Rush Street Interactive, Inc. Q3 FY2021 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the RSI Third Quarter 2021 Earnings Conference Call. Please note that this conference call is being recorded today, November 10, 2021. I will 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 third quarter 2021 earnings release. It can be found under the heading financial quarterly results in the Investor section of the RSI website. Some of our comments 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 upon them. We refer you to our SEC filings for more detailed discussion of the risks that could impact our future operating results and financial conditions. 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 2021 earnings release, which is available on the investors section of the RSI website. With me on the call today we have our CEO, Richard Schwartz; and our CFO, Kyle Sauers. We will first provide some opening remarks and then open the call to questions. With that, I'll turn the call over to Richard.

Thanks, Lauren. Good afternoon, everyone. Thanks for joining the call. I have several topics I'd like to cover today. First, I would like to highlight another quarter of record revenue and the raising of our full year revenue guidance. This quarter represents the ninth quarter in a row of sequential revenue growth for RSI. Next, I'll give an update on the Market Access Initiative and some exciting recent developments on new market opportunities. Then, I'll talk about our operational and marketing excellence. And finally, a walkthrough of product and technology rollouts that are helping drive our differentiated user experience before handing it over to Kyle to dive deeper into our financials. Once again, our team delivered another solid quarter of year-over-year growth as well as sequential revenue growth, demonstrating our continued ability to grow the top line while strategically investing in marketing technology areas that we expect will drive meaningful revenue growth and long-term value. Revenue was $123 million during the quarter, representing a year-over-year increase of 57%, which included revenue growth in all of our online casino and online sports for the market. With this continued success and growth in our business, we are once again raising our guidance. We now expect our 2021 full year revenue to be between $480 million and $500 million, implying 76% year-over-year top line growth at the midpoint. This is up from the previous estimated revenue growth of 72% at the midpoint of our prior guidance range. Kyle will provide some additional details in his remarks. Before getting to recent launches, I want to first address the news I'm sure many of you saw earlier this week. We are thrilled to have been selected to operate our award-winning online sports betting platform in the state of New York. RSI has a strong track record of success in New York, overseeing the operations of the BetRivers sportsbook in Connecticut and New York. But New York isn't the only exciting new market to discuss. Subsequent to the quarter end, on October 12, we announced the soft launch of the PlaySugarHouse online sportsbook in Connecticut. The full launch occurred on schedule on October 19. And since then, we've been delighted to bring our award-winning product and players to Connecticut as the exclusive sports betting partner of the Connecticut Lottery. We have subsequently launched four retail sportsbooks wagering locations in the state of Connecticut in New Haven, Stamford, and Windsor, and most recently opened a sportsbook in New Britain. We expect another six locations to be opened over the coming weeks. During the third quarter, we also announced a partnership with Arizona Rattlers as their partners for online sports betting in BetRivers, Arizona. We were eager to launch BetRivers in that state during October. We now operate real-money gaming in 13 jurisdictions, five of which have online casino, 11 that have online sports betting and six with retail sports betting. We also announced that we've entered the Canadian market with the launch of our social gaming platform CASINO4FUN in the province of Ontario. The free-to-play online casino and sportsbook is available now on all devices through the BetRivers platform. As we have shared before, we've had great success in markets like Pennsylvania and Michigan with converting pre-launch social players into real-money betters. In fact, in Michigan, more than 20% of our pre-launch social players have opened a real-money account and made their first deposit. We are hoping for similar results in Ontario as we expect to launch real-money online casino and sports betting in the coming months. We are really enthusiastic about the opportunity in Ontario, given the size of the market and the ability for us to offer both online casino and sports in the jurisdiction. I can now shift and talk about market access. While we have continued to make strong progress in launching several new states over the past year, we have also made significant strides in our new market access initiative. We are now live with online sportsbooks in states representing 24% of the US population and live with online casinos in states representing 10% of the population. The anticipated upcoming launches in Louisiana, Maryland, and New York will increase our sports betting population by 9%, up to 33%. And our entry into Ontario will increase our addressable population of online casino players by over 40%. Our business development team is working to secure access in future markets. We are excited to have put ourselves in a strong position already with market access plans in 21 online sports betting markets and 19 online casino markets. I now want to turn to some specific highlights from the quarter and exciting trends we are seeing. Connecticut is off to a strong start. While it's still early, we've seen really solid progress thus far. Over the last two weeks in terms of handle, Connecticut is already our third-largest online sports betting market. In Illinois, we continue to hold market share very well. September data that came out earlier this week showed us with our largest share of gross revenue in the last seven months. A great testament to the user experience we provide and our ability to retain high-quality players. In Michigan, we have held steady with our online casino market share and I'm looking forward to soon being able to offer our players an iOS app to remove friction and further improve the user experience. In West Virginia, we've continued to grow online casino shares since we entered the market back in April, and we are now approaching 10% market share. This is another market where launching the iOS app for the first time will be exciting for our players, and we expect it will improve player satisfaction. Lastly, in Colombia during recent months, we are close to 20% market share of handle for combined online casino and online sports, and we again grew revenue significantly greater than 100% year-over-year. This is a tremendous achievement, given our entry into that market several years after its first opening. As I discussed earlier, there will be plenty of new markets to invest in over the coming quarters, which will put us in investment mode for the time being. But we are proud of our ability to remain disciplined and calculated in the way we invest and ultimately generate substantial profitability from markets as they mature. Now, I would like to switch gears and talk about some of our marketing initiatives, investments, and the results we have achieved. To start, we recently signed two new brand ambassadors to BetRivers: tennis analyst James Blake and three-time Super Bowl champion and NFL broadcasting veteran Mark Schlereth. We are proud and happy to join other ambassadors as we create new and exciting betting content for players to enjoy. We're also excited to have launched several hyper-local sports betting podcasts in major cities across the country via our CityCasts programming, including in Chicago, Detroit, Pittsburgh, Philadelphia, New York, and Denver. Stay tuned for upcoming launches in many more cities in the future. This is an effective way to use local talent, talking about local hometown teams to engage players and enhance loyalty because we know many betters prefer to bet on their local teams. We've recently announced we've expanded our commitment to college football by signing exclusive partnership for BetRivers.com with The Field of 68 and The Field of 12 Media Network. These shows hosted by former college football and basketball stars offer our players unique insights into betting and college sports. Our ability to market effectively is critical to our success. We remain a data-driven organization using dynamic learning and analytics to acquire, convert, retain, and re-engage customers. Real-time insights from our Business Intelligence Team allow us to continuously optimize our marketing spend based on a return-on-investment-focused model. This model considers a variety of factors including the price offered in the jurisdiction, performance of diversified marketing channels, predicted lifetime values, and behaviors of customers across various product offerings. Through the efficiency of our marketing, we continue to see great results. We still have an average payback period of six months for all of our cohorts since inception, with year one and year three showing 5.6x respectively. Our marketing spend during the course of this year was 34% of our revenue, which we believe to be near industry lows, further demonstrating our ability to convert marketing investment dollars into top line revenue. Given the strong results, we have accelerated our marketing investments and have extended payback periods slightly, only doing so prudently with an eye on long-term profitability. Now turning to product and technology; as usual, it's been a very busy quarter for technology and product development perspective here at RSI as we continue to focus on providing best-in-class user gaming experience. We recently launched our own dedicated and branded live casino studios for players in Pennsylvania and New Jersey, which concurrently provide blackjack tables exclusively for BetRivers and PlaySugarHouse to make it easier and faster for them to find the virtual feel at popular online tables. Our focus on customer interaction and community responsiveness continues to set RSI apart from other casino platforms. We are also excited to have recently launched RushRace, a proprietary multiplayer slot tournament for our casino customers. RushRace is the first of many exciting experiences powered by RushArena, our innovative multiplayer tournament engine that will allow us to continue to stay ahead of the industry and offer a differentiated product to keep our players engaged and excited to play on our platform. We have also seen great interest in the same-game parlays feature we launched earlier this year. In fact, over 50% of our NFL betters this year have made it a same-game parlay wager. When it comes to same-game parlay functionality, we have a significant point of differentiation from our competitors. Unlike most of our peers, our players are able to combine multiple same-game parlays and even a same-game parlay with another game outcome, or even bet on a different sport. This gives our players more ways to combine bets and create longer odds and bigger payouts. Most offers another product differentiation that creates loyalty and retention with our players. We are also very proud to be recognized by Eilers & Krejcik for improvement, as our new BetRivers app is now ranked number three out of 35 brands tested. This is a strong endorsement from a respected independent source as we continue to improve functionality and user experience of our app. As always, we pay close attention to the reception of our platform in new sportsbook and casino markets from first time users when they experience our significantly upgraded app in conjunction with the new features and award-winning customer service. We are increasingly confident that we have built a market-leading sportsbook app. We also remain on track to begin to roll out our integrated sportsbook and casino iPlus app during the fourth quarter. As previously shared, our tremendous success in Pennsylvania and Michigan and recently West Virginia has all been achieved without an iOS app in those markets. We are really eager to see the benefit of enhanced player engagement through our iOS casino app when we launch it in those markets. I also want to take a moment to congratulate all the members of Rush Street Interactive for being shortlisted for Casino Operator of the Year by the SBC Awards North America, and for being nominated as a Social Operator of the Year and for prestigious recognition by our online gaming peers. We are also very pleased to have won the Sportsbook of the Year by the 2021 SBC Latinoamerica Awards just a couple of weeks ago. These awards, as voted by industry experts, are a testament to the efforts of the entire RSI team and a further recognition of our industry-leading player experience. With that, I'll turn the call over to Kyle.

Thanks, Richard. Before I dive into the numbers, there's one more very prestigious nomination RSI has been shortlisted for the SBC Awards North America that Richard failed to mention, and that is Leader of the Year, and very special congrats to him. And as well as recognition of his hard work over the years in shaping RSI into the organization it is today, having taken the company from vision to fruition during a time when many doubted whether online gaming would ever be a force in the US. Congrats to you, Richard. And now on to some financial data. As Richard mentioned, third-quarter revenue was $122.9 million, an increase of 57% year-over-year. The adjusted EBITDA loss for the third quarter of 2021 was $12.2 million. Adjusted advertising and promotions expense was $45.4 million during the third quarter '21 compared to $17.5 million in the prior year quarter, and $36.9 million during the second quarter of 2021. This reflects our commitment to accelerating marketing spend to take advantage of strong returns, but also our rational approach to ensuring that we put our marketing investments to good use. We expect marketing investments to increase meaningfully in the fourth quarter. The Football season offers more opportunities to attract new players. And our recent launches in Connecticut, Arizona, and social in Ontario have also created an opportunity to further accelerate spend. Depending on launch time in other markets, we could have further investments in the fourth quarter or heavier into the beginning of next year. As we think about markets like Louisiana and Maryland and real-money in Ontario and New York based on the exciting news earlier this week. Our adjusted G&A grew modestly from the second quarter to the third quarter, moving up to $8.8 million from $8 million in the second quarter. We expect this line item to continue to grow in the coming quarters as we continue to build out our development teams and corporate infrastructure to support the substantial growth we're experiencing and continuing to expect over the coming years. As a reminder, our adjusted EBITDA for the quarter removes the effects of share-based compensation, which was $4.5 million during the quarter, while our year-to-date results remove the effects of share-based compensation, the change in the fair value of earnout interest liability and the change in the fair value of outstanding warrants which were all redeemed or expired during the first quarter. We continue to be in a great position with $347 million in unrestricted cash on our balance sheet and no debt. This allows us to continue growing our marketing investments, launch new markets quickly, evaluate potential bolt-on acquisitions, and remain opportunistic with regard to external investment opportunities. As Richard highlighted earlier, we are increasing our 2021 revenue guidance for the full year to be between $480 million and $500 million, up from our prior range of $465 million to $495 million. The revised range implies 76% year-over-year top line growth. This is up from the year-over-year revenue growth of 72% that we were expecting on our previous call. We're seeing strong results across the business, and this increase reflects our confidence in the continued strong trends we've been seeing so far during 2021. We've talked about new markets that are likely launching later this year or early next year. But as a reminder, our guidance only includes contributions from markets that are live as of today. And with that operator, please open the lines for questions.

The first question is from Chad Beynon with Macquarie.

Hi, good afternoon, and thanks for taking my question. Congratulations on the quarter. With respect to the fourth quarter guidance, can you elaborate a little bit in terms of what you've seen so far in October from a gaming competition, given some of the comments that we've heard from your peers? And given your approach towards disciplined promotions, is this something that you're able to maintain given some potential irrational promotions that we're seeing in the market? Thanks, guys.

Maybe I'll start out on just the guidance and how we thought about the fourth quarter. And then I'll let Richard talk a little bit about the competitive environment and promos and the way we approach that. So as we talked about, we raised the guidance by $10 million at the midpoint. I'm pretty pleased that we're demonstrating the ability to set expectations and meet or beat them each time. A lot of different considerations obviously go into our range. More of the variability is on the sports side, since the consistency of handling volume is a little bit higher on the online casino business, which is a bigger part of our revenue. The sports calendar looks a little different than last year. We are obviously excited about all the sports that are happening and lined up to happen in the fourth quarter here. Probably not unlike what you've heard from others, October had a tough start with some low football for the first few weeks. It's gotten a little better over the last couple of weeks. We've got two new state launches in Connecticut and Arizona that we're very excited about. As you know, there's an investment early in market launches and promotions, really before any real revenue starts to be generated, so that probably is a significant factor in either direction on the fourth quarter. But having said all that, we're obviously excited to expect to have our 10th consecutive quarter of sequential revenue growth again here in the fourth quarter.

Hi, Chad. In terms of the competitive nature of the market; I just thought I would comment on that. The market remains very competitive as new entrants come into the markets and existing competitors increase their spend and aggressiveness. So we continue to perform well and we invested for years in developing all the elements of an experience that matter. So when it comes to your operations, your acquisition of players, your retention, those are things you can't just create overnight or a couple of months; that takes years of development and expertise to build out. So we're very comfortable that we're prepared to compete. And we're seeing that we're continuing to have great results. We think despite the competition, we operate with a very rational environment. We operate in a way that we believe is long-term focused on efficient, flexible marketing. And I think we're seeing the results are still available for us because of the investment we've made in the past.

Great, thank you. And then my follow-up just in terms of the iOS app launches. Do you believe that this will be incremental to the current desktop business? Are you expecting customers to kind of use both, maybe mobile for some more snacking and then stop for longer sessions? Just trying to think about the building blocks of your ARPMAU, and I guess this is mainly for '22 after the launches. Thank you.

Sure, we know mobile is king, and having a first-rated app is helping us in sportsbook markets that we know is going to have only upside and provide us in the casino markets. The thing with the current setup is that our players are able to play on their iOS devices, but it is not very clear and seamless. By reducing friction from the user experience, we're going to deliver for them a much better experience. And when you're betting on things like sports, you want to be able to enter the app and do a very quick face ID and get to playing easily and seamlessly. You have geolocation integrated into the app instead of where we have it today in those markets, and we want to be able to communicate with messaging directly to the players whenever we have an update or bonus or promotional offers. So there are lots of benefits that an iOS app is going to bring. But I will tell you that the number one thing is that we'll reduce some friction that currently exists in limited markets.

The next question comes from the line of David Katz with Jefferies.

Hi, good afternoon, everyone. Thanks for taking my questions. I will admit I was a minute or two late, but I would love to just discuss the New York opportunity. Obviously the size and scale of the market, in view of the tax rate involved. And how you're thinking about that financially and strategically?

Yes, so maybe I'll start on the financial side. And if Richard wants to add anything, he can do that. But yes, I mean, certainly, we'd prefer a lower tax rate. But we're definitely confident in our ability to generate profits in New York. We think it's a market where competitors likely will be less aggressive with both marketing and promotions, certainly over the longer term. And I think just given our success that we've proven time and again, with keeping markets low and making efficient use of bonuses and promotions, it seems like New York will play very well to our strengths as an efficient operator.

Okay, and if I can just follow up on Illinois, right? The in-person registration is canceling next year, as I understand it. If you could just give us a couple of updated thoughts about how you maneuver in that context as well, that would be helpful.

Sure. We've seen the in-person registration go back and forth a few times now. But what we have seen is that our market shares have largely stayed consistent. In fact, just yesterday, the announcements came out, and we reported the highest number we've achieved in seven months. So what excites me about the market now is that you've had a slowdown in new players, which lets you see who really operates well. We've been able to deliver really strong growth and enhanced market share recently. So when it comes to switching back to in-person registration in probably March or April, we are prepared; our products are much better than they were before. And we also have strong marketing partnerships in place. This includes partnerships with the Chicago Bears, and we feel that we've been able to earn and retain player trust in this market by offering our product. So we're pretty excited to expand the opportunity to increase our new player flow and demonstrate to the players why we've been so successful.

The next question comes from Ryan Sigdahl with Craig-Hallum.

Good afternoon. Congratulations Richard on the nomination and to everyone else recognized. I want to start with the average revenue per monthly active user, which increased about 1% sequentially. With the NFL season kicking off in September, was there an impact from the NFL on our ARPMAU? Also, what does this suggest for Q4?

Yes, that's a good question, and we talked a little bit about this on the last call. But we actually expected our MAU growth to be a little slower in Q3 due to the sport seasonality in the sports calendar that spread across Q3 last year. Regarding the MAU, we saw a pretty meaningful increase in users in September with the start of the football season, and that's continued nicely into Q4 in October and November. So I'd actually expect the MAUs to move up pretty nicely in Q4. Adjusting for any sports seasonality, we'd expect the MAUs to continue to grow meaningfully over time and really be the larger source of revenue growth. To your ARPMAU question, it'll fluctuate a little more based on the mix of casino and sports and the launch of new markets. It probably didn't impact our ARPMAU much in Q3 because the NFL was only part of the quarter. It will probably pull it down more likely in Q4, as we'll have an influx of players who are lower ARPMAU than our casino players. Plus, we'll be seeing many new players in Arizona and Connecticut that will be incremental to the MAUs but won't be generating as much revenue due to promotions.

Helpful. Thanks, Kyle. On Ontario, you launched CASINO4FUN weeks ago; any early user metrics you can share there?

Yes, there really aren't any metrics that we're sharing. But I think the key is to focus on that market opportunity to build our brand and databases early. We're learning a lot about the market, making sure the registration flows are right and ensuring everything is ready for the time when the market opens. Because, as we've shared before, we expect that to be one of our largest markets for next year.

Great. How does the brand, I guess building the brand using CASINO4FUN relative to your other real-money brands? How does that resonate with customers and consumers?

We're actually using the BetRivers brand in that market. So the platform is referred to as CASINO4FUN, but we're using the BetRivers brand in the market. Since the intent is to use that brand in Ontario, we are investing right now in building brand awareness there. So there is a nice awareness in the community and among consumers in that market before others are really investing the same type of dollars in that brand awareness.

That makes sense. One more on the social casino, revenues plateaued the last three quarters here. Can you remind me what states you guys are live in there? And then also as you convert those to real-money, which I think you said was around 20% if I caught that right? Do they keep playing on both? Or is that effectively a good churn there? Thanks.

Right. So we're not really investing dollars to build out a social platform other than using it as a real-money acquisition opportunity, as we described we're doing in Ontario right now and previously in Michigan and Pennsylvania. You heard that data point right about a 20% conversion rate. Certainly, that's an exciting number. Historically, people would expect it to be under 5%, so the fact that we're generating that kind of conversion rate is a real validation of a strategy that works well for us. That being said, there are some players switching back and forth between the two. We've received feedback from quite a few players when they want to be responsible with their budgets or feel they have reached their spending limit; they switch to the free play model to engage with a product experience at a more entertaining level without any risk. So we do see that players do go back and forth between the two, but we do know that generally, the direction is to convert those players from social to real-money when those markets are legal.

The next question comes from the line of Jed Kelley with Oppenheimer.

Hey, great. Thanks for taking my question. Just back on the Illinois numbers. You mentioned your GGR was the highest it's been in quarters. Can you talk about the impact the same-game parlays had on that performance?

Sure, it's pretty meaningful. I would say the overall app experience improvements are probably an even larger driver. Why I say that is that we've gone through a tremendous amount of improvements in the app, and it's just getting better and better. But having said that, same-game parlays are a valuable tool; as we indicated, over half of our players have used it since the start of the football season. We have a differentiation in our product that we're really excited about. Traditionally, most single-game parlay products among our competitors are limited to one game, and you can't combine them. But we allow players to combine multiple same-game parlays and even bet outcomes from other games. For instance, if a player wants to bet on Brady and the Bucs, they can bet the Bucs to beat the spread and Brady for over 300 yards; that's an extended same-game parlay. Our feature allows users to parlay what they want and combine it with outcomes from other sports, which enhances the odds and offers bigger payouts. This nimbleness and the fact that we also opened up for college football same-game parlays, which customers love, has been meaningful. It levels the playing field, and as I stated earlier, it not only evens the playing field but accelerates our ability to differentiate in that critical area.

And adding extra games to single-game parlays; is that being done through your own technology or are you partnering with Canby? I mean, who's calling that?

We're leveraging the Canby engine for that. One significant benefit is that some companies are outsourcing the same-game parlays from individual companies to supplement their existing core offering. But when you do that, you're limited in your ability to cross-sell and cannot easily manage multiple parlays. You have two platforms providing two separate services, which creates delays in settling bets. We've integrated it in a way that allows for multiple bets and creates greater odds for the players.

Got it. And then just two more. You see the success Michigan's having with i-gaming; the numbers are phenomenal. Where are we with neighboring states such as Indiana and Illinois potentially legalizing i-gaming? And then back to New York, is there any way you can leverage your Connecticut property when you enter that market?

Sure, so i-casino is an exciting category, and we're seeing a lot of opportunity in the Midwest, particularly in Illinois and Indiana, as potential future markets. We've seen bills dropped in Indiana and Missouri and expect those markets to move as more states regulate. The revenue success of the casino category versus sports betting has given states motivation to move forward in that direction. We are actively monitoring these markets and lobbying where we can to encourage that. The exciting thing is that, for the first time in years, our competitors are reaching out to each other trying to focus on getting this category moving and legalized, which indicates positive momentum. I think it's just a matter of time before we see more states open up. In the meanwhile, we are very excited that Ontario, which has the largest population of any potential online casino market in the US, will be opening up for us shortly. Regarding New York, yes, we plan to work with the property and leverage our player base as we publicly shared, our property has performed the best in terms of commercial sportsbook revenues for the retail side, which is significant given it's not the largest land-based casino in the state. We're excited to build on that database and market our brand online in that state.

The next question comes from the line of Bernie McTernan with Needham.

Great, thanks for taking the question. Richard, just given the movement in stock, can you remind us of your M&A framework, any holes that you want or need to fill that you could maybe take advantage of given your equity is now worth more?

Sure. We have really what we need to be successful long-term, market access, which we've shown we have that in all the markets that matter, our own in-house technology to drive the results we are seeing in the casino category, which is something that many companies don't possess with the same quality of product. Additionally, we have the scale to justify some of the larger opportunities ahead of us. Things we've mentioned before are diversification in our product portfolio; find ways to bring in other product categories. There are some opportunities there that we are exploring, and we're always open-minded to other options which could improve our opportunities, whether it's through brands, databases, or product verticals.

Yes, thanks. As you point out, we mentioned in the prepared remarks we do expect that the marketing expense is going to move up pretty meaningfully in Q4 from Q3. I would expect that the increase in marketing spend in Q4 would outpace the margin benefit we get from the sequential increase in revenue. This probably means we're losing more in the fourth quarter than we are in the third quarter. Thinking about the increase in spend, you've got the Q4 sports calendar. So little heavier marketing related to football, trying to attract new players in all the states that we're in, with the Connecticut and Arizona launches being significant investments. The timing of other upcoming launches will also dictate how much we actually spend in Q4 or into Q1 next year. I would expect both Q4 and Q1 to be larger than Q3, but specifically, I'd expect that spend to be greater in Q4, resulting in a wider loss in Q4 compared to Q3.

The next question comes from the line of Stephen Grambling with Goldman Sachs.

Hey, thanks, maybe that's a good place to jump to just any updated thoughts on the path to profitability in any kind of puts and takes to consider along that path?

Sure, I'll take that one. The good news is we're already operating profitably in quite a few markets. We've demonstrated the ability in the past to operate this business profitably. I think that it's going to depend really largely on the pace and timing of rollout of new markets, both sports and casino, and what the competitive situation looks like in those markets. And obviously, there's a lot of commentary around that, and we have competitors that are behaving in different ways in different markets, but it's definitely competitive at this point, both in terms of promotions offered and outright marketing dollars being put to work. We're operating in an environment that's aggressive, and we're doing really well. Our revenue guidance is getting us near the $500 million mark at the top end, which should position us as the fourth largest operator in the market. In the near term, we don't expect profitability to materialize, but we will continue to invest in all the new markets discussed today. We expect to see more markets approved over the next years, and we will continue to find opportunities to invest in. Eventually, once the markets mature, we will be in a better position for profitability. But we'll wait until we have more clarity on when that will occur.

Got it, makes sense. And then maybe changing gears in the markets where you have i-gaming and sports betting, any sense for what the split is in either revenues or users as we look at i-gaming only versus sports only versus the overlap, and how perhaps the path of customer acquisition may be evolving?

So we haven't broken out the split by states. We have shared in the past that overall, our mix has, over several quarters, run between two-thirds and three-quarters casino, and we were near the higher end in Q3, but that's also probably reflective of the sports calendar. So I might expect that to shift a little bit towards sports in the fourth quarter. We've pointed out that, in terms of revenue and value generated from our players, a casino player is worth something like five times what a sports-only player is, and someone who's in both is even two times more valuable. There's a lot of value in states where we have both types of players, so we love markets like Ontario, expecting that to be a big contributor.

Makes sense. And then one last one, just to clarify, I think you have this slide in the deck that shows different cohorts. You referenced this last quarter, but I want to make sure that I understand what's going on there. The 2020 cohort looks like it still has been softening. So I guess what's driving that? And will that eventually reverse out?

Yes, I think you and I talked about this call three months ago, and it's a good question and a fair one. It's really mostly about Illinois. Two things are at play here. First is that we had a head start in Illinois, as everyone knows, before some of our competition entered the market. Some of that market share is what helped boost the charts back in 2020 and early 2021. Secondly, this should reverse itself, to some extent, because of seasonality. A lot of the acquired players in 2020 were from Illinois, which is a sports-only market, so we expect to see some benefit from that Illinois 2020 cohort in the fourth quarter.

The next question comes from the line of Daniel Politzer with Wells Fargo.

Good afternoon, everyone. And thanks for taking my questions. First, just the promo spend; I wanted to drill in a little bit. One of your competitors recently said there's a misalignment between CAC and LTV, and basically they're pulling back. I mean, as you've seen this level of competition and promotion certainly increased over the last few months. To what extent has your strategy pivoted or changed during this time period?

So, we're still running at around a six-month payback period. Since inception of the business, we've seen increasing returns only getting slightly beyond that, so there aren't any new competitive edges. We do see that return on those players is increasing with better conversion and retention rates. If the conversion rates are up, you can spend that money on marketing efficiently, getting those players through the funnel and registering them for their first deposit. And of course, once they're there, how you treat them will influence retention rates, which drives up LTV. Many companies in this space are spending a lot on marketing, but they don't have the product needed to compete. You must have strong execution in both product and service to achieve results, and if any part is missing, the risk grows of not recovering invested capital while needing longer time to mature your product or service.

Got it, thanks, Richard. And then just follow up on Connecticut, any early signs and maybe insights into the competitive environment there given it's effectively an oligopoly? How does this compare with other markets such as Arizona, which recently launched?

Connecticut's really exciting; as you know, only three operators have licenses, including us. FanDuel and DraftKings are the other competitors, and they have a large database to start. We expect them to jump off to a strong lead from their positioning. But as we shared on this call, we are very happy with our progress in the last few weeks being the third-largest online sports betting market with only a few weeks since launching. We're optimistic about growth in Connecticut as players will try multiple sites and only have three, which gives us an opportunity to showcase the difference in how we treat them. We also have a great partnership with Sportech and the Connecticut Lottery with a number of retail locations opening soon. Overall, we expect good growth from our strategy in Connecticut based on our experience in other markets.

Got it. And then just one quick housekeeping item, did you get Colombia revenue for the quarter?

We did not get exact Colombia revenue. That will be in our 10-Q; it grew more than 100% compared to last year, but it's somewhere just south of 10% of revenue.

The next question comes from the line of Edward Engel with Roth Capital.

Hi, thank you for taking my question. I was wondering, has there been any interest in launching or in licensing, or trying to make an agreement to license a third-party brand that might be more widely known for sports fans? And then can you use that philosophy to complement your product?

We have two great brands that we use in the United States. Both are regional and national brands; BetRivers is a little more national, and SugarHouse is primarily regional, expanded from New Jersey to Connecticut. We've evaluated various options and find that our current strategies are working well because local marketing resonates powerfully. Kyle referenced earlier that we're achieving significant online gaming revenues in the country while spending considerably less than others. Nevertheless, we remain flexible and are always open to options that could be beneficial, but we are very comfortable with our ongoing strategy.

Great, thank you for that. Given some success with cross-selling in i-gaming from your social gaming customers, do you see an opportunity to make an acquisition on the social gaming side, which would grant you access to an even larger database to target with i-gaming products?

Certainly, that is an interesting idea we've discussed internally. It's a worthwhile consideration if we can find a product appealing to a casino demographic. That could certainly be a nice fit for our company, but we need to explore the various options available. We have a robust business development team that evaluates opportunities like these. Such acquisitions could definitely enhance our ability to build valuable databases.

The next question is coming from the line of Mike Hickey with The Benchmark Company.

Hey, Richard, Kyle. Congrats on that great quarter, and thanks for taking my questions. On Canada, just curious how significant the gray market is there and how competitive the operators are?

Sure, that's a great question. It really comes down to no one knowing the true answer about its scale and size. Most of the market has historically focused on the sportsbook side. So I think there are players already in the databases of platforms that will also be competing in the regulated market. On the casino side, we're excited about the ability to promote the social casino product to an audience that may not be familiar with a casino brand. We're focusing on the casino category and getting players' early exposure to the experience we offer. In a strange way, Michigan was the opposite, having a large retail database that came online quickly. The question will be how many of the gray market sites can transition into a properly regulated environment without significant delays, something we've seen in some European markets. Several of those markets have been able to launch without any issues. It will also be interesting to see how many of those brands successfully cross-sell to real-money sports betting. However, we believe we have a significant advantage in the casino category, which hasn't been heavily promoted yet.

Nice, thank you. Just to clarify, do you anticipate existing operators will convert from the gray market to the regulated market by applying for the same licenses as you?

Yes, that's my understanding; they will be able to switch from the gray market to the regulated market by applying for the same licenses that we will.

Okay. And then in New York, are you able to leverage the Rush Street retail casino there in terms of the database or leverage other opportunities there?

Yes, the plan is to do so.

All right. Last question you said 20% in Colombia, and you sort of arrived on the scene late; you've had a lot of success. Does that encourage you to look beyond Colombia to the broader Latin American landscape for sort of expansionary growth? Thanks, guys.

Thanks. Yes, it does give us confidence and validation that our strategy of entering the market without short-term focus has paid off. We've built the product, localized it, organized strong local teams, and prepared for the next phase of expansion. We were correct in anticipating years ago that this market offers a great opportunity for growth and serves as a stepping stone for other markets in the region. Brazil's legalized sports betting is still being regulated, and we hear rumors that may be nearing conclusion; this will be positive. Argentina is also in the process of legalizing, as is Mexico. We're talking about large populations, and all the investments we've made in payment vendors, banks, location providers, teams, product, and localized sites will work well in these other markets. This strategy also enabled us to enter Colombia early and build a firm foundation for expansion. So, to answer your question, yes, that's an area of high interest for us, and we're excited about the strategy that has been executed to leverage the success we've had in Colombia in other markets.

There are no additional questions waiting at this time. I would now like to turn the conference back over to Richard Schwartz for any closing remarks.

Great questions. In closing, I'd like to repeat what I shared last quarter. I have not been more excited about how strong we are positioned in this dynamic industry. We are strong and growing stronger by the day. We will continue to successfully gain market share across new markets, including very heavily contested ones like we just experienced in New York and Connecticut. We have ample growth opportunities ahead of us. For example, in the last six months, we entered two markets, Arizona and Connecticut, with a population of 11 million people. In the next six months, we're going to enter Ontario, New York, Maryland, and Louisiana, which is about four times the previous population of over 45 million people in these upcoming markets compared to the 11 million in the last six months. So a lot of growth is ahead for us. We continue to demonstrate our ability to grow top line while remaining flexible and prudent in how we invest in marketing. When the rest of the industry begins to rationalize how they market and bonus players, we believe we will have a sustainable competitive advantage as nothing will change for us since we're already operating rationally today. This is why the best is ahead for RSI. Thank you for joining the RSI third quarter 2021 earnings call.

That concludes the Rush Street Interactive Third Quarter 2021 Earnings Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.