PENN Entertainment, Inc. (NASDAQ:PENN) Q4 2023 Earnings Call Transcript

PENN Entertainment, Inc. (NASDAQ:PENN) Q4 2023 Earnings Call Transcript February 15, 2024

PENN Entertainment, Inc. misses on earnings expectations. Reported EPS is $-2.37 EPS, expectations were $-0.57. PENN Entertainment, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the PENN Entertainment Fourth Quarter 2023 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead.

Joseph Jaffoni: Thanks, Frank. Good morning, everyone and thank you for joining PENN Entertainment’s 2023 fourth quarter conference call. We’ll get to management’s presentation and comments momentarily as well as your questions and answers. [Operator Instructions] Now, I’ll review the Safe Harbor disclosure. Today’s discussion contains forward-looking statements. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please see our press release for details on specific risk factors. With that, it’s now my pleasure to turn the call over to the company’s CEO, Jay Snowden. Jay, please go ahead.

Jay Snowden: Thanks, Joe. Good morning to everyone on the call. As usual, I’m joined here in Wyomissing by our CFO, Felicia Hendrix; and our Head of Operations, Todd George as well as other members of the executive team. We provide a link to our investor presentation, along with our earnings release this morning. If you haven’t already opened or printed it out, I would suggest you do that now as our prepared remarks, we’ll reference several of those slides as we go along. At a high level, 2023 was another transformational year for PENN Entertainment. We are the only company in the industry that has a fully integrated sports media and sports betting platform along with an omnichannel base of assets with which to drive cross-play and synergies as the database continues to grow at a rapid pace.

The future looks very promising given our unique position and long-term strategic advantages. On the retail side of the business, we generated more than $2 billion in property level EBITDAR in 2023 from our industry-leading portfolio of regional gaming assets and impressively delivered on our property level margin goals despite an uncertain macroeconomic environment, thanks to our best-in-class operators and leaders across the country. We also broke ground on 4 exciting new retail growth projects in Illinois, Ohio and Nevada which we expect to complete by the first half of 2026. As a reminder, we anticipate these will deliver a 15%-plus return on the aggregate investment. The continued strength of our retail business provides a solid foundation as we continue to invest in our high-growth digital business which will create significant long-term shareholder value.

Speaking of the digital business, earlier this month, we announced that the founding family behind the score, John, Benge, Abri and Noah Levy will be transitioning from their leadership of the score and PENN Interactive John departed earlier this week, while Bengem Abri and Noah will be leaving in early April. We have been working closely with the Levy’s over the last several months on this plan and timing to ensure a smooth operational transition. Their departure comes at a natural inflection point for our interactive business. We’ve achieved a lot over the last several years, including the completion of our proprietary tech stack, the successful launch of the Score Bet in Ontario the migration of our tech stack into the U.S. and now the launch of ESPN BET.

Even more importantly, we have developed an incredibly deep bench across PENN Interactive and we have several talented leaders ready to step up and take on more responsibility in the coming months. I want to extend my sincere thanks to John, Benge, Abri and Noah for all of their hard work and contributions to PENN interactive success. We are near the conclusion of the month-long search process for the new Head of Interactive and look forward to sharing an update on that with you in the near future. Turning to Slide 6 in our investor presentation. On November 14, we successfully and seamlessly launched ESPN BET simultaneously in 17 states across the U.S. a first in the industry and no doubt a testament to the strength of our technology teams.

Bolstered by the number 1 brand in sports media, the launch resulted in much higher than expected registrations generating over 1 million new sign-ups to our industry-leading PENN Play Rewards program and expanding our digital database by over 50%. In fact, we acquired as many first-time depositors and betters in the first 2 months as we had anticipated we would generate in the first full year post launch. Importantly, approximately 1/3 of these customers are located within 50 miles of one of our more than 43 retail properties which sets up well for cross-selling and monetization as part of our omnichannel strategy. In addition, we saw our average — excuse me, monthly active users grow from nearly 190,000 in the third quarter to more than 770,000 in the fourth quarter.

Our early success bodes well for our planned launches in North Carolina and New York this year which I’ll talk about in a moment. Given the early success in customer acquisition and retention, we now expect the digital segment to inflect to roughly breakeven in 2025 and start generating meaningful EBITDA and free cash flow in 2026 and beyond. Turning to Slide 7 and 8. You’ll see that strong early retention and consistent user acquisition have led to steady month-over-month increases in cash handle even as our promotional expenses have started to normalize. Our January cash handle was 289% higher than prelaunch cash handle in October of ’23, while our promotional expenses as a percentage of handle went down from 32.2% in November to 2.8% this January.

According to the latest sensor tower data which is similar to other data sources you may have seen such as Aptopia, we have consistently held the number 3 ranking and share of weekly active users amongst our top peers, providing a foundation for even greater handle and GGR share gains as we grow our share of wallet and monetization per user. The ESPN BET numbers on the chart on Slide 8 shows steady acquisition and retention across the board, even as our promotional expense began to taper. On our initial promo offer at launch was right in line with our competitors and we lowered that offer by 50% in advance of the Super Bowl given the more recreational play surrounding the game. Meanwhile, the total time spent on ESPN BET according to the sensor tower data also continued to ramp nicely as we added new features and integrations which will only accelerate now that we can focus more of our product and engineering teams energy on product improvements, especially in the areas of same-game parlays, player props and live betting as opposed to time-consuming migrations and launches, something we are all very excited about.

All of this is very promising as it relates to both top-of-funnel demand for ESPN BET and early retention success. The important takeaway here is the ESPN BET app is proving to be sticky in the early days as a result of our strong brands and UI, UX which will improve from here with product enhancements and deeper integrations with ESPN in the coming quarters. As you’ll see on Slides 9 and 10, ESPN BET has helped us reach new demographics of sports fans that are incremental to our digital database, resulting in a 63% greater year-over-year parlay mix and higher volumes for non-NFL games, particularly the NBA. While these parlay results are a clear improvement from where we were prelaunch, we still have a long way to go in this area and you’ll see significant improvements throughout 2024.

We also saw a 35% increase in our percentage mix of females in our digital database. These data points demonstrate the potential for ESPN BET to help broaden the appeal of sports betting to the more casual better and grow the overall market, an important goal of ours from day 1. Notably, before the launch of ESPN BET, overall market handle grew by more than 17% year-over-year January to October 2023 in the states with publicly available data in our market analysis. After ESPN BET overall market handle is up nearly 30% and year-over-year from November through December 2023 and it’s up over 25% even when you exclude ESPN BET. ESPN BET has and continues to bring new sports fans and betters into the sports betting ecosystem. ESPN BET has also helped boost our Hollywood-branded iCasino business which has seen a nearly 280% increase in monthly active users, providing a platform for future growth with new proprietary content continuing to roll out from our PENN game studios.

As we’ve emphasized in the past, when customers engage with us across multiple channels, their value goes up more than 6x over those who engage via only 1 channel and we continue to see a lot of upside as we improve our iCasino offerings. As illustrated on Slide 13, in connection with the launch, ESPN implemented an initial wave of exclusive BET mode integrations across the ESPN ecosystem which includes our 6-pack odds integration. This provides for a seamless click-through from the ESPN game cast to a customer’s desired bet on the ESPN BET app. This is very powerful as there are over 28 million monthly active users on the ESPN media app. You should expect more BET mode integration throughout 2024. I said at the outset of our partnership with ESPN that we’d be getting significant value for our marketing dollars by allocating our $150 million per year to the single best brand and platform in the U.S. to reach sports fans and potential betters.

We’re already seeing that with a robust menu of promotion and integration across all of ESPN’s platforms, including traditional linear advertising, digital media, in program integration, bods attribution, database marketing opportunities and access to some of the biggest personalities in sports media for special events, promotions and social media engagement. As I mentioned, we have just scratched the surface on these integrations and there’s substantially more to come, all included as part of our deal that we will unveil throughout 2024 and into 2025. Our initial ESPN BET advertising campaign was headlined by Sports Center anchors, Scott Van Pelt and L. Duncan. We then added spots with NBA legend Kendrick Perkins, the host of Get Up, Mike Greenberg, followed by our most recent commercial with sports betting analyst, Aaron Dolan, that launched during the Super Bowl week.

This campaign with Aaron is our first product and integration-focused campaign which we expect will help drive continued awareness of ESPN BET and our direct integration with the ESPN Media app. Meanwhile, L. Duncan and Aaron Dolan hosted a Super Bowl party at the M Resort at our property in Las Vegas. And I’m happy to announce we’ll be rebranding Greektown’s market-leading Sportsbook to ESPN bet just in time for the NFL draft in Detroit. In addition, ESPN regional radio talent will be hosting events throughout the year in our retail sports book. We look forward to additional ESPN BET retail launches at key properties as we continue to create meaningful cross-sell opportunities. Looking ahead to the rest of 2024, we are excited to introduce ESPN BET in North Carolina which is expected in March and New York expected prior to football season in each case, of course, subject to regulatory approvals.

While the economic model in New York is indeed challenging, we look forward to bringing ESPN BET to the largest regulated online sports wagering market in North America. These 2 new jurisdictions will be extremely efficient for us. As highlighted on Slide 16, our ESPN annual national marketing spend per capita will be reduced by 20%, with the addition of North Carolina and New York which will take our addressable online sports betting U.S. population from 37% to 46% and significantly expand our reach and scale. Very important for us as most of our ESPN and off-channel marketing spend is nationally focused. As noted in the release this morning, the Interactive segment EBITDA losses for the fourth quarter were higher than expected. The majority of that miss was driven by the high volume of customers acquired through ESPN BET which resulted in elevated promo expense that negatively impacted net revenues.

And, to a lesser extent, unfavorable hold due to customer-friendly sports results. The first 2 weeks following the launch of ESPN BET in November happened to be 2 of the lowest hold percentage weeks of the entire NFL season. Looking ahead, we expect that first quarter 2024 interactive EBITDA losses will be roughly half of our fourth quarter ’23 interactive EBITDA results. And for Q1 to be the largest EBITDA loss quarter of the year for us in 2024. For the entire year of 2024 on a same-store basis, we anticipate an EBITDA loss commensurate with what we saw in Q4 at around $330 million, demonstrating the top line momentum and efficiencies on the cost side. Due to the 2 state launches this year in North Carolina and New York which we announced on Tuesday, we are forecasting a total EBITDA loss in 2024 of approximately $400 million.

As mentioned earlier, we now anticipate 2025 being around breakeven and 2026 to deliver meaningful positive EBITDA and free cash flow. Before turning it over to Felicia, I’d like to thank our property leaders and all of our team members for delivering another quarter of really solid property level performance. Notably, 10 properties spread across our portfolio achieved their highest ever fourth quarter revenue. These outperformers helped offset the impact of supply pressures in a few of our key markets as well as continued softness in our south region. This further demonstrates the benefits of our geographic diversity and unique omnichannel strategy. The introduction of new technologies and our ongoing reimagination of our properties, while providing a best-in-class customer experience is continuing to drive demand for PENN.

As you know, our industry-leading customer loyalty program, PENN play, is supported by our 3 Cs technology which is now deployed at 21 properties collectively representing approximately 70% of our retail EBITDAR. During the quarter, we’ve also grown our total PENN wallet customers to 110,000 and we’ve received $300 million in total PENN deposits. As we’ve often said, those guests who use the digital wallet demonstrates superior loyalty through increased visitation, time on device and total theoretical end. And with that, I’ll turn it over to Felicia.

Felicia Hendrix: Our property level segments reported another solid year. Fourth quarter ’23 EBITDA results of $476 million exceeded the implied guidance we provided on our third quarter call, despite headwinds of roughly $10 million from the Detroit union negotiations and road closures. And as Jay highlighted, our Interactive segment is showing early signs of strong momentum. As usual, you will find on Page 12 of our earnings release a table that summarizes our cash expenditures in the quarter including cash payments to our REIT landlords, cash taxes, cash interest and total CapEx. Of our total $152 million in CapEx in the quarter, $16 million with project CapEx, primarily related to our 4 retail growth projects. We ended 2023 with total liquidity of $2.1 billion, inclusive of $1.1 billion in cash and cash equivalents.

We expect our liquidity to remain strong throughout 2024 and we have no debt maturities until 2026 which are our $330 million convertible notes. As we previously guided on our third quarter earnings call, we continue to expect our lease-adjusted net leverage to peak in the third quarter of ’24. While third quarter leverage will be higher than initially anticipated given the demand-based strength of our ESPN BET launch in the fourth quarter, ’23. This increase is temporary and we will also delever more quickly. By year-end 2025, we will return to pre ESPN BET leverage levels. And in 2026, we will generate meaningful EBITDA and free cash flow from the Interactive division. Thinking about this another way, our path to record free cash flow is very clear, following a year of investment in 2024 and delevering in ’25, 2026 will be an exciting inflection point for us given the high EBITDA to free cash flow conversion of our interactive business which when combined with the free cash flow generated by the existing core business, plus the 4 retail growth projects that will be coming online in early 2026, will position us extremely well to drive shareholder value.

I will now provide guidance for our Retail and Interactive segments. For the full year 2024, we expect retail revenues to range from $5.6 billion to $5.75 billion and adjusted EBITDA to range from $1.905 billion to $2.025 billion. Our guidance factors in extreme January weather, new supply in Nebraska, Illinois and Louisiana, road construction in a couple of markets and moderate upward wage pressure. For the Interactive segment in 2024, we expect to generate revenues of $1.28 billion to $1.415 billion and an adjusted EBITDA loss range of $420 million to $380 million. These ranges include our launches in North Carolina and New York. On a same-store basis, we anticipate an adjusted EBITDA loss of around $330 million. To help you with modeling the interactive segment revenues, you should assume that our 2023 tax gross up of roughly $400 million remains flat year-over-year in 2024 and other revenues inclusive of skins, social gaming and media is roughly $200 million in 2024.

As Jay mentioned earlier, in the first quarter of 2024, we expect the Interactive segment adjusted EBITDA loss to be roughly 1/2 of our fourth quarter interactive EBITDA results and for the first quarter ’24 to be the largest EBITDA loss quarter of the year. We expect 2024 corporate expense of roughly $105 million, inclusive of our cash settled stock-based awards. Total CapEx for 2024 is approximately $500 million, inclusive of $275 million of project CapEx for our 4 development projects. For cash interest expense, we forecast $170 million for the full year after roughly $13 million of interest income. For cash taxes, we are projecting to be in a refund position of roughly $15 million. And as you think about our share count for 2024, our basic share count as of the end of 2023 was $152 million and we typically have roughly $15 million of diluted shares inclusive of the 14 million share dilution from the converts.

And with that, I’ll turn it back to Jay.

Jay Snowden: All right. Thanks, Felicia. As you saw in our release, we’re continuing to expand on our corporate social responsibility efforts. As we look back on the year, I’m very proud of the continued growth of our diversity, equity and inclusion initiatives which are deservedly gaining a lot of attention Newsweek named PENN, one of America’s greatest workplaces for diversity. And Forbes named us for the third straight year as one of America’s best employers for diversity. Time Magazine went so far as to name us one of the world’s best companies for 2023. Meanwhile, on the community front, we provided more than $7 million in support to local charities and veterans focused organizations and more than $17 million in economic development grants in 2023, in addition to the more than 8,000 volunteer hours from our team members to help those in need.

And on the environmental side, we completed our inaugural Scope 3 Greenhouse Gas inventory and established carbon abatement targets for 2024 and beyond. You can read more about these — all of these initiatives in our 2023 CSR report which is scheduled to be published in April in conjunction with our proxy filing. In closing, we’re continuing to see a stable consumer environment and healthy operating trends in our retail businesses. And on the digital side, I want to reiterate that our partnership with ESPN is not your typical media sports book commercial agreement. Ours is an exclusive strategic long-term alliance that, as I mentioned, has the potential to deliver unique products, experiences and integrations that are unmatched. And of course, with that will come attractive returns for our shareholders.

We had 3 primary goals with ESPN BET for the first several months post launch. Number one, execute on a successful launch, both in terms of top-of-funnel demand and app stability, competitiveness and performance. Number two, grow the market, given the strong brand equity and reach of ESPN along with the media integrations. And number three, provide a differentiated experience and value proposition to ensure lasting relationships and product retention. So far, we’re off to a great start on all 3 and have built a tremendous foundation for our upcoming launches in New York, North Carolina and beyond. So with that, Frank, we’ll open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Joe Greff with JPMorgan.

Joe Greff: Jay, I have two questions, not surprisingly, on Interactive. First, maybe an easier one. Can you talk about the search for leading interactive and maybe why one hasn’t been announced because I don’t think the Levy is leaving and the timing was all that surprising. Maybe what was surprising was that there wasn’t someone named to head it upon their news that they were planning to depart. And then a second question, I mean, it looks like right now, your share maybe in January is sort of in the 7% range. I know the goal is to grow beyond 710 [ph] and higher. But if we look at 2 years from now and OSB and I casino, it will be 25%, 30% higher in 2 years than what it is run rating presently. If you’re at a 7% market share level 2 years from now, obviously, a bigger market, can your digital business be EBITDA positive?

And if you can share with us how you think of profitability, bigger market, 7% share, what that margin range would be? I think that would be hopeful looking at things kind of a couple of years out versus the investment that people are focusing on this morning.

Jay Snowden: Good questions, Joe. And starting off with the search for the new Head of Interactive. Look, we’ve been working with the Levy’s per month really throughout fourth quarter of 2024 and thinking through, we have a very deep bench at PENN and who can step up as they exit within the team and we feel like we’ve got some great answers to that question. We actually spent a lot of time in Toronto a couple of weeks ago and we’ve got such a deep bench on the engineering side and on the product side, great marketers in the business. So a lot of this is that we needed the time to make sure that we have a plan in place that by the time the Levy’s depart that people are already communicated to and stepping up. We also started a quiet search in the fourth quarter because we didn’t want this to get out in advance and create uncertainty and we’re very far along in that process.

I can’t comment on exactly where we are but you should rest assured that we’re very deep in the process. We’re very close and we’re very excited on the level of talent that we are considering is incredible. And I think the market will see it that way when we announce what we’re doing but I just can’t — I can’t communicate any further on that today. We feel good about the time line with the levies leaving in April that we should have something announced obviously before that and we’re working to have this be a super seamless transition where the new Head of Interactive would be there at that time, maybe a little sooner, maybe a little after but not have a gap in leadership. So that’s the plan right now and we’ll continue to communicate when we can publicly more about that.

The second part of your question is a good one, the 7% share that we’re seeing currently? And what does that look like a couple of years out? I’ll take a step back for a second because I think there’s as we sit here today and how we’re thinking about the business, we’re 3 months into this ESPN BET post launch. And there’s a lot of positives that you can see in those first 3 months. First, obviously, ESPN and the strength of that brand is on full display. And they’ve been amazing partners. They’ve continued to under promise, over deliver. We think we’re getting something in February. It shows up in December. They give us a lot of extra value add beyond what they’re required to in our $150 million marketing partnership which is great. We saw a really strong app performance and stability.

And we’ve had very good early ratings in the iOS App Store. We launched in 17 states simultaneously, the first time that’s ever been done. And we also just went through our first Super Bowl with tremendous load and we got through their knock on wood because the teams did such an amazing job preparing and we had no hiccups, 100% uptime. So we feel really good about those 2 things. Obviously, we shared in a number of slides that are customer acquisition has been very, very strong. That’s what drove the promo cost being so much higher than we anticipated with over 1 million downloads and deposits and betters in the first 2 months, we thought it would take us a year to get to that. that speaks to very, very efficient customer acquisition costs in those first 2 months, something that we never could have imagined.

And then, of course, on the retention side, we’re in a great spot. If you look at Slides 7 and 8 in our presentation, you can see that we’re already in a very, very strong position, a very firm number 3 position with regard to weekly active users in online sports betting. And obviously, we’ve picked up significant MAUs in online casino as well. And so what we’re seeing there also is that our cash handle as a percentage of total handle has grown month over month over month from November to December to January which means that people are weaning off of those early promos, they’re dipping into their wallets, making deposits and continuing to play with us. And we’re growing the market. We have a couple of slides on that as well. And I think as we sit here today, the opportunity, of course, is to close the gap of the market share — handle market share that you referenced of 7% and what we’re seeing on our share of weekly active users which is more like double that number.

And so the fact that we’re seeing weekly active users at a very stable level means that we’ve got a lot of people that have downloaded deposited and bet, they like the app. They’re coming back to the app on a regular basis but we just don’t have our fair share of the market yet in terms of how much time they’re spending in the app. But I view that as a positive because we know that our ability to grow our share of wallet and improve the monetization of our users is going to come from 2 things which is product enhancements. We’re very well on our way. We’ve been so busy, as I mentioned in our initial opening comments with launches and migrations that our teams haven’t had the ability to really focus on features and functionality. And now we can because we’ve got most of that behind us.

We get North Carolina launch but we’ve done so many state launches that’s not going to be as time consuming. So we need to enhance our same game parlay offerings, player pops, live betting, in-game betting. And, of course, deeper integrations with ESPN and that’s happening and will continue to happen and more with the ESPN Media app, more with the fantasy app. So that’s what’s in front of us. And we believe that if you can — if we can be a 7% handle market share, in the early days with these things that we know are sort of at first inning or second inning of a game, we feel really good about where those are going to take us over the course of the next 12 months, 18 months, 24 months. So we don’t anticipate that 7% is going to be as good as it gets by any means.

We think that the market share is going to be growing steadily as we continue to make product improvements and add more deep integrations with ESPN. And to your question, if we were to be at 7% a couple of years out, could we be profitable? The answer to that is yes. What we don’t know as we sit here today is how many more states will legalize from a sports betting and online gaming perspective. But you should feel as though 7% and above is a level that we could definitely generate a profit. Obviously, we would want to have our iCasino market share close to those levels as well. So that’s the way that we — as we say here today, that’s the way that we view things after the first 3 months. It’s really early, obviously but the number 1 focus was all the things I mentioned and we’re thrilled to see that retention looks really good after 3 months.

Operator: Our next question comes from Joe Stauff with Susquehanna.

Joseph Stauff: Jay, I wanted to ask about kind of the media integrated offering, especially with ESPN’s media app, the 6-pack link out, I think, was available kind of mid-January. How long do you expect before that really is like a kind of a relevant source of new incremental customers for you — and I know it’s obviously early but in Ontario, I think approximately 72% in terms of what you said, of your customers in real betting in Ontario come from the app? What’s the right way to think about, again, sort of that conversion?

Jay Snowden: Yes. The way we think about it, Joe, is that if we can get the level of integrations between media and sports betting in the U.S. between ESPN and the fantasy app, of course and into ESPN BET that we should be able to get those percentages to be about the same here. So we’re on it. There’s really there aren’t disagreements or a lack of alignment between us and ESPN on what those integrations will be. Obviously, we’re looking forward to bet slip integrations. We’re looking forward to fantasy integrations. We think we’ll have a lot of that complete by the time we get to football season. It’s hard to peg today. If it’s all going to be done by September, some of it’s going to be in the fourth quarter. But we feel really good and we have a lot of alignment with ESPN on just how important it is.

I continue to be really impressed at how many resources that they are putting against ESPN BET. This is a big part of a growth opportunity for ESPN and they’re as excited about it as we are. But we should be able to duplicate here in the U.S. with the stats that you’re referencing in Ontario, Joe.

Operator: Our next question comes from Carlo Santarelli with Deutsche Bank.