Rush Street Interactive, Inc. Q2 FY2021 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the RSI Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, that this conference call is being recorded today, August 12, 2021. I would now turn the call over to Lauren Seiler, Associate Vice President of Investor Relations and Development.

Thank you, operator, and good afternoon. By now, everyone should have access to our second quarter 2021 earnings release. It can be found under the heading, Financials of quarterly results in the Investors section of the RSI website at rushstreetinteractive.com. Some of our comments today will be Forward-Looking Statements within the meaning of the Federal Securities laws. Forward-looking statements are not statements of historical facts 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 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 measures are available in our second quarter 2021 earnings release, which is available in the investors section of the RSI website at rushstreetinteractive.com. With me on the call today we have Greg Carlin, Vice Chairman; Richard Schwartz, CEO; and Kyle Sauers, Chief Financial Officer. We will first provide opening remarks, and then open the call to questions. With that I will turn the call over to Greg.

Thanks, Lauren, and good afternoon, everyone. Thank you for joining the call today. Before we get into our quarterly results, I'm excited to announce that RSI has named Richard Schwartz, who co-founded the business with me and Neil, as CEO. I will become Vice Chairman of the Board and I will continue in my role as CEO of Rush Street Gaming, which, as most of you know, is a separately owned private company. It was obvious to me back in 2012, when we started RSI, that the U.S. casino industry would expand to the digital channel. And I'm very proud of all that we have accomplished during my tenure as CEO. Since we launched our first online casino in New Jersey, RSI has been at the forefront of the online gaming industry. Richard has been a key partner to me and Neil in building RSI from the very beginning. His extensive knowledge of the online gaming space and his understanding of the customer have been integral in establishing RSI as a leader in our industry. Now that we are operating in 11 jurisdictions, and we have successfully transitioned to a public company, the time is right for Richard to become CEO and to assume day-to-day responsibilities for executing RSI's strategy. As the second largest shareholder and vice chairman of the board, I'm confident there is no one better suited to execute RSI's business plan. I'm excited to continue working with Richard and our highly talented management team to maintain our industry-leading position and to drive value for all of our shareholders. With that, I will turn the call over to Richard to discuss our second quarter results.

Thank you, Greg. Good afternoon, everyone. To kick things off, I would like to acknowledge Greg's partnership and leadership in establishing RSI as an industry leader. Together over nearly a decade, he and Neil supported RSI right from the outset and had a vision to support developing our own platform in-house at a time it was common to do so. I'm grateful for the trust and confidence of the board and honored to lead RSI during this time of tremendous growth for both our company and the industry. I'm further excited about all the prospects of what is ahead for RSI, not only in iCasino and online sports wagering, but also into new and expanded product verticals. I have several key topics I would like to cover today. First, I will highlight another quarter of record revenues and the raising of our full-year revenue guidance. Next, I will give an update on our market access initiatives and some exciting recent developments. Then I will talk about our operational and marketing excellence. Finally, I will walk through product and technology rollouts that are helping to drive our differentiated user experience before handing it over to Kyle to dive deeper into our financials. Turning to our results, our team delivered another solid quarter of year-over-year and sequential revenue growth, demonstrating our continued ability to grow the top-line while prudently investing in marketing and technology needed to do so. Revenue was $122.8 million during the quarter, representing a year-over-year increase of 89%. Just as impressive as our overall revenue growth was the breadth of that growth. Not only did we grow casino revenue sequentially during the period, but also sportsbook revenues despite a lighter sports calendar. With this continued success and growth in our business, we are once again raising our guidance. We now expect our 2021 full-year revenue guidance to be between $465 million and $495 million implying 72% year-over-year top-line growth at the midpoint. This is up from the previous estimated revenue growth of 65% at the midpoint of our prior guidance range. Kyle will provide some additional details in his remarks. In terms of market access during the second quarter, we went live in West Virginia with our BetRivers online casino. This follows successful launches in Michigan, Virginia, and Iowa during the first quarter. We now operate in 11 jurisdictions with online sports betting in eight states, five with retail sports betting, four with online casino, and Columbia with both online casino and sports betting. Following the launch in several new states during the first half of the year, we have continued to make significant progress in our market access initiative. To start, we are very excited to announce that we have been selected by the Connecticut Lottery to be their exclusive sports betting partner, making RSI one of only three sportsbook operators who will be authorized to operate in the state. This partnership will include the operation of up to 15 retail sportsbook locations across the state of Connecticut as well as a statewide mobile sportsbook. The selection will be a significant milestone for us as it validates the strength of our product, services, and overarching organization in what was a very competitive process. In fact, the Connecticut Lottery has disclosed that we were selected from a pool of 15 other high-quality competitors. Although the state is currently working to finalize the sports betting regulations, we expect to launch in Connecticut this fall during football season. It is also worth noting that we believe our recognition for operational excellence by the Connecticut Lottery will open future doors to compete for opportunities in other lottery markets. Many states are recognizing the opportunity for online gaming, and we are encouraged by the legislative momentum for online sports betting and the addition of online casinos in many states that already have approved sports betting. It has become clear, when looking at the numbers in New Jersey, Pennsylvania, and Michigan, that online casinos generate substantial cash revenue, and many state legislators are recognizing this opportunity. I also want to share specific highlights from the quarter and exciting trends we are seeing. We grew both online sports betting and online casinos sequentially from quarter one to quarter two, including in each of our newly launched markets of Michigan, Virginia, Iowa, and West Virginia. Thus far into Q3, each of these states is continuing to see growth, with our per-day net revenue trending higher quarter-over-quarter. In Michigan, which is a highly competitive market, we have seen a nice progression of market share gains since launch. For instance, we grew our market share in West Virginia, from 2.6% when we first entered the market in April to over 8% despite strong competition. This is evidence of our ability to introduce new players to our diverse platform and superior user experience, ultimately winning their loyalty. I also believe it is important to point out that we are now profitable in four of our markets. We have discussed our marketing investments, payback period, and customer retention. That positive contribution is strong evidence that, as markets continue to mature, we can and will drive strong profitability over time. Although we have many new markets to invest in over the coming quarters, we are proud of our ability to be disciplined and calculated in our investments while ultimately generating substantial profitability from maturing markets. Now, I would like to switch gears and discuss some marketing initiatives and the results we are seeing from them. To highlight an exciting partnership, we recently announced our collaboration with NFL legend Mike Ditka as a BetRivers brand ambassador. We are thrilled to have Mr. Ditka on our team and look forward to creating new and exciting content for our players to enjoy. From a marketing spend perspective, after going public, we accelerated our spend significantly in Q1, which was impacted by investments in new state launches, particularly in Michigan. In Q2, our spend decreased modestly compared to the first quarter. However, we expect our marketing spend to increase again in Q3 as we prepare for several notable state launches later this year and into early 2022. Our go-to-market strategy is critical to our success. We remain a data-driven organization, utilizing real-time insights from our business intelligence team to continuously optimize our marketing spend based on a return on investment focus model. This model considers various factors including product offerings in the jurisdiction, performance of diversified marketing channels, predicted lifetime value, marginal costs, and customer behavior across various products. Regarding marketing efficiency, we continue to see great results, including an average payback period of six months for all of our cohorts since inception. Our first half marketing spend represented 33% of our revenue, further demonstrating our ability to convert marketing investment dollars into top-line revenue. In terms of monthly active users, our MAUs were up 128% year-on-year, and our average revenue per MAU was up 25% sequentially to $377 during the quarter. I also want to take a moment to congratulate all the employees at Rush Street Interactive for being named customer service operator of the year, casino operator of the year, and social gaming operator of the year at the 2021 EGR North America Awards. These awards are a testament to the efforts of our entire RSI team and a further recognition of our industry-leading player experience. Lastly, I am excited about the advancements in our product and technology. We have had a busy quarter from a technology perspective as we strive to offer a best-in-class user experience. Our customers are enjoying many of the new features and content launched in recent updates. For example, in the casino category, we see a strong early response to our live dealer offering in Michigan. We expect to drive similar excitement for players in Michigan as we have seen in New Jersey and Pennsylvania. Additionally, we are excited to introduce several new titles during the quarter, including the biggest game, All Aboard Dynamite Dash, in New Jersey, Pennsylvania, and Michigan. Other recent improvements include enhancing our in-app experience with a live match clock, a live betting feature, improved in-app game streaming capabilities, and an upgraded casino interface. Moving forward, we are on track to launch our single-game parlay product ahead of the football season, which we anticipate will be very well received by our player base. Recent reports indicate our new sportsbook app moved from number eight to number four out of 41 brands tested, validating our improved functionality and user experience. We also remain committed to launching our combined sportsbook and iCasino iOS app in Pennsylvania and Michigan in the latter half of 2021. With that, I will turn the call over to Kyle.

Thanks. As Richard mentioned, second quarter revenue was $122.8 million, an increase of 89% year-over-year, and the adjusted EBITDA loss for the second quarter of 2021 was $6.6 million, which is less than half of the loss in the first quarter despite the sequential revenue growth this quarter. Our adjusted advertising and promotions expense was $36.9 million during the second quarter of 2021 compared to $7.4 million in the prior year quarter and $40.5 million during the first quarter of 2021. This reflects our year-over-year commitment to accelerating our marketing expense to take advantage of strong returns, but also our rational approach to ensuring we put our marketing investments to good use. We expect marketing investments to increase into the third and fourth quarters as we enter the football season and execute on launch opportunities in new markets that Richard referred to earlier. Our G&A grew modestly from Q1 to Q2, moving up to $8 million from $7.6 million. We continue to build out our development teams and corporate infrastructure to support the substantial growth we expect over the coming years. We expect this line item to continue to grow in the coming quarters. As a reminder, our adjusted EBITDA for the quarter removes the effects of share-based compensation, which was $4.7 million during the second quarter. We continue to have a strong position with $361 million in cash on the balance sheet and no debt, allowing us to increase our investments in marketing, launch in new markets quickly, and remain opportunistic regarding external investment opportunities. As Richard highlighted earlier, we are increasing our 2021 revenue guidance to a range of $465 million to $495 million, up from our previous range of $440 million to $480 million. The revised range implies a 72% year-over-year top-line growth at the midpoint, reflecting our confidence in the continued strong trends we have observed so far during 2021. Our guidance does not include any contributions from markets that aren't live as of today. With that, operator, please open the line for questions.

Thank you. The first question is from the line of Bernie McTernan with Needham. You may proceed.

Richard, I'm sure there won't be a huge deviation from the playbook with what you guys are running now. But are there any maybe one or two key priorities that you can lay out that you will be focusing on over the next six to 12 months?

I appreciate it. Thank you. Our focus is really going to continue to be on innovation and differentiation. We are investing a lot more resources as we grow to ensure that we stay ahead of the curve. We are also planning to diversify our business by bringing additional product verticals into the industry. Obviously, we are strong in casinos and sports betting, but there are other product categories that are of interest to us that we will be looking at. You will also see us continue to ensure that we have market access in the markets that matter and to be ready to enter those markets when they become available. I would say we are going to continue to be prudent with our marketing spend and stick with a strategy that has worked really well for us in the past.

If I can just follow up on that market access point, you mentioned in your prepared remarks that many states are recognizing the opportunity for iGaming. It certainly makes a lot of sense from what we are seeing on the per capita side. But is there anything that you are seeing that gets greater momentum happening behind the scenes for legislation and how should we think about iGaming legislation in 2022?

Every time I see reports of revenues for states like Michigan, New Jersey, and Pennsylvania, nearly 25% or more of revenues are coming from casino, which really does convey the strength of that opportunity to raise incremental revenues for future states. Having said that, Indiana and Illinois are two markets that come to mind as ones that have seen a lot of ambition from online companies lobbying for online gaming. States are recognizing the greater revenue potential that online gaming brings. We are also hearing about other states like Georgia, Alabama, and North Carolina that have potential interest in this as well. We are tracking this closely but do not have any strong insights on it at this moment.

Great. And lastly for me, could you review the relationship that you have with Rush Street Gaming and if you have access to their customer data to target iGaming and OSB customers? If so, how helpful has that been?

Certainly. We are a supplier to Rush Street Gaming's land-based casinos, including four locations - one in Schenectady, one in Illinois, and two in Pennsylvania. We provide retail sports betting services and support the operational needs of their sportsbooks. We also support them with a social gaming product. Regarding online gaming, we run operations on their behalf as previously described. In terms of databases, yes, we can leverage and collaborate with them on those properties, and this has certainly helped ensure that our omni-channel strategy is working effectively. We've been successful in driving traffic between online and land-based properties, fostering loyalty to the brand in both environments.

Great, thank you. I appreciate you taking the questions.

I appreciate it, thank you too. You're welcome.

Your next question comes from the line of David Katz with Jefferies. You may proceed.

I wanted to talk about content capabilities and your updated thoughts on developing and providing those capabilities yourself versus utilizing B2B providers or tuck-ins. How do you think about the build versus buy decision for your customers?

I am really passionate about this topic because I understand the desire to always have world-class products. However, I have seen instances in the past where companies might buy something that is not truly world-class. Therefore, you end up with products that do not meet player expectations. Our company unique in this space, as we have our own technology stack and a talented engineering team who understand what to build to create great player experiences. We've successfully released some of our own games in casino categories that have performed strongly in the New Jersey market. We are planning to continue development in the future. However, our core strategy isn’t necessarily to create everything ourselves. Instead, we aim to take high-quality, low-cost products from our partners and add our unique spin on them. This way, we can ensure the experiences we create for our players are distinctive and engaging.

If I may follow that up, there have been some significant deals and acquisitions recently in the industry. Do you think content differentiation and execution will always separate you, or at some point, does size matter?

In product categories like poker or daily fantasy, size can matter due to liquidity and market share. However, in casino and sports betting, user experience is crucial, and the number of players on a site does not necessarily impact that experience. Our focus remains on providing the best possible user experience. Players will notice how they are treated and the unique features our platform offers that others may not have. If we focus on our core strengths, our products will continue to mature, leading to sustained growth without the necessity to buy market share.

Thank you, Mr. Katz. The next question is from the line of Ryan Sigdahl of Craig-Hallum. You may proceed.

You mentioned that four states are profitable. Are you able to name which four those are?

This is Kyle. Thanks for the question, Ryan. I'm not going to go into state-by-state specifics, but we wanted to highlight that as markets mature, we do achieve profitability. We mentioned New Jersey a couple of months ago as being profitable for the full year 2020, and that is indeed one of those states. While we have new markets launching, we anticipate investments in those markets will affect overall profitability as they mature. We are excited about the opportunities ahead.

And one more for you regarding external marketing spend. I know you said it would increase in the back half of the year. However, we are hearing some aggressive plans from competitors. Can you provide any guidance around that, either relative to the first half or as a percentage of revenue?

We do see those competitors as well and, while our marketing spend decreased a bit from Q1 to Q2, we expect to see a significant step up in spend for Q3 and Q4 as we enter the football season and launch new markets. The timing of these launches will affect how that spend is distributed between the two quarters. We are willing to extend our payback metrics as we see good returns.

Great, congratulations on the Connecticut license. Can you quantify your expectations for GGR between retail and online, as well as any comments on profitability potential in the state?

It is probably too early to provide specifics on GGR and market share expectations in the state. The competitive selection process was significant, and we feel proud to have been selected. We feel the structure, particularly with the combination of retail locations, will present a good opportunity. While specifics regarding minimum guarantees haven't been disclosed, we entered this partnership with plans that we believe bode well for both the state of Connecticut and RSI.

Thank you, Mr. Sigdahl. The next question is from the line of Chad Beynon with Macquarie. You may proceed.

Good afternoon, Greg, Richard, Kyle, thanks for taking my question. I wanted to revisit your guidance. Can you help us think about how you are viewing seasonality in online casinos? Given your prior comments, are there any expected sequential declines in player behavior as the average person goes back to work?

Yes, there are several factors that will influence our guidance. The seasonality in casinos is not as pronounced as it is for sports due to its larger revenue mix. However, we do expect some impact during Q3 with a potential increase in Q4 as we prepare for the football season, which is beneficial for sports betting. The current guidance does not include any new state launches but will be adjusted accordingly as they come online.

On Slide 12 in your deck, you noted strong player retention in the cohorts. Are those older credits sticking around as you continue to reduce the promotions? Could you shed light on that?

Yes, you generally see more promotional activity in the early stages of market launches. However, as markets mature and players become loyal, the need for higher promotional activities decreases. We ensure we target our promotions effectively to retain our most valuable players.

Thank you very much.

Thanks for the questions.

Thank you. The next question is from the line of Jed Kelly with Oppenheimer. You may proceed.

This is a question for Jed and Richard, congratulations on the new role. With your recent engagement, have you noticed an increase in new online casino customers as the sports calendar slows down? Would you say the second quarter ARPU is due to a higher online casino mix, or are you simply capturing a larger share of spending from all customers?

You are correct that during months with less sports action, you will see an increased ARPU driven by online casinos. Heading into the football season, we expect a slight decrease in ARPU as player engagement ramps up with increased activity, however, we are still focusing on attracting new players. We are seeing strong performance in both sports and casino.

We did experience growth across our online sports betting and casino verticals. Our market behaviors and revenues are quite balanced, varying by market characteristics, including the product offerings available.

Is the partnership with Boom Entertainment considered B2B or B2C, or does it tap into something else?

It is a B2C relationship where we will be running the operation ourselves and paying royalties and commitments accordingly. This partnership allows us to leverage our expertise in a way that is beneficial both for us and the states involved.

Thank you, guys.

Thank you, Mr. Hickey. The next question is from the line of Stephen Grambling with Goldman Sachs. You may proceed.

I have a follow-up regarding your cohort analysis. Can you clarify why the 2020 cohort looks a little different compared to earlier cohorts?

The variation can be primarily attributed to the launch of Illinois in 2020 and the impact of the sports calendar on that launch, affecting engagement and retention in that particular cohort in Q2.

How does your process in Connecticut inform your strategies moving forward?

Each state has a different decision-making process, and our approach remains tailored to those unique circumstances. We submitted a competitive response in New York and look forward to the opportunity to participate there as well.

How do you approach quantifying maintenance marketing for customers already acquired?

We have seen benefits from focused marketing efforts to re-engage players who have lapsed for various reasons. Increasing our marketing spend has given us the opportunity to reconnect with profitable players who have simply taken a break.

Thank you very much.

There are no additional questions at this time. I would like to pass it off to Richard Schwartz, CEO for any additional remarks.

Thank you for your insightful questions. I am thrilled to be taking on the CEO role at this incredibly exciting time for Rush Street Interactive. I have never felt more optimistic about how we are positioned to succeed in this rapidly evolving market. We have proven ourselves as the partner of choice in terms of market access and retention, and we will continue to innovate to provide the engaging experiences our players deserve. Thank you again for joining us today, and I look forward to speaking with you all again soon.

Thank you for joining today's RSI second quarter 2021 conference call. You may now disconnect your lines and have a lovely day.