PENN Entertainment, Inc. Q1 FY2024 Earnings Call

Greetings, and welcome to the PENN Entertainment First Quarter 2024 Results Conference Call. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead.

Thanks, Shelby. Good morning, and thank you for joining PENN Entertainment's 2024 First Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers. And during the Q&A session, we ask that everyone please limit themselves to one question and one follow-up. Now I'll read the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by these forward-looking terminologies such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussions of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures, and operating results. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. PENN Entertainment assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will include non-GAAP financial measures within the meaning of the SEC Regulation G. And when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. Thanks for your patience with that. It's now my pleasure to turn the call over to PENN Entertainment's CEO, Jay Snowden. Jay, please go ahead.

Thanks, Joe. Good morning, everyone on the call. I'm joined here in Wyomissing by our CFO, Felicia Hendrix; and our Head of Operations, Todd George, as well as other members of the executive team. And I thought it best to take a step back and cover a few important topics related to the PENN digital and omnichannel journey. A few reminders and clarifications as well as some facts that are sometimes missed. And most importantly, I wanted to spend some time talking about what you can expect from us later this year as we head into 2025 and beyond. When we announced the ESPN alliance in August of last year, we highlighted an exciting, differentiated vision and strategy for our digital and omnichannel future at PENN, the foundation of which has been consistent with our thinking since PASPA was overturned in 2018, which is to be at the forefront and to deliver on the powerful and inevitable convergence of sports media and sports betting in a way that no one else can replicate. Building a significant database of younger, highly engaged online sports betting bettors and fans, building long-term relationships via best-in-class product and experiences and eventually providing them with compelling cross-sell opportunities over time to other offerings throughout the PENN ecosystem, a truly unmatched omnichannel strategy. The path to getting to this point has not been without some bumps in the road, as no nascent digital strategy ever is, but we are now strongly positioned to deliver on our vision and deliver on the shareholder value that comes with it. We were introduced to our friends at ESPN at a critical time. Disney and ESPN had gone through a journey of their own over the last several years as it relates to the sports betting opportunity in the U.S., ultimately deciding in 2023 that they wanted to go all in with their brands and find the right partner. They were looking for a partner that had relevant experience, access and relationships at the state level across the country, a proven and fully owned technology stack, which PENN had from its acquisition of theScore, experienced operators, a shared vision and a company culture that aligned with ESPN to ensure a productive long-term relationship. They, similar to PENN, had concluded that sports betting and sports media were rapidly converging and sports fans were looking for, even expecting, a fully integrated sports betting experience with ESPN. ESPN ultimately chose PENN, and the ESPN BET was subsequently launched in November of last year. On that same call in August of last year, we also provided an interactive financial outlook for 2027 that included market share scenarios of between 10% and 20% for online sports betting in the U.S., a range which we still feel very confident about. And I'll break down the reasons for this confidence shortly. Though we were very excited about ESPN BET, we indeed knew it would take us time to build a sizable database, deliver on a best-in-class online sports betting and iCasino products, introduce deep and exclusive integrations with ESPN and build strong long-term relationships with our bettors, users, and fans on ESPN BET. Our overall launch has gone very well in most areas, which I will cover in a bit. And there are also a couple of areas for improvement, as there always are, and we will spend some time covering those and the associated action items as well. We have built a very solid foundation. We are now live in 19 jurisdictions in North America, with New York coming before the start of this upcoming NFL season, and we have successfully built a database of over 3.5 million unique digital bettors over the last 3.5 years, a number that we thought would take much longer to deliver. With our primary acquisition and investment phase in today's available market is now largely behind us, our key focus is on monetization via engagement, retention, and reactivation and making sure we deliver a best-in-class product. We are committed with our partners at ESPN to being the top player in online sports betting with ESPN BET, and we are also committed to being a top player in iCasino with the Hollywood Casino brands and the industry's best in omnichannel execution, given our geographically diversified portfolio of premier regional casinos across the U.S. Combined with a rapidly growing and highly valuable database of PENN Play members that is currently expanding by well over 1 million new members per year over the last few years, a database that has quickly moved from 25 million total members to over 30 million members, and will continue to grow at a similar 1 million-plus annualized rate for the foreseeable future. The things we are going to be able to do with this database, particularly with new AI tools and capabilities, is extremely exciting down the road, the conversation for another day. During the first quarter, we achieved record quarterly online sports betting iCasino handle. Our OSB results were negatively impacted by a slightly lower handle per user than we modeled and well-documented unfavorable hold in the quarter, which continued through March Madness with the favorite UConn winning their matchups by large margins throughout the tournament and ultimately, the National Championship. Our hold percentage has been better to start Q2, with April coming in at over 8% in the aggregate across the U.S. We believe 7% to 8% is a good target range for us over the next few months as we continue to improve the product and operational performance and that we can grow our overall hold percentage from there as we get to the fall and introduce our enhanced home screen experience, parlay offerings and deep integrations with ESPN, which I'll cover in a bit. Admittedly, we have not been as tight and accurate with our financial forecasting in the early days of ESPN BET, which is not representative of our long-term track record or internal expectations at PENN. You should expect that we are currently operationalizing our digital business at this stage with the same energy and focus as you have witnessed from us on the land-based side of the business for a long time. That is a track record we are very proud of. With that said, keep in mind, we are in the process of doing something that has never been done before in our space by launching in 17 states simultaneously with a new sports betting brand, and we are gathering real-time learnings and experiences, so we can fine-tune and improve our assumptions and inputs as we go. It is inherently more difficult, as most of you know, to forecast the digital business because of the number of variables, some of which like hold are oftentimes beyond our control. Nevertheless, we take pride in being best-in-class operators at PENN, and that is no different in the digital parts of our business. We are simply at a different stage in the cycle than others in OSB and iGaming given the timing of our ESPN BET launch. We hold ourselves to a very high standard and are committed to getting this forecasting tighter and more accurate as we move forward as we now have 6 months of ESPN BET data and results to reference and model off of. With all that said and at a high level, here are where things stand at PENN with regard to the digital business currently, all of which bode very well for the future. We launched ESPN BET across 17 states simultaneously, and our technology platform performed near flawlessly. ESPN BET attracted significantly more registrations and first-time deposits than our internal assumptions and even the most bullish of predictions, garnering over 1 million new to PENN online sports betting first time deposits in just the first 2 months of operation, having done so with competitive at-market promotional offers. We did not have to over-reinvest to deliver these results. This speaks to the power of the ESPN brand. We continue to attract new first-time deposits at a healthy pace, showcasing the effectiveness of ESPN as an ongoing organic acquisition channel. ESPN BET has performed very well from a product stability perspective and has received over 140,000 ratings in the iOS App Store, more than all but 3 of our competitors who have all been live in the App Store for years longer than us, with a cumulative app store rating of 4.8. According to Sensor Tower data, ESPN BET has consistently been running in the mid- to high-teens in weekly active online sports betting users from a nationwide market share perspective, and we are not yet live in the most populous online sports betting legal state in the U.S., New York, which will happen, as I mentioned earlier, prior to the start of this upcoming NFL season. All of this has been accomplished despite launching ESPN BET only 3 months after finalizing and announcing our strategic alliance with ESPN, and doing so with an app that we knew, while competitive, had ground to quickly make up in a few key feature categories that we have covered, such as parlays and player props given our focus for the last 15-plus months has been on tech migrations, rebrands, and new state launches. That is all changing now. And the primary focus for our engineering and product teams is on quickly closing the gap on competitors from a feature and UI/UX perspective. We have indeed been pleased with all these early data points and achievements, but we also recognize not all the results are where they need to be at this stage. In addition to the impacts of hold I've already discussed, we also know monetization is a huge opportunity for us. We have seen a lower spend per user so far with ESPN BET than market average and compared to our internal expectations. We believe we can chalk this up to 2 primary factors. Number one, we've grown the total addressable market and brought new bettors into the ecosystem due to the broad reach and strong brand equity of ESPN, the #1 name in sports in the U.S. for decades, that are currently more casual bettors. We should expect their engagement with the app and overall spend to grow over time as they become more comfortable, experienced, and knowledgeable with the app and sports betting in general, and the integrations with ESPN become deeper and more seamless, so any friction between ESPN's ecosystem and ESPN BET is eliminated. We are also seeing this new casual segment is much more likely to engage with parlay bets, which bodes well for us as we expand our offerings. Number two, we are not yet generating our fair share of wallet with experienced and VIP bettors, commensurate with our weekly active user share by virtue of our parlay, same-game parlay, player prop, and live betting features currently trailing the market. Here's the encouraging news in addressing these 2 items. We just announced last week that Aaron LaBerge will be joining us as our new Chief Technology Officer at PENN. Aaron comes to us from Disney, where he had an amazing career of over 20 years and where he was most recently the CTO for Disney Entertainment and ESPN. In addition to as many accomplishments and accolades over the years, Aaron was deeply involved in the technology due diligence of PENN Interactive and felt that our new fully owned, built-for-North-America proprietary technology stack, along with our talented technology teams, were what would make PENN the perfect partner for ESPN to launch ESPN BET. Now he gets to lead those efforts from inside PENN. He will be starting soon. In the meantime, he continues to be deeply involved in our joint development plans from a product and the ESPN integration perspective. Aaron is not only one of the most accomplished and widely respected CTOs in the country, he's a strong leader, collaborator, and business partner. He will act as an immediate accelerant, turbocharging everything we are working on with ESPN, and his expertise in sports betting, fantasy, and media will be truly complementary to this extremely talented executive team I am already surrounded by at PENN. We will plan on hosting an Investor Day at G2E in Las Vegas later this year so you can get a chance to meet Aaron in person and hear from him and Todd and the rest of the senior team at PENN on where we're going in 2025 and beyond with many of the things we've covered this morning, as well as many other forward-looking topics. The bottom line is ESPN BET will very soon be a best-in-class product, which is a perfect segue. We provided in the investor presentation this morning a sneak peek of what you can expect to see at the beginning of the NFL football season in early September from a product and feature enhancement perspective, which will include things like dark mode and improved home screen experience and navigation, and a much more competitive parlay, same-game parlay and player prop market offering and overall experience. From an ESPN integration standpoint, our partners at ESPN are continuing to build deeper betting integrations into the ESPN sports media app. We've already seen the benefits of these integrations, as ESPN BET received nearly 300,000 unique visitors in March alone from ESPN media users who clicked on the deep links, and this number will go up over time, obviously, as we add additional integrations and connectivity. We are especially excited about the upcoming account linking initiative between ESPN BET and ESPN later this fall, which, of course, unlocks the potential to deliver an unmatched level of personalization and user engagement in the industry. The initial benefits to account linking will include deeper and more customized integrations in the ESPN media app. Once accounts are linked and we know your favorite sports, sports teams, and players; we can deliver personalized betting options only found on ESPN BET. And the same can be said about the ESPN Fantasy app, the largest and most popular in the U.S., with 12 million active users and growing every year. When accounts are linked and we know the players on your fantasy roster, there are all sorts of unique and exciting offers, bespoke promotions, and prepackaged betting options we can get in front of fantasy players on the app to drive highly engaging content and retention. You will start to see some of this at the start of the NFL season and additional features added throughout the football season and in 2025. And of course, a little further down the road, there are integrations with ESPN's new direct-to-consumer streaming offering later in 2025. More to come on that as we get closer, but you can start to imagine the possibilities with account linking and deeper integration. This is all happening in the coming quarters. These are initiatives our collective teams are working on together as we speak. We rolled in Bristol just a couple of weeks ago. Dozens of leaders from both PENN and ESPN and the collective teams cannot be more aligned and excited about how deep we can go and will go with all of these differentiated ESPN integrations. ESPN has been and continues to be an amazing partner. Both sides have a shared vision and are laser-focused and deeply committed to making ESPN BET a top name in online sports betting over the coming years. So let me summarize strategically and financially how things are playing out at PENN. 2024 is going to be an investment year with ESPN BET and the groundbreaking of our 4 exciting retail growth projects. Leverage will peak in Q3 before quickly coming down once we get to Q4 and moving forward from there. We have a very solid balance sheet with nearly $1 billion in cash, a fully undrawn revolver of $1 billion, and we generate significant free cash flow, as all of you know, as a company. We are adding Aaron LaBerge to the team on July 1. We will quickly get our online sports betting product to be closer to parity over the coming quarters, and 2025 will be a year of deleveraging the balance sheet as monetization improves with ESPN BET. We launched our stand-alone Hollywood iCasino app early in the year, which will drive improved results as we have seen from several of our competitors and also make significant progress on our 4 retail growth projects. And then you get to 2026, a little over 1.5 years from now. And that's incredibly exciting. We'll be going live with all 4 growth projects in the first half of the year, and we will also be generating positive cash flow from our Interactive unit, an Interactive unit that will be continuing to grow its database and market share efficiently and profitably by offering sports fans and iGaming customers unique features, offerings, integrations, and experiences only found at ESPN BET and Hollywood online casino. Please keep in mind that Disney and ESPN did not agree to this alliance with PENN to be #4 or #5 in the market. Aaron LaBerge joining the team, I think, certainly speaks to that or for the PENN annual marketing spend commitment. Neither of those are really needle-moving outcomes for ESPN. We are both in this to deliver best-in-class digital betting products and unique omnichannel experiences for our loyal customers, users, and fans and to be on the podium competing long term for profitable market share, all of which will result in the delivery of significant value for our shareholders. The future is very promising. The 2 most challenging quarters from a digital P&L perspective are now behind us. We greatly appreciate the investors that have and continue to support us and trust us. We don't take that lightly and are deeply committed to making sure you'll be rewarded for that decision. I covered a lot on the Interactive front, and I encourage you to spend time going through our investor presentation, which provides much greater detail on most, if not all, of these topics. As you look at the retail business in Q1, our highly diversified retail segment was very resilient, improving sequentially each month despite the challenges of some pretty extreme weather across our portfolio in January and early February. However, visitation subsequently rebounded with stable trends persisting into April. Notably, were it not for the weather impacts and low hold and slightly lower spend per user from OSB, we would have met or exceeded our guidance and consensus for the quarter. Our best-in-class team of operators continue to drive strong performance by leveraging our industry-leading customer loyalty program, PENN Play, our highly efficient capital improvements, and our market-leading retail sportsbook offerings. Speaking of which, on April 25, we successfully opened our first ESPN BET retail sportsbook at Hollywood Detroit for a multi-day NFL draft activation, including live draft coverage by ESPN at our casino. We look forward to additional ESPN BET retail launches at key properties as we continue to create meaningful cross-sell opportunities to capitalize on the incredible growth we have seen in our database. And with that, I'll now turn it over to Felicia.

Thanks, Jay. Overall, we were pleased with our property level results in the quarter despite challenging weather. Retail revenues of $1.4 billion and EBITDA of $479 million reflect the well-known impact of severe weather throughout our portfolio in January and early February, followed by resilient performance in March and April. For our Interactive segment, we reported revenues of $208 million and an EBITDA loss of $196 million, which is a significant improvement from the fourth quarter. The shortfall relative to our prior guidance is primarily due to lower-than-expected hold and spend per user. In the quarter, our expenses, including our marketing approach, remain disciplined as we continue to make improvements to our product offerings. As usual, you will find on Page 8 of our earnings release a table that summarizes our cash expenditures in the quarter, including cash payments to our REIT landlords, cash taxes, cash interest, and total CapEx. Of our total $41 million of CapEx in the quarter, $19 million was project CapEx primarily related to our 4 development projects. We ended the first quarter of 2024 with total liquidity of $1.9 billion, inclusive of $900 million in cash and cash equivalents. Our liquidity will remain strong through 2024. As you know, we have no debt maturities until 2026, which are $330 million convertible notes. We continue to expect our lease-adjusted net leverage to peak in the third quarter of 2024, which is a function of our trailing 12 months' net leverage calculation, including our continued investment in our Interactive segment this year as well as our investments in our 4 development projects. As a reminder, on February 15, we received covenant relief under our credit agreement for the 4 quarters of 2024. As we anniversary the fourth quarter of 2023, we should quickly deleverage starting in the fourth quarter of 2024. By year-end 2025, we anticipate returning to pre-ESPN BET leverage levels and continuing to deleverage as we generate meaningful EBITDA and free cash flow in 2026 from the Interactive division. We continue to be excited about our path to record free cash flow given the high EBITDA to free cash flow conversion of our Interactive business. When combined with the free cash flow generated by our existing core business plus the 4 retail growth projects that will be coming online in early 2026, we are extremely well positioned to drive shareholder value. I will now provide guidance for our Retail and Interactive segments. We are updating our 2024 Retail guidance for the lower-than-expected first quarter results due to the severe January and early February weather. For the full year of 2024, we now expect Retail revenues to range from $5.61 billion to $5.76 billion and adjusted EBITDAR to range from $1.88 billion to $2 billion. Our new guidance continues to factor in stable customer demand, new supply in Nebraska, Illinois, Louisiana, and road construction in a few markets. For the Interactive segment in 2024, we now expect to generate revenues of $1.02 billion to $1.07 billion and an adjusted EBITDA loss range of $475 million to $525 million. This guidance includes our New York launch prior to football season. In addition to the pass-through of the shortfall in the first quarter relative to our previous guidance, our new guidance assumes current market share trends prior to our product improvements in the fall and similar holds to our April results. I'd like to talk for a moment about our quarterly Interactive segment cadence for the remainder of the year. As we have discussed previously, the first quarter will be the largest loss of the year. The fourth quarter will be the smallest. For the second quarter of '24, we expect to generate an EBITDA range of negative $115 million to negative $135 million. We expect 2024 corporate expense of roughly $105 million, inclusive of our cash settled stock-based awards. Total CapEx for 2024 will be approximately $500 million, inclusive of $275 million of project CapEx. For cash interest expense, we forecast approximately $175 million for the full year before roughly $15 million of interest income. For 2024 tax guidance, we are projecting a small tax refund. And as you think about our share count for 2024, our basic share count as of the end of the first quarter was 151.9 million shares, and we typically have roughly 15 million of dilutive shares, inclusive of the 14 million share dilution from the converts. And with that, I'll turn it back over to Jay.

All right. Thanks, Felicia. Before I open the line to questions, I wanted to note that on April 23, in conjunction with our proxy filing, we filed our 2023 CSR report, and I encourage you to take the time to download a copy from our website. It highlights the many ways our ESG efforts have continued to expand in the areas of sustainability, DE&I, and supporting our team members and our communities. I want to thank the tireless efforts of our Board's Nominating and Corporate Governance Committee, our internal ESG and diversity committees, and all of our corporate property and interactive leadership teams for continuing to raise the bar in this area. I couldn't be prouder of what we've accomplished and look forward to continuing to build upon this momentum in 2024 and beyond. Finally, in addition to Aaron LaBerge joining PENN as our new CTO, we are fortunate to have recently added Anuj Dhanda to our Board of Directors to help guide and inform our growing technology initiatives. Anuj serves as EVP, Chief Technology and Transformation Officer for Albertsons Companies, and he brings extensive technology, cybersecurity, and business transformation experience to our Board. His deep understanding of the rapidly evolving technology landscape, including areas such as AI, will be a tremendous resource and asset for us. We also recently announced in our proxy that John Jacquemin will not be standing for reelection at our 2024 Annual Meeting. John is one of our original Board members who has been with PENN for over 30 years. With John's retirement from the Board, we'll be losing one of the sharpest minds in business and a guy who always has his finger on the pulse of micro and macroeconomic trends. On behalf of all of us at PENN, I want to personally thank John for his dedication, friendship, and support of our company for all these years. So thank you. And with that, Shelby, we'll open it up for our first question.

We'll take our first question from Carlo Santarelli with Deutsche Bank.

Jay, just for starters, obviously, guidance was just kind of fresh there at the end, but it looks like margin is down a little bit from prior assumptions? And is that just a function of some cost escalation that's maybe minor that you're seeing right now? I know obviously weather in January, but when we last spoke, you guys had kind of talked about that. So I just wanted to better understand the slight tweak there. And then I have one follow-up.

Carlo, this is Todd. Yes, just a few minor adjustments. Some of it in labor. There is some upward pressure in labor. And then really, it's just from where the revenue trends have been going. Nothing really major, nothing really driving it. The new competition in the markets that Felicia mentioned will lead to maybe a little bit of an uptick in marketing, but all very manageable as we move forward.

Great. And then if I could, just on the Interactive side, specifically on the OSB side. And acknowledging I did some serious gorilla math to kind of come up with these assumptions, but is it fair to assume that kind of the low hold, relative to what you would have expected, that 7% to 8% range that you talked about. Had that been normal, the difference in net revenue would have been, call it, $50 million or somewhere thereabouts? And I would imagine flow-through on that is relatively high. Like any way you guys could help quantify the 1Q impact simply from the hold?

Yes, Carlo, you're, as usual, very close to what the numbers are. So I think that's the right way to model it. We also modeled a little bit of higher handle per user. We did see momentum from Q4 into Q1 from a handle per user perspective, but we're continuing to really work on the monetization efforts that I mentioned earlier, which is largely going to come with product enhancements and new features on the app, which is going to be happening between now and football, but a whole slate of them coming right at the beginning of football season. So in our Interactive guidance, we're really assuming sort of a steady state between now and September with regard to market share and hold percentage being in that 7% to 8% range, which we feel we're continuing to make really good decisions operationally to continue to keep the hold in that range between now and then, and we should see it grow from there as we enhance our parlay offerings come football season.

And we'll take our next question from Barry Jonas with Truist.

Great. You've given great color on ESPN BET and sort of your expectations and outlook. Can you maybe talk a little bit more about iGaming, your outlook as you get to that stand-alone app? And then also curious about the other components of Interactive, theScore, and maybe skin fees. Just would love to get a wider view of the Interactive segment and your outlook there.

Yes, happy to. And Todd, you can jump in here as well. I would say, look, from an iCasino perspective, we're seeing improvements, which is great. We also know that it's a huge opportunity for us. We're probably the only major player that doesn't have a stand-alone iCasino app at this point. We will have that ready to go in very early '25, hopefully a little earlier, but we'll say early '25. And you can imagine, when you're talking about activating your land-based casino database and they're sitting at a Hollywood property, but they have to download ESPN BET in order to play with online casino. The messaging gets a little bit cluttered or confusing. So that's something that we know is going to be a real shot in the arm and a tailwind for us once we deploy our stand-alone iCasino app. We're making really good progress on. It's going to look great. We just need a little bit more time given the priorities between now and the start of football season on the OSB side. So look, internally, if you look over the medium and longer term, we would expect our online casino market share to be right there with our online sports betting market share. It trails today. It has trailed, and we think that we've got the right people and the right plans in place to be able to close that gap over time. As we grow our market share in OSB, we should be growing our share in online casino as well. TheScore Bet in Ontario is continuing to perform really well. We're still in that low double-digit market share from OSB and iCasino perspective. We've actually got some really exciting deep integrations that we're launching over the next month in Ontario, which, for anyone that's headed that way, you can take a look at, but that would include things like being able to have an embedded bet slip in the media app and being able to track your bets in the media app after you place bets with theScore Bet, things that we're going to be doing with ESPN BET over the coming quarters. We're just not there yet, obviously, in the U.S. yet, but we're starting to launch those initiatives in Ontario. And it will be exciting to see what the traction is. But it's very seamless between theScore media and theScore Bet and all of those areas. And that's obviously the goal between us and ESPN here in the U.S. as well.

Yes. The only thing I would add maybe around theScore and the way we're kind of thinking about the U.S. as well. We have a really talented group of folks at PENN Game Studios. And with the games that they're developing in Toronto, we introduced our Blue Jays Blackjack game, and it's really taken off. So we're looking for those types of opportunities as we come to the U.S. And really, this group of folks has created some great products that typically quickly ramp into our top 10, top 5 offerings that we have online.

Got it. You provided some great insights on app usage and retention in the presentation. Can you discuss what you're observing regarding repeat deposit trends for ESPN BET?

Yes. It's been really interesting. We look at, obviously, not just deposits but withdrawals. And you look at that on a monthly basis. And that sort of net difference between, you obviously want more deposits than withdrawals going, is continuing to get better and better, really every month, for the last several months. So that tells you that people are liking the experience. They like the app. Deposits are in a good place. Obviously, one of the things that we're seeing because we have had a lower handle per user as the product continues to ramp is we're also seeing a slightly lower deposit per user than what we expected as well. So deposits are coming through, users are engaged, but the average bet size has been lower. And as we talk to our users through feedback and research, it's a lot about parlay offerings and same-game parlay, which obviously is the top priority for us between now and September.

And we'll take our next question from Shaun Kelley with Bank of America.

To revisit the guidance on digital, I want to clarify our previous discussion. Last quarter, we mentioned around $600 million in revenue from both pass-throughs, with approximately $400 million from pass-throughs and about $200 million from other revenue sources. Can you confirm if those figures remain accurate or if there have been any changes?

Yes. They're mostly in the ballpark. There was some transfer pricing that was included in prior revenue guidance. That's not in current guidance. And I can walk you through that offline. It's not material, but most of what we provided before is in the ballpark.

Okay. And then my other question is sort of about promos coming down. So one thing we've seen, right, is you've been showing us, in your information, the views on promo as a percentage of handle. But we also look at it as a percentage of GGR. This is somewhat dependent on what you're seeing on hold. So the question kind of comes down to how do you expect to see your promotional cadence move throughout the year? And what do you need to invest specifically around the launch in New York to kind of continue to get that where you want it to be? So just help us think about that promo percentage and maybe the dollar investment in New York for Q3 as that's obviously a big market and not super favorable on the tax side?

Yes. Todd, and I will tag team an answer for you on that one, Shaun. We're obviously pleased with the progress on promo expense as a percentage of handle from Q4 to Q1. I think you should expect to see that number continue to tick down, not up, unless there's a state launch included in a given quarter, which in Q2, there will not be. In Q3, you'll have New York. And so you'll probably see it tick up a little bit there although, and Todd can expand on this. We're definitely thinking about our launch in New York very differently than all of the state launches to date with ESPN BET, simply because the tax rate makes it very, very challenging to do anything real aggressive there. So Todd, maybe you want to speak a little bit on New York, how we're thinking about it?

Thanks, Jay. Yes, Shaun, this is where the ESPN deal just makes so much sense for us. When you look at their fantasy app users, their ESPN app users, their espn.com visitors and everything, you start going down that list, and we're talking millions of people in the ESPN database that all reside in New York. So with ESPN, we have access to this, and this will be a big driver and really what we'll be leading with in New York, getting away from some of the other launch strategies that all of us have used in new markets and that would include the way we look at affiliates, the way we look at promo bets. So it will be a very different approach, but really leveraging the ESPN brand there.

And we'll take our next question from Joe Greff with JPMorgan.

Jay, Aaron's background looks great. Obviously, his prior experience at Disney and ESPN is certainly very relevant for you guys. So I have more of a qualitative question for you. A year from now when you guys are reporting first quarter 2025 results, what are the things that you want to be able to say that you, Aaron and the Interactive team have delivered on? What would be the top 3 priorities and hopeful accomplishments?

Yes, I'm addressing this as I think about the top three priorities. Firstly, we want to see continued growth in our market share for sports betting and online gaming from the kickoff of football season to this time next year. This will be supported by the launch of upgraded features and improvements in user interface and experience, along with broader market offerings. Secondly, it’s important for us to achieve better retention results, evident in deposits significantly outpacing withdrawals, both in terms of the number and size of deposits. Finally, we aim to expand our VIP play. Over the past 18 months, we've been focused on technology upgrades, launching the ESPN BET brand, and expanding into new states. Now that we've streamlined our technology and product resources, we can work towards closing the gap with leading competitors. While we won't have everything in place by the start of football season, we've made substantial improvements in many key areas. Our app is competitive and stable, and we receive positive feedback regarding our deposit options. While we have a solid foundation, we need to enhance the home screen experience and parlay offerings. Those would be my top three priorities. Todd, please feel free to add any additional points.

Thanks, Jay. I would like to emphasize the importance of the stand-alone iCasino app and the product roadmap we are excited about. The current volumes we are seeing in iCasino are very encouraging. Additionally, I want to stress the significance of retention as we transition from a promotional environment to focusing more on brand and product loyalty.

It's interesting to consider what Aaron would say if he were here. He would likely mention the deep integration opportunities with ESPN. You will hear more about this from all of us at the Investor Day at G2E, but we share a vision of what we can achieve and how far we can go with integrations in the fantasy app. When we're able to link accounts between the ESPN ecosystem and ESPN BET, the possibilities for personalization will be limitless. Additionally, these opportunities will be highly unique, allowing us to do things with ESPN and in sports media that others cannot. This is certainly a significant priority for us as well.

Great. And then just a quick follow-up. Does the greater than previously guided Interactive loss for this year, does that steal some investment for 2025? And is it quixotic to think that the loss can be very small or even breakeven in 2025?

Yes. I think 2025, I mean just taking a step back, directionally, we still feel, as I said in the comments, that '24 is the primary investment year. '25 is going to be a year of us getting closer to breakeven and deleveraging the balance sheet. 2026, we inflect a meaningful positive EBITDA and free cash flow from Interactive. I think a lot of what we say about '25 is going to really depend on how we're exiting 2024. And so we'll have a pretty good idea on how things are going when we're at G2E in October. When we're reporting our Q3 results in November, we'll be sort of at beginning and mid-football season with a lot of the product enhancements and seeing what the traction and retention looks like. So I would say, directionally, nothing has changed, but to get into exact numbers is really challenging at this point until we get through into Q4.

We'll take our next question from Joe Stauff with SIG.

On Slide 9, there are metrics regarding weekly engagement, which appear to have increased by approximately 17% to 18% compared to around 15% to 16% in the previous slide from the fourth quarter call. It seems to be a pre-Super Bowl trend. Could you explain the differences in weekly engagement as shown in these charts? Also, I apologize if I missed this earlier, but can you provide insights on the North Carolina launch and how it performed compared to launches in previous states?

Yes, happy to hit both of those. I think as it relates to Slide 9, we're looking at this weekly and we're sharing it when we have it on a quarterly call. And I think it does speak to the level of retention that we are seeing. So we're pleased with what our monthly active users, what our weekly active users look like. What we have a real opportunity is in handle and spend per user, which we believe and feel strongly is going to come from product enhancements that we've already covered. So it's good to see the trends that are on Slide 9. It's good to see that people are spending more time on the app as you get from January to March. These are all highly encouraging. And I think what's also very exciting, Joe, and we shared this for the first time, and we just got the data, so I don't have a whole lot of detail on what to share about it yet, but 300,000 uniques have come through from ESPN media ecosystem to ESPN BET in March alone, right? So that's very exciting. And again, we're still going through the data there. But there's solid 5-digit numbers in there that went from ESPN to ESPN BET, downloaded the app, and then an even bigger number, 5-digit sizable number, people who went from ESPN to ESPN BET and already had the app, and then were engaging with the ESPN BET. So that's exciting. I think we're like top of the first inning, scratching the surface there. You're going to see more 6-pack odds within the home page of ESPN app coming soon, certainly within theScore scoreboard. And that's where people spend so much time right now, it's within gamecast. So you have to be a pretty big fan to be live tracking a game, but when it's in the theScore score area as well as home page, we think that, that 300,000 per month is probably going to grow over time.

Yes, Jay, that's all of that plus the only thing I would add is that the number of unique bettors in North Carolina is higher than what we've seen in any other state. Also, we launched while NC State was making an incredible run through the tournament. A lot of people were betting on NC State, which did impact the hold percentage, but there are many happy customers down there who continue to engage with us.

We'll take our next question from Brandt Montour with Barclays.

Jay, Felicia, Todd. For Jay, I was concerned about the lower handle per MAU in the first quarter. I understand that there’s always a desire to increase betting volume per person. My question is how to balance that with the idea that more recreational play usually results in a higher hold. Parlays, which have a lower handle, tend to have a higher hold. I thought this was part of your strategy in the business excluding VIPs. Could you clarify how you reconcile these two points and share your thoughts on this?

Yes, you raise valid points. I believe that over the long term, we will see improvement. It's important to note that Q4 and Q1 often have a lot of variable factors affecting hold percentage. We experienced launch-related fluctuations, particularly with the North Carolina state launch and some challenges noted by Todd due to that. Additionally, there were some special promotions and VVIP impacts in January. Therefore, I wouldn’t consider Q1 as indicative of our future trajectory. The trends we observe in April are much more reflective of our outlook. I anticipate improvements, especially with the upcoming fall football season. Looking ahead 1.5 to 2 years, I expect significant monthly active users on ESPN BET relative to competitors, though the handle per user may be somewhat lower. Our parlay offering continues to grow each month, and we are moving closer to the mid- to high-20s percentage mix compared to our position in Q1. This is encouraging, especially as our parlay offering is still being refined. I believe we are likely to see an increased preference for parlays once we enhance our offerings. The shift from 4.4% in Q1 to 8.5% in April reflects that there was indeed noise in Q1, but a modeling range of around 7% to 8% seems reasonable until September, with expectations for slight increases post-September as we implement new additions and improvements.

That's helpful. And then a follow-up on iGaming. When we look at your content slate, obviously, you don't have your own app, standalone app. But when I look at your content slate, it seems like you obviously are under indexing versus peers in terms of the number of third-party games. So I'm just curious why the decision hadn't been made or still hasn't been made to add third-party games, which obviously aren't as high margin as in-house games, but those are EBITDA dollars that you could be getting. It's probably easier said than done to just flip all those switches on, but I'm curious if you feel like there's a strategic reason to wait until you have the stand-alone app to get some of those games?

I mean I'll take a stab at the beginning and then Todd can jump in. No, we're strategically not placing content inside of the Hollywood app. We've definitely been adding new content rapidly over the course of the last 6 months. And so I think you'll continue to see that happen until we get to a point of parity. There's no strategic reason to withhold content versus the competitors. Todd?

Yes, Jay is exactly right, Brandt. And you'll see in the upcoming months, even more integration, I think the last 2 or 3, we've really started to ramp that. And again, as we mentioned, we're seeing record results for iCasino and that's a big driver of it as well.

We'll take our next question from Chad Beynon with Macquarie.

I wanted to ask about the land base, the retail margins. So in the first quarter, margins were down basically 140 basis points year-over-year. Based on the updated guidance, it looks like Q2 through Q4 implies 180-basis-point year-over-year decline, so actually getting worse. But you mentioned that March accelerated and April showed the stable trends as well. So are there additional costs? Or is this just conservatism? Could you just kind of help us think about that year-over-year margin decline?

Yes, sure. So again, a lot of this is labor and marketing. Those are the 2 big numbers. And typically, with seasonality, your highest margin month is always February, March a close #2. So with those behind us, you do see some seasonality with revenue declines, which would lead to slight margin erosion. But just giving ourselves some room in there with the pressure on labor, the pressure on marketing dollars, but nothing really major. All within control and giving ourselves some room as we move forward.

Yes. The only significant development later in the year that we haven't seen yet is some new supply in Nebraska, which will affect our Council Bluffs property, as well as locations in Ohio and the new Caesars Harrah's project. This might have a slightly greater impact going forward compared to the first quarter.

Okay. And then there's been some stories and some headlines around college prop bets and maybe some other changes, just in terms of what would be offered to customers. Could you help us quantify that? Or just maybe think about some potential changes in terms of menu options going forward?

Yes. Chad, look, the college prop bet topic is interesting. There's a number of states that already prohibit that from happening from any of those wagers being allowed. So it's a very small percentage of handles for college games and for college football. And then it's even smaller, obviously, on the base of total wagers and total handles. So I would view it as largely a nonissue, in that, I think people who are looking to bet player props for college are probably going to continue to make wagers. They may just make wagers on game outcomes or NFL props as opposed to college player props. So I wouldn't overly read into that one. Again, we have experience of some states already prohibiting this and our volumes in those states on college football overall versus the states that allow it are really not materially different as a percentage of total wagers in those states.

Thank you. We'll take our next question from David Katz with Jefferies.

Can you just talk about the concentric circles today within the customer bases of ESPN BET and your land-based business? And presumption is that over time, those concentric circles will rightly overlap between those 2 will kind of grow closer? But just give us a sense of where today is and what the future looks like, please?

Go ahead, Todd.

Yes. This is a great question and something that we look at and basically the circles we kind of draw are say, in 25-mile increments. So looking at our database and the ESPN database that has joined us online, if you start thinking about 25, 50 and even go out 100, 200, we have basically doubled the addressable database through our ESPN partnership. So as we start to go forward, what we've been able to do in a very short amount of time. And again, we haven't even been live with ESPN for 6 months yet. We've been able to drive significant visitation from that ESPN online database into our properties. And I think the latest experience we had with the draft in Detroit, just saw a lot of excitement around the entire city of Detroit and a very well-executed event. But also showing excitement around the ESPN brand and being associated with our Greektown property there. So more to come on that. But we saw something similar with the Super Bowl events at our M property, and then we've done some smaller tests with this database in our Pennsylvania properties, especially areas where we have online sports betting, online casino offerings and then retail properties. It just provides a tremendous opportunity with a really low cost of acquisition for that database.

We are certainly in the very, very, very early innings, but encouraged by the early tests that we've been running. We've ran a couple in Pennsylvania and seen really good monetization from digital-only customers when they visit land-based. So as Todd said, lots of opportunity very early on. I think it will be a big part of our story as we move forward.

Understood. And as my follow-up, if I may. Just with respect to the Interactive side, having gone through the process of same-game parlays, which I understand you're working hard on. Can you talk about live betting and in-play, which seems to be a next chapter that sports betting operators are after this year?

Yes, that's an area I mentioned in my prepared remarks, David, that we're looking to improve our offerings and expand our market reach and overall capabilities. I believe we currently have a solid offering, but there's a significant opportunity to enhance it for the upcoming football season, which is crucial. So, I suggest staying tuned for updates on that. We'll have more information to share on live betting, parlay options, same-game parlays, and player props as we approach September. Additionally, during our Investor Day at G2E, we will have much to discuss regarding all of this as we approach that time, and we are also focused on what lies ahead in the coming quarters.

All right. And we will take our next question from Ben Chaiken with Mizuho.

Just one quick one for me. In Interactive, I think there's been a few references to improving the product, refreshed home screen, enhanced product offerings. I would think one of the largest differentiators of your product in theory would be access to the ESPN data and analysis, which should help, in theory, make more informed wagers or at a minimum, feel more comfortable with their decisions, player statistics, match-up statistics, recent trends. Will that ever be at your fingertips fully integrated with the betting app? Or do you intend to keep those kind of separate?

Yes. I guess, Ben, the way I would answer that. I can't answer it from ESPN's perspective, but where I can that we have alignment is what I referenced in my prepared remarks, and we talked a little bit about in our slides, which is on the account linking. And account linking is so important because if you already have an existing account with ESPN and you use ESPN's media app or mobile web, and you prioritize your favorite teams and your favorite players for stories and scores and the like, obviously, we can deliver more personalized betting options for you when we have that information. And so that's really powerful. We're working on that now. We'll have account linking done at some point throughout the football season. We're shooting for as early in the football season as possible. But once you do the account linking, that's when you can get really sophisticated on personalized offers, within the Fantasy app, within the ESPN media app. It's where, obviously, there's opportunities down the road with direct-to-consumer streaming. And we know that it's you watching the game. We know your favorite team and there could be an offer maybe within game from your television set. There's a lot of really interesting things that we can do. And obviously, we would have a lot of data on those folks that have linked their accounts between us and ESPN. So that's, I guess, the best way for us to get at it here over the course of the next year and beyond. I think beyond account linking, not really prepared to speak to it today, but I think that presents a huge opportunity for us.

Got it. Just to be totally clear, I think I wasn't referring to the athletes themselves when I mentioned paying players. I'm talking about athlete statistics, team statistics, and recent trends within matches. Will all the information you might find on ESPN be accessible within the betting app? Just to clarify the question, not necessarily about the bettor.

Yes. That's a separate topic, Ben. We probably need to spend some time going through that with ESPN because there's league rights and player associations and unions and there's all sorts of things that would play a factor in that. So not to say the answer is no or yes. It's just to say I don't think we're there yet. We would need to do more research on that. It's something that we've talked about with ESPN. It's just not on the road map in the next 12 months.

The question-and-answer session has now concluded. I will now turn the program back over to Jay Snowden for any closing remarks.

Thanks, everyone, for joining us. I'm very excited about where we're headed, and look forward to catching up with all of you in 3 months in August. Have a good one.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.