Earnings Call Transcript - RSI Q4 2021

Operator, Moderator

Good afternoon. Thank you for attending today's Rush Street Interactive Fourth Quarter and Year End 2021 Earnings Call. My name is Hanna, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to our host, Lauren Seiler with Rush Street Interactive. Please go ahead.

Lauren Seiler, Host

Thank you, operator and good afternoon. By now everyone should have access to our fourth quarter and year end 2021 earnings release. It can be found under the heading financials quarterly results in the Investor section of the RSI website at rushstreetinteractive.com. Some of our comments here today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not statements of historical facts and are usually identified by the use of words such as will, expect, should or other similar phrases, and are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We assume no responsibility for updating any forward-looking statements. Therefore, you should exercise caution in interpreting and relying 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 are available in our fourth quarter and year end 2021 earnings release, which is available on the investor relation section of the RSI website at www.rushstreetinteractive.com. With me on the call today, we have Richard Schwartz; our CEO; and Kyle Sauers, Chief Financial Officer. We will first provide some opening remarks and then I’ll turn the call to questions. With that, I'll turn the call over to Richard.

Richard Schwartz, CEO

Thanks, Lauren. Good afternoon, everyone and welcome to the RSI fourth quarter and year-end earnings call. As we begin our second year as a public company, we are going to spend time discussing our approach to profitability, priorities, reviewing our results and looking forward to where we see RSI in 2022 and beyond. To begin with, I'd like to comment on the recent shifts in investor sentiment and the focus on the path to profitability. We've been focused on building a sustainable long-term business, with profitability as the central goal since founding RSI nearly 10 years ago. For those who have followed us through our public company journey, you recognize a constancy of approach towards achieving profitability. In fact, we were adjusted EBITDA positive as recently as calendar year 2020. We have a track record of doing what we say we're going to do. We have gained market access in all key markets, consistently grown revenues quarter-after-quarter. We've delivered on our technology roadmap and consumer experiences. We've been transparent on where and when we plan to make marketing investments and why. We attract high-quality players and create player loyalty. As an increasing number of competitors reduced marketing and promotional spend, the cost for RSI to attract players has diminished, and visibility for our marketing efforts has increased. We will continue to invest in new markets where we see opportunity but only do so prudently with a clear line of sight to profitability. The founders that run this business own more than 50% of the company and built their careers being trusted stewards of capital for the investors and achieving long-term profit. We will continue to focus on strong returns here at RSI. In a few minutes, we will share some exciting data points about our profitability milestones. But first, I'd like to share some information about our most recent results. 2021 was an incredible year of growth and accomplishments for our company. We continue to position ourselves for long-term growth and success as we accomplished a lot. More specifically, during 2021, we grew our topline by 75% year-over-year and maintained our disciplined approach to investing marketing and promotional dollars into player acquisition. We launched online gaming in Michigan and West Virginia and online sports betting in Michigan, Virginia, Arizona, and Connecticut. We grew our monthly active users by 67% compared to last year, while maintaining one of the leading monthly revenue per user rates of $346 per player. We've made significant improvements in our proprietary technology platform, particularly in our online gaming platform for sports study, where we've been recognized as having one of the leading apps in the industry. We ended the year in a strong cash position with $281 million of cash on the balance sheet and no debt, leaving us well funded to continue to invest in technology and products while supporting new market launches over the coming years. We ended 2021 with our 10th consecutive quarter of sequential revenue growth. We generated $131 million in revenue, up 31% over the prior year. Sequentially from quarter three to quarter four, we grew revenue in every one of our markets. In addition, we grew sequentially in both casino and sportsbook, demonstrating our strength in both categories. As you may recall in the last two quarters, we mentioned that with a number of new market launches starting in the fall and we did investment mode this quarter. As we said with the recent market launches, we increased our marketing investment in the quarter to $64 million and our adjusted EBITDA loss for the quarter was $31 million. As most investors now know, there was intense competition for marketing assets during the fourth quarter. We weren't immune to the impact, but we continue to be prudent with our marketing spend consistent with our focus on attracting high-quality customers. The good news is that we've seen some relief in quarter one, in existing markets, as there is less competition for marketing assets, and our cost to acquire players has declined nicely in the last couple of months. While there is a lot of enthusiasm surrounding the recent launches in New York and Louisiana, we are also tremendously excited about our expected entry into Ontario and Mexico in the second quarter, both of which include online casino, in addition to online sportsbook. A combined population in these two new markets is around 145 million people more than four times the number of people that access our casino product today in North America. We've demonstrated great success in markets with both casino and sports betting, and we expect to replicate that success in new markets. While existing markets continue to mature, the newly launched markets of New York and Louisiana and the anticipated launch of Ontario and Mexico will keep us in investment mode for the next couple of quarters. We will continue to be disciplined and dynamic with our marketing spend and look forward to the long-term returns in these new markets. As we've shared before, our strategy isn't simply to chase market share and the high volume of players. Instead, we focus on attracting quality players who will play and stay loyal to us for the right reasons. We offer a premium user experience to reduce player friction, and we target players who appreciate and respond to our product offering and customer service approach. We continue to expand our business by growing the top line while strategically investing in marketing and technology that we believe will drive meaningful revenue growth with long-term value. Heading into 2022, we are more convinced than ever that our consistent approach is the right one, and we will provide long-term value creation for our shareholders. We are introducing 2022 full-year revenue guidance of between $580 million and $630 million, implying 24% year-over-year top line growth at the midpoint. As a reminder, this guidance only covers existing markets where we live today. As I referenced earlier, investor attention has shifted recently to a strong focus on the path to profitability. For those that have followed us from the beginning, you know that profitability has always been a focus of ours, and that hasn't changed. While predicting the exact point when we were adjusted EBITDA positive was quite difficult, we believe we will achieve positive adjusted EBITDA in the coming quarters, particularly in established markets. When we acquire greater certainty on the timing of new launches in regulated markets, which always requires additional investment. There are a few takeaways from this that I think are important. First, we have a path to profitability in all markets where we are live. The pace at which we get there and the magnitude of profitability in each market is going to depend on whether it includes both casino and sports, our market share, the competitive intensity, and the tax rate. Second, is that even adding more modest market share than some others, we are able to achieve profitability in markets relatively quickly because of our prudent promotional marketing spend and strong player retention. Third is that, over time, new market launches will become a smaller part of the total for us, and the impact of new market investments will be outweighed by the mature markets that are profitable. Next, I'd like to discuss our market launch. We now operate real money gaming in 14 markets, five of which feature online casino, 13 feature online sports betting, and six feature retail sports betting. To put this in perspective and further my comments about investments, at the end of 2020, we relied on only six markets. Today, this mix of live markets accounts for approximately 31% of the U.S. population for online sports and 10% for online casino, a great achievement, but a lot of opportunity remains ahead. In the U.S. states where we operate, in terms of GGR for the fourth quarter, we have 10.5% market share for online casino and 4.5% share for online sports betting. We are the clear number four in the United States whether measured by GGR or reported revenue. Now I want to quickly recap our most recent market launches that I've been referencing thus far. We began the recent string of launches in mid-October, with the launch of online sportsbook in Connecticut in partnership with the Connecticut Lottery. The online market in Connecticut was followed by the opening of nine retail sportsbooks in the state, also in partnership with the PLC as their exclusive retail sports betting partner. A few weeks after Connecticut, we launched the BetRivers online sportsbook in Arizona. Then earlier this year, we were among a small group of operators who launched day one in New York, and the same was true when we also went live day one in Louisiana later in January. I also want to touch briefly on how we look at early results and provide context from our vantage point as investors continue to evaluate and assess the state-provided numbers over the short term. To do this, I will use New York as an example. As many are aware, the overall market in terms of handle is off to a blistering start, as we expected. New York is on track to be among the largest online sports betting markets in the United States. As said, there is a large amount of promotional costs reflected in early results from the new state. The early results are following the promotional spend. Similar to RSI, in other state launches, we've been more measured with our promotional offerings and expect to earn market share over time as the high-quality customers we target enjoy the experience we bring to them. For example, in Connecticut, we've seen our handle share grow from 6% in the opening months, and to 7%, 8% in December, and almost 10% in January. In Arizona, where we started a little later than some and launched in October, our December handle is almost 80% greater than it was in November. New York is much newer, but as we all know, the bonus was insignificant, although, still relatively small, our handle share has grown each of the six weeks there, despite three more entrants coming in since the initial launch. There is still a long way to go all these recently launched markets, but we're encouraged by the trends we are seeing and continue to believe the path to profits will be through the user experience, which is a combination of great product and operational excellence. Moving beyond the recent launches, we are thrilled that Ontario has been working hard on the framework and the regulatory process and have announced a targeted launch date of April 1. Pending all the typical approvals, we plan to be ready to launch in Ontario with our BetRivers casino and sportsbook app. We've been focused on generating brand awareness in the province and building an early database of players to our social product and pre-registration. We've talked a lot about our success in Michigan with converting our pre-launch social players to money players, and we believe we will have similar success in Ontario with people who want to be ready to join BetRivers when we go live. Ontario will look different than many of the U.S. states we have launched in, since online gaming has been in the region for a while, but we are no strangers to entering a market later and building share over time. Colombia is a great example where we now hold close to 20% market share of handle. This past month, we announced another exciting international opportunity in Mexico. We have partnered with Mexican media conglomerate Grupo Multimedios for market access, bringing our online gaming platform to Mexico. Under the terms of the 25-year agreement, we will operate online casinos and sports betting countrywide, and we would leverage Grupo Multimedios' vast media assets and distribution channels for promotional and content integration purposes. Our partner's portfolio encompasses television, radio, print, billboards, and digital, and includes a digital sports property, which attracts more than 7 million unique users per month and is growing at a 29% compounded annual growth rate. Also, our partner owns Millennial, the number one national digital news information source in Mexico, with 27.7 million unique users per month, and its network of 22 television stations and 53 radio stations. Needless to say, we are very excited about this opportunity and anticipate launching online casinos, of course, during the second quarter of 2022. With regard to market access in states, we plan for future launches. We are very pleased to have access partners lined up in both Ohio and Maryland, which we anticipate will be the next opportunities to go live in the United States. We are often asked about our thoughts on future jurisdictions for online casino and sportsbook. While it is challenging to predict the legislative process and the timeline of future states, we have been very pleased to obtain market access wherever desired and remain committed to growing our presence in both online sportsbook and casino in states as they regulate. Now I want to switch gears to talk about some of our marketing initiatives, investments, and the results we are seeing from them. To start, we recently signed several new brand ambassadors to BetRivers including great and respected tennis TV analyst James Blake, three-time Super Bowl champion and NFL broadcasting veteran, Mark Schlereth, baseball legend Bobby Valentine, and Chicago television personality Brittney Payton, daughter of the former Chicago Bears player Walter Payton. In Canada, we have signed Dan O'Toole, a broadcasting legend north of the border, who works for FOX Sports in the United States. We launched the podcast, which very quickly achieved the number one spot on all sports podcasts in Canada through the end of January and continues to be a top draw. We are very proud to have all of these investors showing our team as we create new and exciting betting content for players to enjoy. We also announced an exciting multi-year exclusive partnership with LaLiga to be the exclusive wagering partner for the RushBet brand in Colombia. More recently, in conjunction with our launch in Louisiana, we also announced a new relationship as an official sports betting partner of the New Orleans Pelicans. As we previously stated, our ability to market effectively is critical to our success. We remain a data-driven organization, using dynamic learnings 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 products offered in the jurisdiction, the performance of diversified marketing channels, predicted lifetime value, and the behaviors of customers across various product offerings. This efficient dynamic approach shows through in our ability to attract and retain high-quality players. We grew our monthly active users during the year by 67%, and we grew monthly active users sequentially from Q3 to Q4 by 24%. All of this was done while maintaining what we believe to be industry-leading CPA of $327, despite entering two new online sports markets in the fourth quarter. Just as exciting, in the fourth quarter and fiscal year 2021 trends are what we've been seeing so far in 2022, with monthly active users already up 27% from where we were in Q4. Our increased marketing investments during Q4 helped us to reach a wider sports audience during the most intense sports season of the year and resulted in a temporary increase in CPA across our markets. However, the increased brand awareness that resulted from the increasing marketing investment is already bearing fruit in Q1 this year, whereas CPAs have come down significantly to lower levels. Now turning to product and technology. First off, I'm pleased to let you know that as planned, we released the iOS app in Michigan and West Virginia during the fourth quarter. We are seeing great reception of the product, and it's a huge improvement. It reduces friction at sign up through geolocation throughout the entire user experience. In fact, we are finding that new players using the iOS app are generating greater than 50% more handle than new iOS users who are not using the app. Also noteworthy is that we plan to have the iOS app available in both Ontario and in Mexico, which will mark our first launches into casino markets with our iOS app available for all new players. In addition to numerous improvements and functionality enhancements during recent months, we don't want to lose sight of how important it is that our technology team has built and continues to refine a world-class and robust product that has allowed us to scale and launch in more markets in the last year than we had previously in the company's history. Congratulations to our continually growing technology team and all of their incredible work. I also want to update you on the success we've been seeing with our newly released multiplayer slot tournament. As you recall from our last call, we released this exciting new feature in Colombia and West Virginia, and now we've added it to Michigan and soon in Pennsylvania. Players engaged in the tournaments have increased their number of sessions by almost 10%, and those players engaged in slot tournaments spend more than 30% more time per session after the release. This is a double win; players visit more often and spend more time with us. Now that we have mobile apps live in all of our U.S. markets, the next major milestone in our tech journey will be the release of a single app for the app stores across all players. This will improve our marketing efficiency and ensure a better user experience. We plan to have a single app release for the third quarter of this year. With an effort to diversify our business and enhance cross-sell opportunities to both online casino and sportsbook over the long term, RSI recently acquired the technology platform and team of Run It Once Poker. We were really impressed by the management team, including the company's principal, Phil Galfond, who is one of the most respected poker players in the world. Our plan is to leverage the innovative poker mind from the Run It Once team, along with RSI’s prior team led by executives with many years of experience developing industry-leading and highly scalable poker platforms. Our goal is to improve upon the tremendous foundation and user experience that the Run It Once team has created, and over time integrate the poker vertical into our proven platform when the market is ready. The cost of the acquisition was $3.3 million in cash and $2.5 million in stock. There will be no near-term impact on our revenue, and we are adding modest amounts to our ongoing G&A costs. Welcome to all of you at Run It Once, and we're happy to have you join the RSI family. With that, I'll turn the call over to Kyle.

Kyle Sauers, CFO

Thanks, Richard. Fourth quarter revenue was $131 million, up 31% year-over-year. Full year 2021 revenue was $488 million, up 75% year-over-year. As Richard mentioned with the Run It Once acquisition and recent new state launches, we finished the year in investment mode as our fourth quarter adjusted EBITDA loss was $31 million, resulting in a full year 2021 adjusted EBITDA loss of $65 million. Adjusted advertising and promotions expense was $64 million during the fourth quarter of 2021 compared to $23.1 million in the prior year quarter and $45.4 million during the third quarter of 2021. As we discussed on our previous earnings calls, this reflects our commitment to accelerating marketing spend given new state launches but in a rational manner relative to the industry. As Richard highlighted earlier, we are expecting to go live in both Ontario and Mexico in the second quarter. Assuming that happens, we'll be launching six new markets inside of three quarters, which is a big milestone for us. With regard to marketing expenses for 2022, we expect continued growth as we invest in new markets and support those that have already launched. As we've discussed in the past, new market launches are an investment period for us, and we've been making that investment in New York, Louisiana, and also Ontario already during the first quarter. With Ontario and Mexico launching in Q2 as anticipated, we would expect those investments to continue and we would expect to step up from our Q4 2021 marketing run rate in the first half of 2022 and some moderation in the back half, assuming no major changes in the regulatory or state launch landscape. Our adjusted G&A grew to $11.6 million during the fourth quarter, up from $8.8 million in the third quarter. We continue to build out our technology teams and corporate infrastructure to support our continued growth and expect this line item to continue to grow throughout the year in 2022. We continue to be in a great position with $281 million in unrestricted cash on the balance sheet and no debt. We have the financial position to allow us to continue growing our marketing investments and launch in new markets quickly. As Richard highlighted earlier, we're providing 2022 full year revenue guidance. We expect 2022 revenue to range between $580 million and $630 million, implying 24% year-over-year top line growth at the midpoint. As a reminder, while I know some of our analysts include revenue growth from future market launches, we are only including those markets which are already live. So specifically, our revenue guidance includes New York and Louisiana but not Ontario, Mexico, or other markets that may launch later this year. With that, operator, please open the lines for questions.

Operator, Moderator

Certainly. The first question is from the line of David Katz with Jefferies. You may proceed.

David Katz, Analyst

Afternoon, everyone. Thanks for taking my question. We've seen sort of an eventful quarter in a number of ways, and I wonder what you think about the notion of scale versus being smaller and what the attributes are that are to your benefit as a result of that and how you sort of balance those issues about scale and candidly, whether there are some horizontal or vertical integration at some point that may be productive versus where you are today which is working as you've laid it out?

Richard Schwartz, CEO

Hi David. Thanks for the question. I think the answer is that sportsbook and casino are both product verticals that you don't play against other players; you play against the house, and because of that ultimately every player judges the operator based on the quality of the experience you offer them and the type of service you provide. So ultimately, I think the scale comes down to whether you can market efficiently and continue to acquire players; sometimes larger scale is not as efficient as being smaller scale. I think ultimately, our strategy is to look long-term and to continue to find those opportunities where we know we're going to get back long-term returns on those investments for new players. Why? Because the hardest part of the industry is figuring out how to retain the players once they arrive. Once you invest in that, which we've done over the last 10 years, you end up getting a much larger percentage of those players staying loyal for much longer, and ultimately you build your scale over the long term by offering the best user experience. So, when it comes to horizontal and vertical integrations or opportunities, those are always being considered. Certainly, I think that some product categories like daily fantasy benefit from scale more than casino and sportsbook, like I just mentioned. I think at the end of the day that you could see—you're already seeing a rationalization in our industry, which we welcome that because ultimately it could be positive for companies like ours that will allow through the best product and best user experience to gain the scale long term that we all want for our company.

David Katz, Analyst

Perfect. Thanks for that. Can I just follow up with respect to the product roadmap? And if you could elaborate just a bit more on how do you see that evolving in the near term, next year or so?

Richard Schwartz, CEO

Sure. From online casino, we have a three-year head start in terms of investment in that product relative to where we were on sportsbooks. So, we've really made a big effort as mentioned in the remarks, and we've actually closed the gap and actually been very strong in now achieving real parity with the market leaders in the quality of the product for sports betting. But what excites us more is that, that's just the beginning. What we have done in online casino categories, we've innovated beyond what others do in this space, and that involves creating all kinds of product features ourselves in-house, different types of bonusing engines and experiences that differentiate the player experience. We pioneered in online casino, and we're taking all that infrastructure that's already been built and we're now adding it sports centric themes and content to that experience to create a differentiated experience. So fundamentally, we have the same features and functions that are necessary to be a leading product today, but we're not satisfied with that. We want to push the limits of innovation, and we've already done that to a large degree in casino, and our team right now is focused on bringing those core functionalities and applying a new level of content, a new type of gamification layer on top of our sports betting engine so players who play with us feel a different experience than anywhere else. So that's the highest priority for development teams in terms of innovation, and we're planning to roll all these features out later this year and next year.

David Katz, Analyst

Thank you very much.

Operator, Moderator

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

Chad Beynon, Analyst

Hi. Good afternoon. Thanks for taking my question. Kyle, you noted that the revenue outlook to revenue guidance for 2022 does not include Ontario and Mexico. But I'm still going to ask about those markets and trying to get a little bit of help on this. I believe that a market like New York may have actually been negative revenue just because of the promotions and kind of how that works through the accounting that you guys report. When we think about a market like Ontario and Mexico that is different than in New York, are there reasons? I guess could you kind of help us think about if those could actually be negative revenue markets or just because there won't be as much promotions as what we saw in New York? If you launch on time, that should contribute to the revenue guidance that you gave? Thanks.

Kyle Sauers, CFO

Yeah. Thanks, Chad. I appreciate the question. I think I'll start by validating your first part of your question on New York, and I think you're right. Our expectation is that would be a headwind to revenue in the first quarter. I wouldn't expect that going forward, but in the first quarter, yes, due to kind of promotions running through. Ontario and Mexico—you're right, we haven't included that in guidance. I don't want to get too deep on that. I think we would expect those to first have a path to profitability that’s much faster than a sports-only state because they'll both include casino and they also have a much smaller cost structure because of lower tax rates than New York. So, I think we feel really good about getting those to profitability sooner than a place like New York. And then in terms of negative revenue, really, any market that you launch for some period of time, whether that's weeks or months, you're going to have some headwind on revenue. But what we've seen in the past is markets that look like Ontario and Mexico having both verticals tend to move through that more quickly.

Chad Beynon, Analyst

Okay. Great. Thanks for that additional color, understanding that wasn't in the prepared revenue guidance. And then on the tech side, you talked about the iOS launches, just wondering if you could provide a little bit more color in terms of the users? Did you see people convert over to iOS or did you actually see incremental players in some of the non-iOS players who are still playing on the HTML? Thanks.

Richard Schwartz, CEO

Sure. We've seen both new users and existing users, but I will say that we focus a little bit more on the new users coming in to give them a chance, and we're comparing how they are doing versus existing players also using the prior version available through web browser. We've seen, as we reported, a really strong improvement from those who come out and start with the iOS app, which is what we expected. So, we're going to be continuing to sort of drive a larger percentage of our existing players to those apps in the months ahead.

Chad Beynon, Analyst

Great. Thank you very much. Appreciate it.

Richard Schwartz, CEO

Thanks, Chad.

Operator, Moderator

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

Ryan Sigdahl, Analyst

Good afternoon, guys. Kyle, maybe the first question on guidance, so revenue guidance does not include new jurisdictions that are launching, but it sounded like the spend commentary. Did I guess can you clarify that? And then how should we think about spend relative to Q4 and the first half of the year in existing markets? So, apples-to-apples on the revenue side.

Kyle Sauers, CFO

Yeah. Let me try and take those apart and see if I've got all your questions in there. So, yes, you're right that the revenue guidance does not include any of the launches that will go live after today. So, it includes New York and Louisiana, but not Ontario and Mexico. We aren't guiding to a marketing expense number or an EBITDA loss number, but we did want to give some color around marketing spend and what drives those costs and wanted to make sure it was clear that Q1 already will include costs from Ontario. There's a lot of excitement and brand awareness that we're already generating up there ahead of launch. So, we think that's a great opportunity. So, we want to make sure you knew that was happening because it is a cost that we're incurring, and we also just wanted to give a little bit about the cadence of marketing expense, assuming that Ontario and Mexico both launch in Q2, which is what we anticipate.

Ryan Sigdahl, Analyst

Got it. And then just on the Mexico launch, how is that contract with Grupo structured? I guess, is it a joint venture, is it B2B2C like a couple of states or is its full control and some payment structure?

Kyle Sauers, CFO

Yeah. So next, obviously it's a big opportunity for us. It's a B2C relationship that operates similar to other markets. I'd say except for notable exception, a big advantage for us with this is the relationship with Grupo Multimedios, and they have a fantastic variety of different media assets and distribution channels in Mexico. Richard talked about those. They are a really respected organization down there and have been around for a long time. So, they're going to be a great partner for us to help us enter and operate down there. So, we're really excited about that. Some real advantages we have in Mexico compared to Colombia, which has gone great for us.

Ryan Sigdahl, Analyst

Maybe just one follow-up on that Kyle, is it a fixed fee structure or is it an affiliate kind of recurring participation based on sending users or some other metric? And then also to the?

Kyle Sauers, CFO

Yeah. We haven't disclosed any sort of equity stake, and we haven't gotten into the terms. It's a B2C relationship like our other ones, so really nothing new or exciting to share on that.

Ryan Sigdahl, Analyst

Great. Thanks, guys. I'll turn it over to the others. Good luck.

Kyle Sauers, CFO

Thanks.

Operator, Moderator

Thank you, Mr. Sigdahl. The next question is from the line of Bernie McTernan with Needham and Company. You may proceed.

Bernie McTernan, Analyst

Great. Thanks for taking the questions. Just want to start out on the MLB strike. We've been getting some questions from investors just how big of a potential impact that could be, just want to see if you had any impact or any thoughts on how big the MLB is either as a percent of handle for the year or concentrated in Q2 and Q3? I mean, how big of a swing factor could it be within guidance for the year?

Kyle Sauers, CFO

Yeah. So obviously, our guidance that we provided today includes the MLB season. No question about that. And that's an evolving situation. At this point, the cancellation of the first couple of series or weaker games isn't enough to make us think that we'd have to relook at our guidance in any way at this point. Obviously, just like other people with online sports betting sites, we're keeping a close eye on that and we'll update if we think there is some change that needs to be made. But I'd also remind you that in any given quarter sports makes up a quarter to a third of our revenue and casino makes up the rest. So, we're not nearly as exposed there, but I think like everybody else, we'd love to see the MLB season get started as quickly as possible.

Bernie McTernan, Analyst

Understood. And then another current event rumor that Apollo is looking to sell Yahoo Sports, potentially a sports betting company. Not sure if there's a comment there, if that could be an attractive target or not, but maybe take the opportunity to remind us if you think owned media would fit into your marketing strategy?

Richard Schwartz, CEO

Yeah. Sure, I'll take this one. Yeah. So, I think anytime you have a media partner asset that could help you drive traffic and have some brand awareness in the marketplace is something that it's important for us to consider. There are all opportunities or all companies that maybe have opportunities to it. So, that's certainly something that is worth—companies like us and others taking a look at because certainly they have been in the business for a long time and have some great assets.

Bernie McTernan, Analyst

Understood. Thank you.

Operator, Moderator

Thank you, Mr. McTernan. The next question is from the line of Jed Kelley with Oppenheimer. You may proceed.

Jed Kelley, Analyst

Hey, great. Thanks for taking my questions. Two if I may. Can you just give us a sense of how we should think about your gross margin cadence for the rest of the year, given New York's and Louisiana's launch? Should we expect a similar seasonality? And then just how should we view any impact from Illinois going to remote or online registration?

Kyle Sauers, CFO

Yeah. I'll take the first one and then let Richard chime in on Illinois. So, I'd say there's probably not a ton of impact of seasonality on our gross margins. Although, I'd say generally casinos have higher margins, so in heavy sports quarters, you might see a little bit movement there. I think what will drive our gross margins over time is the maturity of markets and adding markets that have lower tax rates in places like Pennsylvania where we have a decent amount of share there. I think specific to New York, as you pointed out, that will impact our Q1 margins, hope I decline a bit in Q1 from where they were in Q4. And then we'd expect them to improve as the year goes on, and I think you probably already know this since you asked the question, but just to be specific and clear about why that does impact margins. It's a big market, big opportunity, and there are a lot of bonuses involved in sign-ups, although ours is lower than others. Your revenue can actually be negative for many weeks after launch, and then that turns positive over time as you work through the bonus dollars. As I mentioned this on an earlier question, in our case, we expect to report revenue from New York that's negative in the first quarter. So, you have negative revenue and then you have costs that are associated with generating that revenue and generating that GGR and New York, most notably the tax rate. So, it creates a little bit of a headwind sequentially in the first quarter, but then that will improve as the year goes on.

Richard Schwartz, CEO

In terms of Illinois, we've performed really well there, and we hope we have been able to hold our share, which is a reflection of a great user experience and players really trusting the app that we offer. I think mobile registration is going to be a big win for the state of Illinois and the industry, but it will increase the competitive intensity in the market, no doubt about that. We have a very strong brand here locally, which as we've shown, we have a strong brand and performed well. So, we expect to continue to do well in this new climate.

Jed Kelley, Analyst

Thank you.

Operator, Moderator

Thank you, Mr. Kelley. The next question is from the line of Dan Politzer with Wells Fargo. You may proceed.

Dan Politzer, Analyst

Hey. Good afternoon, everyone and thanks for taking my questions. So, I wanted to follow up on Mexico and Ontario and just how we should generally think about the contribution directionally. I think broadly we would assume that there would be positive revenue, but understand there are also a lot of start-up costs. So, I mean, is it fair to say that these should at least be positive EBITDA contributors for the year? Or is there something else that we should be thinking about?

Kyle Sauers, CFO

So, let me just make sure I'm understanding your question. You're asking if there, if we would expect them to be contributing positive EBITDA for the year 2022?

Dan Politzer, Analyst

Right. Acknowledging there is typically high start-up costs when you enter into a new market and also along with that if you could touch on maybe how you're thinking about the competitive environment in those markets as you enter them?

Kyle Sauers, CFO

Yeah. So, I don't want to get into forecasting specific profitability by market necessarily. One of the comments I made earlier that I think is relevant to that question is when we are in a market that has both casino and sports, we get to profitability sooner. There is a good track record there. In terms of the tax rates or effective tax rates, after any promotions are both good in Ontario and Mexico for us. We'd expect that the gross margins in Ontario and Mexico are going to be closer to the high end of our gross margin range. So, I'm sure we'll talk more about profitability in those markets on future calls. But we think they both have a great opportunity. But they will have those initial costs that you referred to where we spend a little more on marketing early on, and we might not generate as much revenue early as those players build and create more revenue and stickiness over time.

Richard Schwartz, CEO

Just to add a couple of things for Ontario specifically—it would be the largest online casino market in the country if it were a U.S. state, so it has a large population. We expect to—already have some brand awareness there because we've done substantial pre-launch marketing at a scale that we haven't done before. Importantly, I think there's a lot of discussions about the gray market. Existing sites are already operating there, and how we think about that is that in several of our markets already in the past, we've come into markets where we already have existing online regulated casinos operating for several years, and we've done well and grown market share each of those markets, as we have seen with markets like New Jersey, Colombia, and West Virginia. So I think there is excitement for our product quality, and online casino really stands out. And that's why we're as excited as we are about Ontario and Mexico opening up because it gives us a chance to leverage our strength.

Dan Politzer, Analyst

Got it. And then just for my follow up, some of your competitors have talked about marketing and media spend, and I know you guys have been pretty restrained there historically. But have there been any changes or tweaks as you think about kind of the go forward as you spend your marketing dollars on where you spend it?

Kyle Sauers, CFO

Yeah. So, we historically have been cautious, and I would say a little more moderated as some of the others in our industry, and we are excited by, as I said earlier, that a rationalization of spend is occurring in the marketplace. We tend to be very data-driven and nimble and dynamic, and are shifting things frequently and we are when we see opportunities to increase spend because we're confident we're going to get a return on those invested players. We do that. And so, the hard part is we've already done which is getting the retention, like I said earlier, figured out that now allows us to look at these markets based on tax rate, product vertical, competitive intensity, and be able to have a high degree of confidence when we spend in a market, we know what our CPA targets are—cost-per-acquisition targets are—that are going to get us the returns we want over the longer term. It's allowed us to be very, I think, thoughtful in our approach and continue to market and spend where it makes sense based on the returns that we expect to get.

Dan Politzer, Analyst

Got it. Thanks so much. Appreciate the color.

Operator, Moderator

Thank you, Mr. Politzer. The next question is from the line of Edward Engel with Roth Capital. You may proceed.

Edward Engel, Analyst

Hi. Thank you for taking my question. It seems like your cost structure is a little bit different than competitors at least over the past two years. A lot of your OSB focus peers have kind of ramped their customer acquisition in Q3 and then Q4 ends up being a big payback quarter. I know the past few quarters or years have been a little bit impacted by new state launches, but longer term, should we expect Q4 to be kind of your biggest profit contributor for the year?

Kyle Sauers, CFO

Yeah, go ahead, Richard.

Richard Schwartz, CEO

Yeah, I was going to say, for us consistency is something that we've built this business around, and really because of our strength in casino. We haven't really seen more of a consistent seasonality than I think the sports-first companies. Of course, we have a large and growing sportsbook business that does rely on seasonality in Q4. But really what it comes down as we mentioned a few times already is that when you invest in our current quarter, you're not going to get the returns from that player for months or in some cases even many months and quarters, depending on the market and the tax rate. So, our philosophy is to find the times when we could increase our brand in front of the audience, acquire those players, but really focus on high-quality customers who are with us for the right reasons, not bonus hunting for example, because those aren't going to be the ones we are really targeting. So, we target those customers; we find that they're going to stay for the full year and beyond. Our goal is to make sure that when it comes to casino players, they're going to be stable and consistent and enjoy the experience year-round. For the sports calendar, you will find that we’re going to spend more in quarters like Q4 and Q1 where we have football and big basketball events that are really popular for the sports calendar.

Kyle Sauers, CFO

Yeah. And maybe I’d add just when you're thinking about the cost structure and you mentioned there is an impact from these new markets that are launching, right? And that is a big factor here in addition to some of the seasonal factors. But just to give a little perspective, after we launch in Ontario, we're going to have 140% more population in North America that have access to our products than we had just at the end of 2020, and it’s even 70% greater population than we had just five months ago. So, the way we’re attacking this and going after it is impacted by new launches. So, I mean, that's a big increase. It's a huge opportunity for us, and it would be silly for us not to take advantage of that, although in a measured way, as we always have. As Richard has talked about today, I just want to—and I guess I’d add that population growth I’m talking about doesn't even include the Mexican opportunity with a population of 130 million people. So, a lot of good things ahead, but I think in the near-term, market launches will impact costs far more so than seasonality will.

Edward Engel, Analyst

Great. Thank you for that. And then if I could just squeeze one more in here, just kind of based on some of your commentary on sales and marketing costs and advertising costs, I mean maybe new state launches, it feels like we should expect EBITDA losses in 2022 to exceed those in 2021, is that fair? And then a bunch of your peers have had a guiding to positive EBITDA by the fourth quarter of '23. Is there any reason why that wouldn't be achievable for RSI, especially assuming or I guess, assuming those states will legalize iGaming, or something that California doesn't deregulate?

Kyle Sauers, CFO

Yeah. I think so that’s always the interesting thing about trying to predict profitability out so far, right? I think maybe I'll reiterate what we said about the markets that we've been in up through the first half of 2021: we expect those markets to be positive by the end of this year, and for the fourth quarter, we're very close to it on a market-by-market basis. And if we hadn't launched any more markets, then we would have expected the whole business to be profitable in 2022. So, that just tells you how big of an impact new markets are and the balancing that investment with your maturing markets. I have to manage that. So, I don't think I want to give a forecast for 2023 profitability if we didn't launch anything more after Mexico. I think we've got a real good opportunity for showing profitability in 2023.

Edward Engel, Analyst

Perfect. Thank you so much.

Operator, Moderator

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

Unidentified Participant, Analyst

Hi. Thanks for taking the question. You've got it for Stephen. The first question I have is the EBITDA margins in the core. I mean you mentioned, have you not launched a new state post 2021, you would be positive, but would you be able to give a margin that you were running at either nationally or any other core states like Pennsylvania or Illinois before including allocating the fixed costs?

Kyle Sauers, CFO

Yeah. So, I'll start with—I want to clarify something that you said, just so it's entirely clear that the markets that we're talking about are those launched up through the second quarter of 2021. So, that wouldn't include Connecticut and Arizona or New York and Louisiana launches that have happened more recently. And we're not going to get into giving specific margins by state. I think it's instructive enough to show that as a business enterprise as a whole, we would have been profitable this year had we not launched any more states after the first half of last year. I think you can expect that would continue to build in aggregate, and over time that offsets the investments we're making in new market launches, and that's how we build a profitable business over the coming years.

Unidentified Participant, Analyst

Thanks. That's helpful. And then just a secondary question more on the long-term margins. I mean you describe the dynamic where promos decline, and so your gross margin would improve, but are there any other levers that you can pull as you think about long-term profitability?

Kyle Sauers, CFO

Sure. I mean it would — we're obviously in the very early innings, and there's a lot of momentum in the industry. We're early in our company's growth profile. So, there's a lot of places for leverage over time. We're making a lot of investments in technology and the corporate infrastructure as we build the company and build out. Over time, we'll get leverage there. We're obviously ramping up marketing for these new launches, so that as you pointed out subsides as markets mature, and as all the competition starts to rationalize, so that normalizes, and that will offer leverage also. And then I think the other piece is over time as markets grow for us and get more mature, that can improve the gross margin profile in any given market, and then we'd expect that there will be pieces of our cost of revenue or cost structure that will be able to reduce over time as well.

Richard Schwartz, CEO

I would just add that, in our industry, customers are expensive to acquire. So simply keeping your customers happy and playing for the long term is really your best way to grow margin and grow market share over the longer term. It is a really simple concept, but it's really hard to execute on. Ultimately, any companies globally over the past couple of decades that have achieved market positions of leadership have figured out how to provide the user experience at the top level. That's what we spend a lot of our time on here.

Unidentified Participant, Analyst

That's helpful, thanks. Best of luck.

Operator, Moderator

Thank you, Mr. Grambling. That concludes the question-and-answer session. So, I'll pass the conference over to Richard Schwartz for closing remarks.

Richard Schwartz, CEO

Well, thank you again for joining us today. It was a pleasure speaking with you. We look forward to doing it again soon.

Operator, Moderator

That concludes today's Rush Street Interactive fourth quarter and year-end 2021 earnings call. Thank you for your participation. You may now disconnect your lines.