Rush Street Interactive, Inc. Q2 FY2022 Earnings Call

Good afternoon, ladies and gentlemen and welcome to Rush Street Interactive Second Quarter 2022 Earnings. It is now my pleasure to turn the floor over to your host Lauren Seiler. Ma'am the floor is yours.

Thank you, operator and good afternoon. By now everyone should have access to our second quarter 2022 earnings release. It can be found under the heading Financials Quarterly Results in the Investors section of the RSI website rushstreetinteractive.com. 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 a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2022 earnings release and our investor deck which is available in the Investors section of the RSI website at www.rushstreetinteractive.com. With me on the call today we have Richard Schwartz, Chief Executive Officer; and Kyle Sauers, Chief Financial Officer. We will 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 and welcome to our second quarter earnings call. This quarter's results reflect a balanced performance between topline growth and efficient customer acquisition and retention with a focus on sustainable returns. We are well positioned to continue growing and growing profitably as we remain on target to be adjusted EBITDA positive for the back half of 2023. We continue to see opportunity for further growth in existing markets, while also continuing to launch in new markets such as Ontario, Mexico and West Virginia where we recently added online sports to our existing online casino product. When we combined our extended market access with our sophisticated technology and a world-class user experience, we feel great about how we are positioned within the industry and for the future. Revenue for the second quarter was up 17% year-over-year to $144 million. Monthly active users in the US and Canada were up 35% year-over-year with growth derived from both new and existing markets. We grew our average active users in all markets year-over-year other than just one which was flat, a great sign that our brand continues to grow in our markets. Looking at adjusted EBITDA, we posted negative $18.6 million a considerable improvement compared to last quarter. The improvement was driven by a combination of higher revenue, lower marketing costs, improving gross margin and only a modest increase in our G&A costs. In line with last quarter, we were profitable in the five markets of New Jersey, Pennsylvania, Michigan, Illinois and Columbia. And their combined profitability improved for the first quarter to second quarter, validating our continued progress towards corporate-wide profitability. In addition, West Virginia turned positive for us in the second quarter after only four full quarters of operation. As a reminder, this is the same short time period in which we reached profitability in Michigan. As for the remainder of the year, we are tightening the range on our guidance to between $600 million and $630 million, which reflects a few key considerations. First, we are taking a conservative view around any potential headwinds from our consumer heading into the busy fall season. But I want to be clear, as of today we are not seeing any headwinds with our consumer when we look at things like average deposit size or even metrics such as handover player. Second, since the start of the last football season, we have added seven markets where we operate online sportsbook. This creates a lot of opportunity, but also some unknowns as we learn how those markets will respond during a full football season and how the competitive dynamics intensity will play out. And lastly, as we ramp up in Mexico our approach will be disciplined and gradual. We expect a modest contribution and investment during the initial six months of operations in 2022. But over the longer term, expect this market to be a significant growth contributor for RSI. As we move into the second half of 2022, we are building a global business that continues to scale with the recent launches in Ontario, Canada and Mexico. We are now live in four countries. We operate combined online casino and sportsbook now in four US states, Ontario in Canada and all of Mexico and Colombia. In addition, we operate our online sportsbook in nine other states in the US, giving us a diverse set of growth opportunities. With that I want to provide some thoughts on a few of our recent launches. First in New York, we continue with our more measured approach in the market which is evident in our second quarter results compared to the prior quarter. We remain focused on targeting and attracting high-quality customers and retaining them with a world-class user experience, as opposed to financially incentivizing short-term behavior. We look forward to the upcoming football season as more and more players have learned about the BetRivers platform and our customer-friendly approach. During the beginning of the quarter we launched in Ontario. As a reminder, for the preceding 10-plus years, this has been a competitive market. We entered a market where a number of operators already had established brands and equally important existing player databases. Although it was unclear until relatively close to launch how the transition from gray and white market would play out, previous operators in the market were ultimately able to smoothly migrate their existing players into the regulated market. This meant a portion of the operator started with a notable advantage. From our vantage point, we knew it would be important to invest in our brand awareness early with a broad TV campaign during the Winter Olympics in February. The awareness began to pay off when the market opened in April. The fact that Ontario is also an online casino market also plays to our strength, as we shine in casino markets, given the innovation built into our product and user experience. Since the operators can't promote inducements from players to register on other sites in Ontario, an operator like us that has a wide range of unique selling points has an advantage because we can promote our differentiated experiences as an effective way to attract new customers. In the near term, this approach will result in a more gradual build to get players in the door and ultimately, it will lead to consistent growth over the next number of years. We think we can grow substantially in Ontario over time and feel very good about our start there. We are seeing good progress in Ontario, where July's revenues per day are up over 30% compared to June, even with a lighter sports calendar. In late June, we went live in Mexico. A bit of history we think is informative. Colombia is a market with a population of about 50 million people. We entered that market without a brand, without a database and without any experience in the region. We operated for almost a full year with only an online sportsbook before adding online casino. Yet we went from a standing start to a top three player in the market and have consistently built share over time. In Mexico, we enter in a better position. It is a larger country with a population of approximately 130 million people and we were able to launch out of the gate with both casino and sportsbook. In terms of building our brand, we have a great local media partner that is well known and respected. In addition, we have technology that has already proven itself in both North American and Latin American markets. We are really excited about Mexico and believe that our high-quality user experience will stand out and appeal to players in Mexico as it has to Colombian players enabling us to grow market share with a measured approach. Looking ahead, we are planning to launch online sports betting in Ohio in January. Ohio is a state that we are excited about given the demographics, the sizable population and adjacency to four other markets where we are already operating at the BetRivers sportsbook. So there is a lot of media overlap. Maryland is another exciting market where we are preparing to launch online sports betting whenever the regulators allow. Just earlier this week, we launched a retail location in the state with our partners at Bingo World, which is located just outside of Baltimore. Lastly, it's exciting to see Massachusetts become the newest US state to approve sports betting. We have an agreement with a market access partner that is included in the recent legislation and we will share more details about our plans in the future. Turning to marketing. We are seeing a more rational environment develop with what appears to be the continuation of a fundamental shift away from a singular focus on generating revenues at any cost. We saw this pullback start during Q1 and continue into Q2 with a slight pullback likely reflective of seasonality and a lighter sports calendar. However, even compared to the year-ago Q2 period, our cost to acquire players are down by around 35%. Looking ahead to the fall when the sports calendar picks up again, we are mindful that we may see another phase of aggressive sportsbook advertising during the football season but we will remain prudent with our marketing dollars. That said, we continue to be data-driven and plan to continue to invest in customer acquisition at viable cost levels and at times of the year, when those customers are most prone to begin betting with us, such as the upcoming football season. We expect we will continue to grow our share by earning the loyalty of customers by treating them well, being thoughtful, developing high-quality experiences and reducing friction at every possible point. The recent shift to a more rational environment plays to our advantage; a focus on earning rather than buying customers and really earning their trust is where our platform and customer service shines. For the long run, our approach has been and will remain to emphasize user experience first as opposed to how much financial incentive is offered to players. As new markets continue to launch, to be profitable in our view you need to get players in the door at a reasonable cost and focus on strong retention and customer service. We have built our platform and culture around this philosophy and we believe it is paying off on our movement towards profitability and cash flow generation. From a product and technology perspective, we have spent the last quarter laser-focused on improving the customer experience and scalability. While these initiatives may not always be evident on the surface to the end user, ensuring a frictionless and high-quality experience with minimal disruption is an evergreen effort on the back end. These continued improvements and the many features we've talked about over the last year have been validated by our significant app rating improvements over the last year. Our average rating is up over a full point from this time last year. I'm also excited to let you know we recently completed the acquisition of Poker Night in America, a leading content provider of live and recorded poker tournaments and events. Poker Night has a strong following and a deep library of poker TV content and media creation capabilities that will help to further build out the BetRivers network and engage our target audience on an ongoing basis. Recall that two quarters ago, we also purchased an online poker platform. Together these two tuck-ins will position us well for when we eventually launch online poker and the associated strong cross-sell opportunities that poker will bring to our casino and sportsbook verticals. The acquisition was paid for with approximately $2.2 million in cash and $2.7 million in RSI stock. We don't expect this acquisition to have any near-term impact on either revenues or profitability but rather it will serve as a growth enabler for our business. With that I'll turn the call over to Kyle.

Thanks Richard. Second quarter revenue was $143.7 million, up 17% year-over-year. We continue to see strong growth in player acquisition and retention as measured through our monthly active users as well as player engagement and monetization as evident in our average revenue per monthly active user. A quick note regarding disclosure. With the launch of Ontario during the second quarter, our reported monthly active user metrics now include both Canada and our US markets. Our monthly active users were 133,000, up 35% year-over-year. The increase reflects steady player acquisition and retention across online casino and sports betting plus the expansion of casino and sports betting into new jurisdictions. Looking sequentially, Q2 metrics illustrate the typical seasonality of the second quarter, although our decline this year was smaller than it was in 2021. Average revenue per monthly active user was $325 during Q2. We saw a 23% increase from the first quarter with ARPMAUs being positively impacted as we moved away from the initial New York launch. These consistently higher ARPMAUs are a reflection of strong iCasino results and the high-quality customers we attract to our platform. As we have called out for the past few quarters, the strength at recent new market launches since last fall, including New York, had us in a heavy investment mode. While investments in new markets will continue, we are on track towards our plans of adjusted EBITDA profitability for the second half of next year. Our second quarter adjusted EBITDA loss was $18.6 million, vastly better compared with the first quarter. Our five markets that were profitable in Q1 produced higher profitability in Q2 as Richard mentioned earlier. West Virginia also turned profitable during the quarter. All of our other markets that were live during the first quarter were closer to profitability during the second quarter. Advertising and promotions expense was $44.2 million for the second quarter, well below the mid-$60 million level we have been running during the two prior quarters. As we touched on last call, we've been very focused on lowering our costs to acquire new players and retain and engage existing players. This quarter's results highlight the success we've been seeing as we continue to refine our marketing efforts to be more targeted and thus more efficient. Consistent with our flexible marketing approach and finding ways to invest marketing dollars that bring the best returns, we're able to find ways to reduce marketing spend in the second quarter with plans to take advantage of more opportunities in the back half of the year. Having said that, we expect marketing costs to increase again in the third quarter and again sequentially in Q3 and Q4 due to the football season. But we still plan for Q1 of 2022 to be the high point for marketing spend during the year. As expected, gross margins improved modestly in the second quarter compared to Q1 and we expect them to continue to improve further in the back half of the year. G&A costs increased to $13.5 million during the second quarter, up from $12.4 million in the first quarter. We'll continue to invest in our technology teams and corporate infrastructure, so we expect that this line item will continue to grow in the back half of the year. Turning to the balance sheet, we continue to be in a positive net cash position. We ended the quarter with $202 million in unrestricted cash and no debt. We believe we're well positioned to comfortably return to adjusted EBITDA and cash flow positive with our existing cash position. Looking at the rest of 2022, we've tightened the range on our full-year revenue guidance to between $600 million and $630 million. As Richard mentioned, we haven't seen any signs of consumer weakness from our customers, but we want to be mindful of that possibility in the back half of the year, so we've built some of that into our latest thinking on revenue. We also have a large number of states that haven't been through a full football season, which creates a lot of opportunity, but also some unknowns about how fast those markets will grow and what the competitive dynamics will look like. At the midpoint of our tightened range, this implies revenue growth of 33% in the back half of the year, which is very exciting. As a quick reminder, our policy towards revenue guidance is to only include those markets that are currently live. Now some high-level thoughts on profitability. We saw significant progress from Q1 to Q2. But as I mentioned, we expect marketing costs to increase in the back half as we increase investment in casino markets and head into football season for the first time in many markets. That could also be accompanied by a nice increase in revenue. The net result will be a second half loss that is substantially less than the first half, while losses in Q3 and Q4 could be somewhere in the range of what we saw in the second quarter. We continue to execute well and see a clear path to profitability on a market level and from an overall business perspective, and we'll be excited to share additional details with you as we get closer to that mark. In the meantime, we remain excited by all the new markets and industry growth ahead of us. And with that, operator, you can please open the line for questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from David Katz from Jefferies. Your line is live.

Hi, good afternoon, and thanks for taking my question. Can we go back to the, Richard, your comment about the guidance, and I guess Kyle also. So you're making a provision sort of just in case, can you just talk about what you've assumed in there and sort of how you decided upon how much to take off of the top end and kind of how you thought about it? Just recognizing it's an incredibly complex circumstance for everyone, but just a little more elaboration would help?

Sure. Yes, Dan, I'll take this one, and thanks for the question. I wouldn't say there's a lot of big changes in the thinking since last quarter. It's really just tightening up some of the assumptions. We now have half the year under our belt. And relative to, I guess, the second half consensus, the new midpoint of guidance is, I think it's less than 2% lower than the previous guidance. We tried to highlight in the remarks just some of the thinking on the tight revenue range. We do want to be mindful of potential headwinds from consumer weakness. Obviously, everybody is talking about that in the investment community. Richard said this we haven't seen signs of that and the data that we're looking at but it's on our radar, so we want to be mindful there. Then we're just we're thinking about going into a football season, which is very exciting. We have, I think, seven markets that haven't been through a full football season. So that's exciting, but it also has some unknowns, so we want to account for that. And then Mexico is a new addition for us since last quarter, but we just want to make sure that people realize that's going to be a more modest investment, not a big impact on revenue and expenses out of the gate here, and we'll take our time to build that market, but we're really excited about it. So those are kind of the factors that went in. I wouldn't point to one that dominated, but we, as you can imagine, look at the entire portfolio of all the markets and relook at how they're all performing and where we think they're going to head to. We just tightened it up a little bit.

Understood. If I could ask for clarification, Kyle, in your commentary you mentioned the marketing expenses for the third and fourth quarters, and I believe you indicated that they would increase again, which means the loss would expand. You also suggested that the fourth quarter loss might increase even more. Could you please clarify that for me?

Sure. So maybe I'll focus on marketing to start here. But we spent less on marketing in the second quarter than we probably originally anticipated doing, which I think that really speaks to our ability to be super flexible with the marketing spend and cater that spend to the opportunities that we see and invest where and also when it makes the most sense. But also if we want to dial it back we can if we choose to or if it was necessary. So we shifted some of that spend from Q2 to the back half of the year expecting that to provide better returns for us. The majority of that increase in the back half that we shifted in markets where we have a casino. But of course, we're also keen on the football season to attract sports bettors. But I guess then if I just look at where the sell-side has pegged us for marketing spend in the back half. I think as a group analysts are already generally near the range for what we're kind of thinking although you can imagine we will have some flexibility as I just pointed out, in how we spend and which quarter we put that money to work in depending on the opportunities we see.

Right. And just one more. You said the back half is approximately what you're thinking but the cadence between 3Q and 4Q?

Our current view, which may evolve, is that we expect to see a reasonable increase in spending from the second quarter to the third quarter, and we anticipate spending slightly more in the fourth quarter compared to the third. This aligns well with the revenue growth we expect to see. While I’m not suggesting they will match perfectly, we do foresee the fourth quarter generating significantly higher revenue than the third. Lastly, as I mentioned earlier, we believe that the first quarter of 2022 will represent the peak for our marketing expenses for the year.

Got it. Okay. I appreciate it.

I would like to add a brief point. We are really excited about the integrations we’ve secured in Ontario; however, many of them will not be ready until the latter half of this year. While we have already secured these investments, a significant portion will come in the third and fourth quarters, which is promising for us given our enthusiasm for that market. Additionally, in New Jersey, we shifted some of the second quarter marketing budget to the third and fourth quarters as we are planning to rebrand the New Jersey site from SugarHouse to BetRivers soon. We wanted to ensure that we maximize our investment in that market post-rebrand, which will take place in Q3 and Q4. This explains why some of the marketing budget from Q2 was reallocated to later in the year.

Got it. Thank you very much. Appreciate it.

Thanks, David.

Your next question is coming from Dan Politzer from Wells Fargo. Your line is live.

Hey. Good afternoon, everyone. Thanks for taking my questions. So, I wanted to hit first on gross margin in the quarter. I know it was up a little bit sequentially but it was still down year-over-year. If there's any way to just kind of unpack the components of that in the second quarter. And just as we think about it flowing through the rest of the year is that kind of still mid-30 range that I think you talked about last quarter still with a reasonable expectation for the fourth quarter? Thanks.

Yes. I think, excuse me, we can work back up to close to that range by the fourth quarter. So confirming on that thinking still, I think the reason for the year-over-year decline probably two primary pieces: one was, and we talked about this on the last quarter. New York was a drag on margins in the first quarter due to negative revenue associated with New York and a lot of costs associated with that. That's still a headwind heading into the second quarter but not nearly as much. But we also launched Ontario in Q2. And as I know we've talked about before, margins improve over time as markets mature. Right at the beginning of a market launch you're going to have some headwind on your margins. Looking ahead to Q3 and Q4 absent something different happening than we might currently expect, there are new launches that will dramatically impact margins. So we'd expect them to improve.

Understood. As you consider the potential launches in Maryland, Ohio, Massachusetts, and Kansas, it's important to note that while all these states have sports betting, none currently offer iGaming. What are your thoughts on your launch strategy? How crucial is it to establish a significant presence in each of these states, or do you believe there might be opportunities for some of them to introduce iGaming in the future?

Sure, I'll take that one. Certainly every state is unique. We don't just have a single approach for every state and we are considering the likelihood of adding iCasino in those markets as well as overlaps with other states. For example, we've mentioned earlier on the prepared remarks that Ohio has a lot of adjacency markets. Your costs in that market will be efficient because you'll have a lot of overlap from other markets. When it comes to markets like Maine, we haven't announced any plans there. But certainly, we will if it changes. But certainly one thing that we look at is how many competitors there will be? And in the case where there will be a relatively limited number of them, in the cases of Maryland and places like Ohio we are planning to enter those markets. And of course, the strategy is to typically look at the competitive set, look at the tax rates, look at the adjacency markets, look at the time of the year when the launch is happening and make those decisions based on all those criteria. But certainly, we recognize that casino markets are a strength for us and we want to prioritize those when we can.

Thanks so much.

Thank you. Your next question is coming from Bernie McTernan from Needham. Your line is live.

Great. Thank you for taking the question. Just on competition called it out as a headwind that you're factoring in your guide, but I just want to see if you are seeing any signals yet that would point you to think that will go back to a more competitive environment?

Okay, Bernie. Hi. I'll take the first question, and then I think Kyle will take the second one. In terms of the competitive environment, the vibe remains very competitive, but not as aggressive as last year. We've heard many of our peers say they're going to be investing less in marketing and being a little more modest and rational in their approach. But we'll be watching what actually happens to ensure that certainly that is reflected in what we're seeing. Our strategy is to focus on players' acquisition at reasonable rates where we can be confident that we'll get a positive return on those investments.

Maybe I'll jump in on the Mexico piece, Bernie. I'll first, I'll give you a bit of a non-answer; the answer is faster than Colombia, I'd say give us a quarter or two to let us start building some momentum. We are, I think as Richard highlighted, entering Mexico with just a lot of advantages. Just the infrastructure that we had set up for Colombia, we've obviously done really well down there and a lot of that is being leveraged for Mexico. We've got a great partner, which gets us access to some really good assets down there. And obviously, it's a much bigger population. So it will be faster, but we'll give some more details and thoughts on that as we move a little further away from 1.5 months or so from the launch.

And just to give a little bit of extra context, we're just really starting some marketing campaigns now for the first time. It took us, as we said, a little bit of time to launch and configure all the payments in the right way and get the product up to where we needed it to be. We're very excited about the quality of the experience we offer. We think it's first-rate and we're really optimistic about the opportunity to grow a significant business in Mexico over the longer term.

Thank you. Your next question is coming from Mike Hickey from Benchmark. Your line is live.

Hey, Richard, Kyle, Lauren, thanks for taking my questions, guys. Good job on the EBITDA number. I guess the first question is, if you are seeing a weakening consumer obviously sort of bake that into your guidance. What would sort of be the early indications that that was happening sort of less new players coming into the app or the transactions transaction size? I guess, what was given the early signs that that was happening? And if you do start to see a weakening consumer, are there ways that you can adjust the app experience to sort of compensate Richard, whether it's promotional activity your hold rate or otherwise?

Yeah. So I'll start and let Richard jump in. I just want to make sure that what we said was clear, just because that I wasn't sure on your question. We've not seen any weakening yet and we've been looking at a bunch of different data points. You can look at it from a lot of different ways. You can segment your player base between your more valuable players and those who don't wager as much you look at average deposit size, you can look at the average bet size, the frequency, and the number of bets. We are in a much slower part of the sports calendar, so you've got to factor in seasonality. But those are a lot of things we look at to see if there's any cracks. We haven't seen that yet but we did want to make sure we were factoring it in.

Add a couple of things. I think certainly the things we mentioned in the prepared remarks like average deposit size, you might see an impact there, which we haven't seen. Bet size right if someone is lowering the bet size to a more smaller amount, that would be an indication, which again we have not seen any indication of that. And the handover players' frequency, as well as the player are factors that you look at. One thing I want to note is that from the online gaming perspective, it's a very affordable way to have a high-quality entertainment experience from home. It's unique in that you're not really incurring any incremental expenses for consumers to participate. Not having to drive and incur gas costs or go to a restaurant incurring enhanced service fees. Not having to travel anywhere, and obviously overnight. I think there's a lot of things about this product category and service category that's very attractive in terms of providing a compelling experience where a user can stay home on a night for four hours, be entertained for $20 or $40 and have a great experience in a way that's unparalleled in other types of at-home entertainment.

Fair enough. Richard, you mentioned you're seeing a more rationalized spending environment from your peer set, which may or may not continue. I'm just curious about what you're observing regarding player retention trends. Are they improving, or are they remaining the same considering the backdrop of more disciplined spending?

No, it's a good question. Probably not a lot of change there. We haven't disclosed specific retention metrics. But I think when you look at what we spend on marketing and the revenue that we are generating from our players, I think that tells you we have some really strong retention within this industry. So we're really proud of that. We haven't given specific metrics. But we haven't seen that be a negative for us in any way recently.

Thanks. Thanks, guys.

Thank you. Your next question is coming from Ryan Sigdahl from Craig-Hallum. Your line is live.

Good afternoon, guys.

Hey, Ryan.

Just one for me. I guess trying to bring all this together. You mentioned guidance assumes 33% year-over-year growth in the second half, which would be a reacceleration versus the 19% year-over-year growth yield in the first half of the year. But then again, your commentary seems more cautious on assumptions on the consumer, et cetera. So I guess what's included in there that's going to drive that reacceleration given those other more conservative assumptions?

Yeah. I think there's a few things. One is Ontario continues to build. I think Richard highlighted in his comments, we've seen July's net revenue per day is 30% higher than June, that's exciting to see continued progress in Ontario. And then another big part of it is we've got all these markets that haven't seen, many of which haven't seen a football season at all and a couple that haven't seen a full football season. So that's exciting for us as well. And all these markets that we're in are still growing. I think we feel good about that.

Great. Thanks, guys. Good luck.

Thank you. Your next question is coming from Joe Stauff from Susquehanna. Your line is live.

All right. Thank you. How are you? Richard, Kyle Sauers, good afternoon. I had a couple of questions on your KPIs if I could. Just talking about say your core strength in iCasino and the monetization KPIs. I was wondering what it might look like naturally it's down on a year-over-year basis as you suggested you launched in a number of OSB states. But wondering if you can give us a read or an assessment of how that looked just say within your iCasino product in particular?

I just want to clarify the question. When you mention the KPIs, are you referring to the MAUs and the ARPMAUs that we talked about?

Yeah. Specifically here, I'm talking about sort of your average revenue per MAU.

Yeah.

And what that look like again, for your say core competitive advantage within iCasino, is it more flattish versus the down 14% year-over-year?

We are not breaking it out specifically between the two. It's important to note that we also have players who engage with both segments, which is a valuable customer base. The variability in our quarterly ARPMAU is less influenced by the casino side and is more dependent on the types of markets we have recently launched and where we are experiencing growth, whether that is in sports alone or a combination of sports and casino. As mentioned in our last call regarding New York, we had a significant number of MAUs in Q1, but they generated negative revenue, which negatively affected the ARPMAU figure. This is why we saw a sequential increase in that metric, as those factors had a substantial impact. We will see how the remainder of the year unfolds, but I am optimistic about growth in the MAU numbers. As for ARPMAU, we'll have to observe how the casino markets develop, particularly in Ontario, and how the influx of new bettors for the first football season performs across these new markets.

And that makes sense. And I guess as we think about the second half of this year, maybe just kind of isolating on this particular metric. User growth as you suggested it seems likely right given kind of again the number of new markets, how the market grows is evolving, but would you expect ARPMAU to maybe moderate in terms of its year-over-year changes?

You're asking if I'd expect it to go down in the back half of the year?

Yeah.

So I don't want to give you a guide on that necessarily. We haven't found something we've guided Joe. But I'll tell you I think there's some opposing forces on that that could cause it to go either way. One is that we should see more concentration in sports. So that can be a negative due to so many more players at some of them at lower dollar amounts. But on the positive side, we do have a lot of these markets that are building. As markets build the players become more valuable as they're spending more time on your app and they aren't enjoying as many of the initial bonuses that impact that number as well. So those two things will work against each other. But I don't want to tell you that I'm confident that it will be up 10% or down 10% because it could move either direction.

Fair enough. Thank you.

Thank you. Your next question is coming from Jordan Bender from JMP Securities. Your line is live.

Good afternoon. Thanks for taking my question. So your GGR per user for both iDMA and sports betting continues to move up over time. So when you think about investment in the player are you finding that the returns are more attractive when you're spending towards your customer base as you think about potential acquisitions?

Can you ask that one more time Jordan, I'm not sure we understood exactly what you're getting at.

Yes. So your GGR per user continues to go up over time. Would you rather use your cash and reinvest it back into the player, or would you rather kind of go down the acquisition road and grow the base that way?

You're saying if we just think about the total investment whether that would be in external marketing dollars or promotional dollars that you put in front of existing players, which is where do we lean? I'll let Richard jump in. I mean it's definitely a balance and one that changes over time as markets mature and depends on whether it's casino or sports. But I'll let you...

Yes, sure. Thanks, Jordan. Yes, so consistent with what Kyle just said it really varies depending on the market. But certainly we know and are focused a lot on the retention of existing players. A player that's been with you for a year plus or over multiple years is worth more and more valuable over time. So you want to make sure you're properly segmenting investments towards those players. I think we do a very nice job of segmentation of our players and making sure the right players get the right incentives, which has driven a big part of our ability to retain the customers. When you have a substantial marketing budget, you are going to be balancing those costs out on the retention side with bonuses for the first sign-up of deposits and those become a pretty significant part of your bonusing because every new player that comes signs up you're offering them an incentive to join you. At the end of the day, it is a balance between the two. I think we do a nice job with segmenting the right bonuses for the right players who are lapsed but also making sure that we continue to reduce our cost to acquire players with the goal of being affordable in terms of our acquisition by ensuring that we recognize that when we acquire new customers you do have a bonus that you're providing them with a sign-up that does have some significant costs associated with it.

As markets mature, we are spending a smaller percentage of our revenue on marketing. This demonstrates leverage in our model. Additionally, as Richard mentioned, there tends to be more bonuses during the early stages of acquisition. Not only are we investing in external marketing to attract players to our platform, but we are also offering incentives for them to join and engage with BetRivers. Over time, this strategy evolves, focusing more on rewarding loyal players who consistently choose us, which ultimately brings greater returns. Both factors create leverage opportunities for our business and likely for the entire industry moving forward.

Great. And then turning back to South America for a second. Peru looks like it just legalized online gaming. Is this a market that you guys would have interest in entering?

Sure, I'll take that one. We certainly have invested a lot of energy and time over the years establishing a strong foundation in Latin America. Certainly, Peru is a large population market. Not too far from Colombia, in fact it has had some media overlap between the two markets. So certainly that's a market that we have an eye on and are monitoring it very closely as we await the legislation path to the bill and we're waiting for the President to sign it.

Thank you. Your next question is coming from Edward Engel from ROTH Capital. Your line is live.

Hi. Thank you for taking my question, and I'm hopping on a bit late, so sorry if this was addressed. But your marketing expense ticked down a lot sequentially in the 2Q despite launching in both Ontario and Mexico. How do you see marketing costs kind of trend throughout the back half of the year? Should we expect kind of flattish versus 2Q or continued kind of sequential declines that you kind of said last quarter?

Yes, sure. So there is a decent amount of good stuff maybe to go back and review, but I appreciate the question. So the marketing was down quite a bit in Q2. We delayed or shifted some of our spend from Q2 pullback to be able to allocate a little more to Q3 and Q4. So what we're expecting is to see a decent uptick in the third quarter from the second quarter and then probably even a little bit further increase into Q4 from Q3 with that higher Q4 still being less than our high watermark of Q1 marketing spend from this year. So that's kind of the cadence that we're expecting. There are a lot of opportunities we see. Obviously, you've got football season starting, but putting investment into casino that we think we can get really strong returns from.

Okay. Perfect. And then just as you're kind of expanding into some of these newly regulated markets outside the US, whether that's flagged AMR or Canada. How important is it to be kind of first to market when those new territories launch? Is day one as much of a priority as it is in the US or a little bit less so?

So it really depends on the market. I'll give the two examples of Ontario and Mexico. The gray market existed for 10 years in Ontario yet there was an opening of a regulated market at the same time where we were one of a handful of operators that were ready and able to launch day one, which I think is helpful because those that are looking to play at a more secure safe environment as regulated or the audience. It tends to be pretty invested customers and folks that want to be playing with the regulated sites. We want to be there for day one to capture those players. I think we did a nice job of getting some high-quality customers very early on. But it certainly, at this point in time, in that market, the key wasn't just showing up one day market opening but really spending the year before trying to secure the right marketing assets that are relatively limited in that market to reach those consumers in a meaningful way. We invested a lot in preparation in that market when the market was open, and now not just for the last quarter but moving forward to be able to continue to grow there by having some great assets many of which are not yet live and the integrations are not yet complete that we are still working on. When it comes to Mexico, that market had also been operating for years and there weren't really any additional competitors entering around the same time that we were. We're taking our time in Mexico to make sure that we build it the right way and build a brand of high quality and ensure that we're setting ourselves up for long-term success. You don't have the same pressure in Mexico of having a large number of competitors launching at the same time with the aggressiveness that you saw in Ontario. We are able to take a little bit of time to do it the right way, and make sure that all systems are working and that the payments and the registration flows are working exactly as we want them before we start applying a larger marketing effort towards it. You're going to get players that are really satisfied with the first impression.

Hi. Good afternoon. Thanks for taking my question. You launched Live Dealer in West Virginia in the quarter. How has the customer response been? And what's the potential rollout to other states look like? Thanks.

Right. Live dealer is a great product. The company that really pioneered it in evolution, as many of you know, is one of the more successful gaming companies globally. Players trust what they see. And when you see that you're playing Blackjack and you see the card is being dealt from a live person at a card shoot, you have a tendency to believe the outcome more than you would if you just saw a random number generator from a computer program that shows you the outcome. Of course, you always start to doubt if you have 16 and you get 6 from the RNG solution, you might be less willing to believe it's trustworthy than if you saw a dealer pull up a 6 out of the chutes. Because of that, the category is very popular, very successful. We've been very proactive, and we have a great partnership with our suppliers in this space. We've been able to grow that, not just in West Virginia, but where it's very helpful. We're seeing in markets like Ontario is a very popular product category for us. We've added some additional dedicated tables for our brands in markets like Pennsylvania and others like Michigan are coming soon. This is a category that we believe is very important for us, and we've invested in it and continue to invest in it. I think it's really exciting because it brings a different experience. You still need to have the RNG table games as well. RNG means random number generator table games because those offer players a lower price point as well. If you want to play for a smaller bet size, you'll play the RNG automated systems. But if you want to play at a live table, typically the entry fee is a little bit higher. You have to have something for everyone, and that's what we offer.

Great. Thanks. And then, not to hold you to any specific state prediction, but given the iGaming success that you've talked about in some of your competitors and the tax revenues that states are generating from this. Do you believe that after the mid-term elections this fourth quarter, maybe there will start to be a little bit more progress as legislators just get a better understanding of the risks and the benefits of the growth of this industry? Thanks.

Yes, absolutely. Thank you for the question. Previously, we have noted increasing support from peers for the legalization of online casinos. From our perspective, these efforts are accelerating and gaining momentum. We are very enthusiastic about these advancements. As states begin to consider additional tax needs, adding iCasino is a straightforward option because the regulatory framework is already established. The product and brands are operational. Regulating a sportsbook is usually more complex than regulating a casino, as many casino offerings involve simple computer integration that has already been tested in other markets. The implementation of iCasino can happen swiftly. We are seeing not only superficial interest but also a genuine commitment to investment from our industry to facilitate the legalization of additional states in the coming years. This trend is likely to mirror what we observed in European markets, where sports betting was introduced first, followed by iCasino. For example, in West Virginia, they began with sportsbook and added iCasino a year later. There is a convergence of positive developments, and recent studies indicate that even a few additional states legalizing iCasino could yield significantly higher revenue compared to those that have only legalized sports betting. There is a growing acknowledgment of the potential for states to generate extra revenue through the addition of iCasino.

Thank you, Richard. Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.