quality players attracted to our platform and our U.S. and Canadian ARPMAU of $374 reflects this trend as this is the highest ARPMAU we’ve seen in 8 quarters, up 4% sequentially and 8% year-over-year. grew 2% year-over-year and 4% in markets with iCasino, all while reducing adjusted marketing spend during the quarter by 24% year-over-year and 16% sequentially. Regarding hold, iCasino was in line with our expected range.

As Richard mentioned, in online sportsbook, we’re seeing our expected hold percentage move higher due to the innovations we’re making to shift our sports mix to include more player prop bets. In terms of percentage of bed count, our same game parlays increased by 55% year-over-year and the new PROP CENTRAL functionality Richard talked about helped drive 87% year-over-year increase in prop bet handle. We think these improvements are sustainable and are contributing nicely to the success we are seeing on the sports side. Our gross profit increased 20% on the 15% revenue growth. The result was an improvement in gross margin to nearly 32% compared to 30% during the same quarter last year. We’re well down the road to be able to show meaningful improvement for the full year in our gross margins.

Turning to marketing. We continue to get more efficient with our spend. Quarterly adjusted advertising and promotion spend was $34.1 million. This was down from $44.7 million last year and down from $40.4 million in the second quarter. This is being accomplished at the same time, we are in market share, continuing to grow active user count and getting a larger share of wallet from our players measured by ARPMAU. Regarding G&A expense, we were at $15.8 million for the quarter, which was up from $13.9 million in the second quarter. If you recall, last quarter, we had some tailwinds from foreign currency during the second quarter and mentioned on our last call that we expected G&A costs to be back near or above Q1 levels in the third quarter. In the third quarter, we had currency headwinds of roughly $1 million — said another way, without the effect of currency impacts in Q2 and Q3, our G&A would have been similar for each of Q1, Q2 and Q3 of this year.

We ended the quarter with $171 million in unrestricted cash and no debt. The cash balance increase during the quarter was mostly from improvements in working capital. In addition, during the quarter, we freed up some of our restricted cash to give us more flexibility and allow us to earn interest on these funds. With our EBITDA now turn positive, we are comfortably more than fully funded to reach cash flow positive. We are tightening and raising our guidance for the full year. We now expect full year revenue to be between $665 million and $685 million, which increases the midpoint to $675 million, up $5 million from our previous guidance. And with that, operator, please open the lines for questions.

Operator: [Operator Instructions]. Our first question for today comes from Jordan Bender of JMP Securities. Please go ahead.

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Q&A Session

Jordan Bender: I’ll actually stick my follow-up, Kyle, you just kind of referenced the guidance range for ’23 moving up at the midpoint.

Kyle Sauers: I think we lost Jordan there. Are we still live on the call.

Operator: Jordan, you might have muted yourself locally?

Jordan Bender: Yes. Sorry, can you guys hear me?

Kyle Sauers: I can hear you now.

Jordan Bender: There we go. Sorry. You mentioned the guidance went up at the midpoint for the year. Can you just kind of talk about where competition falls into that number when thinking about maybe the top end or either in the lower end of that range, just given some of that incoming competition coming up.

Kyle Sauers: Sure. I’ll take that one. I think it’s a factor, but there’s a lot of different factors when we think about defining the revenue range. You’ve got, particularly in Q4 for us, sports hold is a bigger impact. We’ve got some markets that are growing faster than others. So we have to think about the variability there with potential currency impacts. And then we still have the anticipated upcoming exit from Connecticut that we’ve got built in some variability around that. So competition is a piece of it, but it’s one of many factors.

Jordan Bender: Okay. And then in September, you guys are included in this. It seems like motion stepped up on a same-store basis from the prior year, obviously, with the NFL coming in that’s expected. But the drive up higher, are we seeing a little bit more of a promotional environment out there? And then does that also translate into the iGaming side of the business.

Kyle Sauers: Yes. Thanks for the question, Jordan. I think maybe to start with just the bonusing strategy. It’s going to look different in different markets depending on the opportunity for us in that market, maybe what the competitive landscape looks like. in that market, even the taxability of bonusing. So I think we just need to understand that extrapolating out from one or a few markets when you’re looking at bonusing doesn’t necessarily apply to every market. I will point out that we were particularly low last year in Q3. So from a year-over-year perspective, does look higher. But we have been about where we where we have been on the sports side for the last several quarters. So it wasn’t a big sequential change for us.

And I think the landing of bonusing will continue to be dynamic and change for us and probably for all players, depending on how markets are maturing and how you’re thinking about spending on external marketing spend versus bonusing for retention and reactivations. And then to the last piece of your question about iCasino, that’s been a relatively flat for us. I think it was actually down year-over-year in terms of percentage of bonusing relative to GGR in the third quarter. So no major shifts there. And you can imagine that’s a much bigger impact on the overall business for us given that we’re 3.75-ish iCasino versus sports.

Operator: Our next question comes from David Katz of Jefferies.

David Katz: The Delaware opportunity sounds like a pretty exciting one. Can you just talk about the scale and scope of how we might think about that relative to the size of your business? Or any sort of color you can put around its magnitude would be helpful.

Richard Schwartz: Kyle, why don’t you take that one? I think with the high data [indiscernible] we’re excited about the market. But I think in terms of the actual impact financially, I think we’ll turn it over to Kyle to mention.

Kyle Sauers: Yes. So obviously hasn’t launched yet, not included in any guidance. We’ll certainly assess how that’s going when we get to our Q4 call and have more color at that point. But we are really excited about it for the reasons Richard mentioned. Very confident about the product and how it’s going to be received by players in that state. As Richard mentioned, there’s some marketing dollars that are going to be put to work and that’s new there. The market is pretty small right now. But over time, we think there’s a pretty nice opportunity to expand. It’s not going to happen overnight. But if you maybe just relative data points, if you just compare Delaware to our other live markets in the U.S., New Jersey, Pennsylvania, Michigan, West Virginia.

And you just match up adult population, income levels, you could argue that Delaware is only 1/10 the size relative to those other states as it should be over time. So again, it’s going to — it will take some time, but we think it’s a really great opportunity.

David Katz: Just to follow up there, is it something we should be thinking about as negative profitability initially? Or do you have enough scale at this point where you can sort of operate neutral and build over time?

Kyle Sauers: So I would not think about it as some big headwind in 2024 like most markets, it takes a little while to get up and running. There’s some costs associated with that. But like other North American casino markets, that we’ve demonstrated. Delaware, it should get profitable pretty quickly. And it’s going to take some time to grow. But I think just maybe thinking about the economic profile, gross margins in Delaware for us should reach kind of near our company average and the contribution margin should likely be higher over time because there’s not going to be the same marketing intensity that you’d have in a single operator market.

Operator: Our next question comes from Chad Beynon from Macquarie.

Chad Beynon: I wanted to ask about flow-through or margins. The last 2 quarters, you’ve grown revenue about $20 million year-over-year. And EBITDA has increased between $15 million and $20 million during those quarters, respectively, year-over-year. So flow through in the 75% to 100%. In the fourth quarter, based on your guidance and Richard, based on your commentary that the year should be profitable, that would kind of infer that flow-through will actually be higher than 100%. So first question on that. And then more importantly, as we think about 2024, if there’s no new state launches, how should we think about flow through given the leverage that you’re getting on the current marketing spend and the fixed costs?

Kyle Sauers: Yes. I’ll take that one, Chad. Thanks for the question. I think on the flow-through here in the near term, it’s probably getting too precise to pick a percentage. There’s a lot of moving parts here. even things as simple as the currency fluctuation that I mentioned that was a $1 million pickup for us in Q2 and $1 million headwind in Q3 and at these levels with these single-digit profitability. It starts to have — even things like that start to have a meaningful impact. When we get into next year, I think the way I think about it is we expect to continue to grow. Obviously, this is a growth market. We’re a growth business, and that’s independent of new market launches. Market are maturing, we’d expect to get leverage over our marketing spend, our gross margins should be able to improve in 2024 versus 2023 as those markets grow, we’ve got some fixed expenses.

Our revenue mix should come from higher profitability states. And G&A, I think if you look at the way we spent this year and really the way we spent since we’ve gone public as a company, we’ve been honest with the way we’ve built the infrastructure of the business. So we may or may not get leverage over G&A next year, but it’s not going to be a big drag for us.

Chad Beynon: And then given that you’ve been able to achieve profitability and some probably more sports-only states than we originally thought. Does that change how you’re thinking about getting into some sports-only markets where you have a license, you have a way in, but haven’t launched to this point.