Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rush Street Interactive Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference call is being recorded today, August 2, 2023. I will now turn the call over to Kyle Sauers, Chief Financial Officer. You may proceed.

Thank you, Operator, and good afternoon. By now, everyone should have access to our second quarter 2023 earnings release. It can be found under the heading Financials Quarterly Results in the Investors section of the RSI website at 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 fact and are usually identified by the use of words such as will, expect, should or other similar phrases and are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We assume no responsibility for updating any forward-looking statements. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2023 earnings release and our investor deck, which is available on the Investors section of the RSI website at rushstreetinteractive.com. With me on the call today, we have Richard Schwartz, Chief Executive Officer. 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, Kyle. Good afternoon. And thank you for joining us today as we discuss our second quarter 2023 results. As an organization, we are executing very well and have achieved positive adjusted EBITDA during Q2, ahead of expectations. We continue to deliver topline growth while capturing meaningful operating leverage and efficiencies that are driving our bottom line. I want to touch on a few topics today. Let me start off with a few high-level takeaways from the quarter. We’re really pleased with our overall performance. We generated $165.1 million in revenue, which was up 15% from last year and which again exceeded the street consensus. Additionally, in the first half of 2023, we’ve improved our adjusted EBITDA by over $54 million relative to the first half of 2022. We are proud that almost two-thirds of our improved profitability was driven by revenue growth and improving operations with the remaining one-third for more efficient marketing spend. These results set us up well for the second half of the year, where we continue to expect to be adjusted EBITDA positive. From my perspective, our results reflect our commitment to innovation, customer satisfaction, and sustainable growth and profitability. The ability for us to achieve these results is also about the quality and commitment of our team, which I believe is one of the best in the industry. We continue to build upon our strong foundation as we have solidified our position as a top five operator of online gaming and sports betting in the United States. Growth in our domestic markets was broad-based. As in the prior quarter, we experienced year-over-year growth in both our online casino and sportsbook-only markets. In fact, when looking at U.S. markets launched after 2020, along with our international markets, we grew over 35% year-over-year in the second quarter. This further demonstrates our ability to launch and grow in new markets by building our brand and enhancing the player experience. On the international front, we had another strong quarter. We continue to perform very well in the highly competitive Ontario market, as we are generating outsized year-over-year gains, as well as sequential growth. Ontario has recently increased the amount of data they’re sharing. Two things jump out to us. First, further evidence that our ARPMAU is significantly higher than markets, coming in at well over 2 times that of our competitors. Secondly, this is also the first time they’ve broken out the difference between casino and sports, with casino making up almost three-quarters of the market. This trend is similar to what we’ve seen in U.S. markets with iCasino and should provide an outsized benefit to RSI as future iCasino markets launch. Colombia once again was a strong performer with revenue expanding over 30% compared to last year. During the quarter, we achieved growth of almost 50% when measured in Colombian pesos. In Mexico, we remain on schedule to see a ramp-up in contribution towards the back half of the year. Our approach here is similar to the strategy we executed in Colombia over a several-year period, which is to consistently localize the platform to foster a market-leading player experience and cultivate the RushBet brand. Turning to prospective markets. We continue to see positive activity on the legislative front. Given the economic prospects and the potential size of the online casino market relative to the sports betting market, we continue to see online casino more and more as a topic on state legislative agendas post-2020 sessions. As we touched on during last quarter’s call, Ohio’s House added language to its budget to study the future of gaming, including online casino. In late June, both the House and the Senate passed a bill that calls for a joint committee to study this topic, which is expected to include iGaming. In addition, since we last spoke, there have been advancements in Maryland, as part of the fiscal 2024 budget, the State Lottery and Gaming Commission has been mandated to submit an iCasino study to the general assembly before year-end. Notably, a prominent legislative member in the state has expressed optimism about the potential for passage of an iGaming bill when the legislature reconvenes in January. In his remarks, the legislator emphasized the state’s need for new revenue streams and recognized the significance that online casino could represent as a valuable third leg of the stool along with existing online sports betting and traditional land-based casino markets. The commission expects to work on the study to begin later this summer and be complete by mid-November. We also continue to participate in discussions in states such as New York, Illinois, and Indiana, where progress was made this past year, but for one reason or another, didn’t cross the finish line. In most instances, in states where we see progress, the topic doesn’t simply recede. Rather, it tends to evolve. Those are the types of discussions we continue to see where there was active legislation this past year. We’ve also seen more interest from governments in the Canadian provinces as they evaluate legalizing online casino for private operators following the lead of Ontario. Based on our success in Ontario, these efforts are potentially very exciting for us. As we’ve said several times before, we continue to remain confident over the long term given the potential economics to government budgets, especially when compared to inflows from online sports betting. Turning to our promotional efforts. In line with our objective to deliver sustainable growth and profitability, we are constantly refining and optimizing our strategies. We continue to allocate resources, including product development, bonusing strategies, and operating priorities towards retaining and serving customers and segments that align with our long-term financial objectives. In other words, we focus on the high-value players who we expect to be long-term profitable. Our MAU and ARPMAU numbers for the quarter reflect these efforts to emphasize greater investment in higher-value players. With this focus on quality and a more rational promotional environment in the market, combined with improvements and new features available in our platform, we are well positioned and excited to head into the fall and the upcoming football season. On the product and technology front, we continue to innovate in both iCasino and sports betting as we look to drive engagement and retention. In iCasino, in addition to the many ways we improve engagement and retention with features like slot tournament, bingo, and wheel spins, we’ve recently introduced a Jackpot hot mode feature. This feature is designed to enhance the excitement of daily and hourly jackpots. The way these jackpots work is that they are guaranteed to be paid out. Ahead of payouts, players are typically informed and are aware that their chance to win a jackpot is growing as a guaranteed period approaches. Thus, the final minutes of the hourly jackpot and the last hours of the daily jackpot are designated as the hot period, offering players a higher excitement level in anticipation of possibly winning the jackpots because someone is guaranteed to win within a sub-period. In sports betting, adding features to enrich our parlay and prop bet offerings has been a priority. We continue to add features to encourage more parlay and prop bets. For instance, during the second quarter, we aggregated player props by league into distinct listed views, providing easier findability and more prominently showcasing prop bet types. The impact has been immediate. Baseball prop bets this year in the second quarter were up more than 60% compared to a year ago. We are very excited with this addition and other merchandising improvements we’re planning to release heading into the NFL and NCAA football seasons. Another example of strong player response is the success in the quarter with the use of our proprietary Squares game during the NBA playoffs to incentivize players to place parlay bets. When we configured Squares to be issued during the NBA playoffs for Same Game Parlay, the percentage of Same Game Parlay handled for NBA increased by over 150% relative to where we were during the regular season before we implemented this configuration. This is validation of the behavioral change we drove in players and a direct result of this innovative product inspired by our customers. As we reach the midpoint of the year, we find ourselves in an excellent position. We continue to grow revenues, improve operating leverage, and achieve our goals. We have a robust balance sheet and plans to advance our proven and proprietary technology platform and operational discipline to grow profitability over time. With that, I’ll turn the call over to Kyle.

Thanks, Richard. Second quarter revenue was $165.1 million, up 15% year-over-year, ahead of expectations and with well-balanced growth across the business. As Richard highlighted, we’re excited to have reached adjusted EBITDA profitability in the second quarter, coming in at a positive $1.2 million. This is significant progress compared to last year’s second quarter of an $18.6 million EBITDA loss and last quarter’s EBITDA loss of $8.7 million. We’re in an excellent position to continue this adjusted EBITDA profitability for the second half of 2023 and into next year. Now I’ll dive a little further into our outperformance during the quarter where we performed better than expected on revenue with growth across the board in iCasino, sports in both U.S. and international markets. We get asked often about our approach to sportsbook markets. We have a great product and a well-established presence in those markets, and this gives us an impressive opportunity when iCasino gets legalized in sports betting markets. To put it in perspective, in the second quarter, in sportsbook-only markets, we lost a little more than $1 million in aggregate, providing minimal drag on our results. In fact, excluding New York, our sportsbook-only markets in the aggregate were profitable in the second quarter. Looking ahead, we have a great opportunity to be profitable in all of our markets as we continue to execute on our strategy. We also continue to attract and focus on high-quality players and our industry-leading ARPMAU of $359 in Q2 reflects the strategy. In total, our North American ARPMAU was up over 10%, both year-over-year and sequentially, validating the high-quality experience we offer. Consistent with our past statements, we’ve continued our focus on investments in markets with iCasino with U.S. and Canadian MAUs, up over 9% year-over-year in those markets. Regarding hold percentage, iCasino was in line with our typical expectations. When it comes to sportsbook, we had meaningfully better hold during the quarter. Some of this was due to favorable event outcomes, but as Richard touched on, the shift in our mix has been a contributor to our better hold percentage as well. Due to the efforts Richard highlighted, we have significantly improved our bet mix and also our player mix, both of which we believe are sustainable. So we believe our sports hold percentage will structurally improve moving forward as a result. Moving on to gross margins. We improved by 640 basis points compared to last year, coming in at 33.6% in the quarter. As we’ve discussed on previous calls, we expect meaningful improvements for the full year in our gross margins. Turning to marketing. We decreased spend on both a year-over-year and a quarter-over-quarter basis, while still making the right investments in new player acquisition and retention. We spent $40.4 million in the second quarter, down from $44.2 million last year and down from $49.4 million in the first quarter of this year. We have scaled back as we focus more on those markets with the highest expected returns over the long term and while we wait for new market launch opportunities that we expect to come in future quarters. Looking at G&A, we increased costs modestly compared to last year, coming in at $13.9 million. We had some favorable impact from foreign currency during the quarter, and we’ve also been mindful of new investments. As a result, we expect G&A costs to be back near or above our first quarter levels in the third quarter. We ended the quarter with $128 million in unrestricted cash and no debt. As we turn to adjusted EBITDA profitability, our cash use will slow and we expect to be more than fully funded to reach cash flow positive. We are tightening our guidance for the year to $650 million to $690 million, increasing the midpoint to $670 million, up from our previous guidance. And with that, Operator, please open the line for questions.

Our first question comes from Dan Politzer with Wells Fargo. Your line is now open.

Hey. It’s Zach Silverberg on for Dan. Thanks for taking my questions and congrats on the quarter. Just seeing some of your recent success in the international markets and some of your past comments and some of the recent legislative momentum in Brazil. Can you just kind of talk about that market and other similar international markets that you guys are looking at the potential for growth there?

Sure, Zach. This is Richard. We are aiming to capitalize on our early success in Latin America. Our efforts there are designed for the long term, and we have a wealth of talent and expertise in our operations. When considering other market opportunities, the potential is significant, especially when analyzing population sizes. For instance, Brazil has recently issued its regulations after several years, opening a market with over 200 million people, which surpasses the combined population of Colombia and Mexico at around 180 million. This presents a great opportunity in Brazil. Peru, with a population of 33 million, has just legalized online casino gaming and introduced regulations, with a regulated market expected to launch by the middle of next year. Chile and Argentina are also making progress. We are exploring these opportunities and determining which ones align best with our strategy. We are enthusiastic about the region, believing we have a competitive advantage over many operators and an opportunity to achieve significant results there.

Thanks. And just one follow-up. In your prepared remarks, you talked about some of the state legislative agendas. Just recently, we saw Ohio double their sports betting tax rate. There’s been some chatter on other states. Can you just maybe relay anything you’re hearing about potential states increasing the tax rates or anything of that sort, either the sports betting reg…

Yeah. I know…

...had?

I certainly think that in some of the sportsbook-only markets, there wasn’t a lot of tax generation perhaps meeting up with some of the expectations that were set by the states. I think that’s probably what happened in Ohio. But certainly, we haven’t heard much more on that topic and certainly think that in the markets where we have online casino, which is an area where we have a lot of strength. And you are seeing that the vast majority of taxes being generated are coming from the casino category, and we think that bodes well for the ability for that category to continue to be legalized in additional markets to create some tax flow for states like Ohio. We are pretty active in moving towards progress towards legalizing iCasino which would then add to the tax basis that is generated from online gambling.

Thank you.

Thank you for your question. The next question comes from the line of Jordan Bender with JMP Securities. Your line is now open.

Great. Good afternoon and thanks for taking my question. So last quarter, you talked about revenue kind of following quarter-on-quarter and with actual results coming up quarter-over-quarter. Just kind of making the assumption that you maybe beat that guidance by $5 million or so, it’s about the same amount you raised your guidance for the full year. Is it kind of fair to assume that your guidance raise for the year was just kind of on the back of that beat or are you actually seeing improvement kind of in the back half that’s causing that optimism?

Yeah. Thanks for the question, Jordan. As we talked about, we did have really good performance across the whole business. We had a little help from sports outcomes in the second quarter. It’s still early in Q3, but we’re tracking well against our plans. And to your point, I think we beat consensus by about $7 million and raised the full year by $5 million. So that I think the second half for us in terms of the guidance looks similar to where we were before. I don’t know that I would equate it exactly the same way you did, because we do, as you can imagine, go through and reforecast the back half of the year. We look at all the different markets. We look at how things are trending. We look at player values and ended up in this range that we’re comfortable with for the $650 million to $690 million.

Okay. Great. And then just for the follow-up kind of, you talked about you originated your EBITDA positive in the back half of the year. Just given the better-than-expected EBITDA result in the second quarter, is there a situation or a scenario where you can be EBITDA positive for the full year of 2023?

Yeah. There’s certainly within that guidance range that we offer, and then some of the other context we gave with kind of the trends for marketing expenses and G&A expenses, there would be scenarios that would cause us to be profitable or adjusted EBITDA profitable for the full year and thinking about the back half of the year, specifically. In the prepared remarks, we commented that we’re still very confident in profitability for the second half. I’m very excited about what we achieved here in the second quarter. Q3 could well be profitable as well. It kind of depends on where revenue comes in. Seasonally, it wouldn’t be unusual for Q3 revenue to be flat or potentially down from Q2. We’ll see where it shakes out, particularly considering we had some good sports outcomes in the second quarter. So having said all that, if revenue comes in, let’s say, even with the second quarter, Q3 could be profitable from an EBITDA perspective. And then if revenue is a little lower than that, maybe it starts to get a little tighter, but still very excited about profitability for the back half of the year. And to your original question, certainly, within the guidance range we’ve given, it’s possible for us to be profitable for the full year.

I appreciate the questions and nice results.

Thanks, Jordan.

Thank you. The next question comes from the line of Chad Beynon with Macquarie. Your line is now open.

Hi. Good afternoon. This is Aaron on for Chad. Thanks for taking my question and congrats on the really strong quarter.

Thank you.

So, obviously, positive EBITDA in the quarter was a great result. I’m curious, has anything changed in terms of your expectations around the magnitude of your profitability in the second half, just given some of the operating leverage and operational improvements you called out? And it seems like there’s more confidence out there just generally that the U.S. can avoid a hard recession. So just curious whether that plays into your views for the rest of the year? Thanks.

Thank you for the question. We haven't publicly shared specific expectations for profitability in the second half, but we have our internal benchmarks. Overall, we're pleased with our results so far. The second quarter's profitability exceeded both our expectations and those of the market. Revenue has been strong, our marketing efficiency has improved, gross margins are solid, and we have managed G&A costs effectively. If these trends continue, which there are no indications they won't, we are raising our expectations. Regarding the possibility of being profitable for the entire year, that is within the guidance range we’re considering. This certainly reflects our optimism for the latter half of the year and the future ahead.

Okay. That’s great. As a follow-up, I just want to touch on iGaming competition for a second. There’s a major competitor who recently reported that they’ll be introducing an upgraded iCasino product in the near future. Can you just talk about what you’re doing or areas you’re really focused on to protect your position and continue to grow? Thank you.

We have significant expertise in this area and are dedicating substantial resources to stay ahead of industry trends and innovate within the market, both in the U.S. and globally. A key focus for us is on content; we are very quick to initiate new content and expand our libraries, which appeals greatly to our consumers. We are emphasizing personalization and utilizing various algorithms to enhance our recommendation engines, ensuring that players are matched with games they prefer. We're also improving user experience across game flows and lobbies, adding animations and engaging elements to facilitate easier access to and enjoyment of games. We've developed proprietary tools and promotional game engines unique to the industry, which we continuously refine. For instance, our slot tournament engine stands out as a compelling offering that provides significant value, encouraging players to return for winning opportunities. Additionally, we are introducing exclusive content and continuing to innovate to enhance player value. Our unique bonus store allows players to exchange loyalty points for experiences such as wheel spins or entries into high-stakes bingo games, which are distinctive features in our industry. We pioneered community play and chat rooms across all casino games, and our staff is actively engaging with players to create fun and entertaining experiences that bolster retention. Overall, we are committed to investing in new features, games, and meta-games, striving to stay ahead in the industry. We are confident in our product and its rapid improvements.

Thank you, Richard. Thank you, Kyle. Appreciate the color and congrats again on the strong quarter.

Thanks, Aaron.

Thank you. Our next question comes from the line of Jed Kelley with Oppenheimer. Your line is now open.

Hey, thanks for taking my question. According to your presentation, it appears that high-grade gaming in the U.S. and Canada grew by 21%. You mentioned the underlying profitability of the sports betting markets, but can you provide details on the underlying profitability of your iGaming and sports betting in the states where you're operating, excluding your international markets?

Sure. I appreciate your question, Jed. From our prepared remarks, we indicated that our sports betting markets collectively experienced a loss of approximately $1 million this quarter. However, if we exclude New York, the sports-only markets would have shown a profit. When we evaluate the contribution profit from any specific market, it takes into account all marketing expenses and operational costs in those markets, as well as our corporate overhead, which primarily appears in the G&A line. By doing some rough calculations, you can estimate the performance of the other markets, excluding casino, which helps to cover the G&A costs and ultimately leads us to achieving profitability this quarter.

Got it. And then you talked about a lot in your prepared remarks about the potential to cross-sell the OSB database to when iGaming legalizes. Are you getting incrementally more confident that we’ll see some legislation break your way in the next 12 months?

It's difficult to predict, but more states are introducing legislation and making serious lobbying efforts for progress. In Canada, provinces like Alberta are moving quickly due to the recognized tax benefits and consumer protections from regulation in Ontario. Other areas are also being marketed to consumers, and operators want to replicate Ontario's success to generate tax revenue in regions like Quebec and British Columbia, which show interest. In the U.S., multiple states, including New York, Indiana, and Illinois, are actively working to legalize iCasino, representing a population of over 60 million. Currently, iGaming is active in a population of just 34 million, indicating significant potential growth. While we can't predict the timing, preliminary studies are being conducted that could help expedite legislative adoption, and we are optimistic about the progress across various North American markets.

Thank you. Thanks, Jed.

Thank you. The next question comes from the line of Edward Engel with ROTH MKM. Your line is now open.

Hi. Thanks for taking my question. It was nice to see the marketing expense down 9% year-on-year. I was just wondering, it was also a sequential decline too. Is this a fair run rate you think for the rest of the year, the kind of $40 million per quarter?

Yeah. So good question. Thanks. We came in a little better in the second quarter compared to probably where we originally expected, and so it’s likely that the spend is closer to flattening out from here from that Q2 run rate, maybe a little uptick into Q4. So I think you’re on the right path there. Obviously, we’re going to remain flexible with the spend. We’ll see where we get the best value and best opportunities for returns in acquiring players. But I think that’s generally the right way to think about it.

Great. And then as I kind of think for next year, again, marketing expense down 9% year-over-year, would it be fair to assume that states which have been around for over a year, that marketing expense is actually down a lot lower and I guess is there any kind of range you could maybe give us?

Yeah. I don’t think I’ll go as far as giving a range today. We haven’t given any guidance for next year yet. I do think we would expect to get leverage over the marketing line in 2024. We expect to grow revenue. So as a percentage of revenue, I would expect to see some leverage there, but I don’t think I’d want to put a specific number on it just yet this far ahead.

Okay. Great. And then if I could sneak one more in. Similarly, on the G&A side, only up 3% year-on-year, but down sequentially. Is there any lumpiness as we think of the year? I think, I remember you talking about maybe G&A coming a bit higher, but it seems like it’s trending pretty well?

Yeah. So I think, as you know, you’ve followed us for quite some time. We’ve been pretty conservative with the way we build costs over the years here and we’re always mindful of the investments we’re making. One thing I mentioned in the prepared remarks, we did have a little bit of a benefit from foreign exchange rate that lowered G&A costs in the second quarter. So we probably expect Q3 and Q4 to be back near or maybe even above the Q1 G&A rate that was closer to $14.7 million, I think it was. So there was a little bit of a benefit in Q2 that wouldn’t necessarily repeat.

Really helpful. Thanks, guys, on the positive EBITDA.

Thanks a lot.

Thanks, Ed.

Thank you. The next question comes from the line of Ara Masias with Jefferies. Your line is now open.

Hey. Good afternoon. Congrats on the quarter and thanks for taking my question. On the slide deck, you talk about the prop bet list views which have helped drive 60% year-over-year growth for MLB. Will you be expecting a similar also NFL as well? And what else may you be introducing that’s new for the NFL? Thank you.

We have made significant investments to enhance the betting experience for our players by surfacing the most suitable bets and wager options for them. The recent changes we implemented in the list view greatly facilitate the discovery of bets. For the upcoming football season, we plan to introduce an exciting new feature called Prop Central, which will showcase all player props in one unified location. Currently, players must navigate to each individual game to find player props, but this new offering will allow them to see all player props collectively. We believe this will significantly increase the volume of prop bets, especially since player props are very popular in the U.S. market, fueled by the interest generated from the fantasy industry. Our focus has been not only on expanding parlay bets, particularly Same Game Parlays, but also on broadening our player prop lineup and introducing more features. For the football season, we will incorporate live betting options for props and enhance Same Game Parlays with live bets tied to touchdown scores and other player statistics. Additionally, we are enhancing personalization capabilities on our platform. Overall, our goal is to innovate in this area and drive higher volumes for the bets we want to promote.

Okay. Great. That’s all. Thank you.

Thank you.

Thank you.

Thank you. There are no additional questions at this time. I would like to pass the call back to Richard Schwartz for closing remarks.

Thank you again for joining us today. With a solid financial position, a strong technology platform, and effective operational discipline. As I just said, we’re very well equipped to continue to successfully execute our strategy and position ourselves for further revenue growth and profitability in the future. We look forward to updating you on our progress when we share our third quarter results in a couple of months. Thank you.

This concludes today’s call. Thank you for your participation. You may now disconnect your lines.