Rush Street Interactive, Inc. (NYSE:RSI) Q4 2022 Earnings Call Transcript

Rush Street Interactive, Inc. (NYSE:RSI) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good afternoon, and thank you for attending today’s Rush Street Interactive Fourth Quarter and Year End 2022 Earnings Call. My name is Jason, and I’ll be the 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. And now, let’s pass the conference over to our host, Kyle Sauers.

Kyle Sauers: Thank you, operator, and good afternoon. By now, everyone should have access to our fourth quarter 2022 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 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 expected. 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 fourth quarter 2022 earnings release and our investor deck, which is available in the Investors section of the RSI website at rushstreetinteractive.com. With me on the call today, we have Richard Schwartz, Chief Executive Officer, who will first provide some opening remarks and then open the call to questions.

With that, I’ll turn the call over to Richard.

Richard Schwartz: Thanks, Kyle. Good afternoon and welcome to our fourth quarter and year-end 2022 earnings call. Last year was a terrific year having made great strides towards our long-term objective of building a sustainable profitable business. We are well positioned as we enter 2023 to continue striking the right balance between topline growth and delivering on our profitability goals, while also continuing to balance investments between online casino and online sports-book. Specifically, during 2022, we grew our topline by 21% year-over-year and did so while maintaining our disciplined approach to investing in customer acquisition and retention. We launched our platform into five new jurisdictions, including Ontario, Mexico, New York, Maryland and Louisiana.

During the fourth quarter, we’ve maintained one of the leading monthly revenue per user rates of $327, while achieving growth of 22% in our monthly active users. We made significant improvements in our proprietary technology and platform, particularly in our online betting user interface, features and functionalities where we’ve been recognized as having one of the leading products in the industry. And we ended the year in a strong cash position with $180 million of unrestricted cash on the balance sheet and no debt. We believe this leaves us more than fully funded to reach sustained profitability. We finished 2022 with record revenues of $590 million. For those who have followed us over time, you will appreciate that our top-line growth is not growth at all costs rather it is purpose-driven as a result reflect our demonstrated ability to acquire and retain customers at sensible investment levels.

We lead with a product offering that offers a best-in-class user experience designed to engage and delight players by delivering friendly, fun and fair betting experiences. When evaluating our results, we see the combination of solid revenue growth plus disciplined marketing spend, improving gross margins and modest growth in corporate G&A costs. We remain firmly on our path moving closer to profitability. As we’ve stated on prior calls, we expect to achieve positive adjusted EBITDA for the back half of 2023. Kyle will provide further details, but we initiated 2023 full year revenue guidance in the range of $630 million and $700 million. With that, I want to provide some thoughts on our markets. In aggregate, across our US markets, we continue to see solid revenue growth, strong volumes continue for online casino and sports betting in the markets where we are alive with both.

In fact, in our Latin American and new North American markets launched after 2020, we saw 95% revenue growth during the year. This demonstrated our ability to grow nicely in new markets where, at the time of launch, we have no existing player databases and limited brand awareness. In our newest sports only states of Maryland and Ohio, we have evolved our approach and invested less in early marketing initiatives relative to our previous sports-only market launches. We expect this level of investment to be reflected in our market share, but we also expect faster recovery of our initial investment in these market launches. Internationally, our current results continue to be anchored by Columbia where revenue continues to expand at very substantial growth rates year-over-year.

In the fourth quarter, on a year-over-year basis, Colombia grew a remarkable 89% in Colombian pesos, which amounts to 53% growth in our reported US dollars. Also during the fourth quarter, we announced the opening of new offices in Bogota and Medellin to support the expansion of our Latin American presence. In Bogota, we opened a new location to serve as the headquarters for our Latin American operations team, while in Medellin, we expanded our technology hub to house a team of areas top tech talent to support our global technology platform and maintain our healthy roadmap of product development. Moving to Ontario. We remain pleased with our progress and performance. Ontario is, obviously, a competitive market with an additional 26 sites either launching or transitioning to regulated during the fourth quarter, up over 60% from the end of the third quarter.

However, our strength in online casino is certainly helping us very much early days. continuing to grow nicely evidenced by sequential growth of almost 30% during the fourth quarter as we continue in ramp-up mode. In a rapidly expanding market to transitioning operators, our market share remains the mid-single digits for online casino and low-single digits for online sports book. Turning to Mexico, we remain very deliberate and measured in our ramp. The focus continues to be on building the foundation that will support stable long-term growth and profitability. We are continuing to work with and leverage our media partner to build brand awareness and further localize our platform and user experience. As we have said prior, we expect to see a more significant contribution from Mexico beginning towards the back half of this year.

That said, we are pleased with the foundation we have established thus far. Looking forward, there are more conversations across our industry about online casino legislation than we’ve ever before witnessed. In fact, our count is that five online casino bills have been introduced already this year. Regardless of the outcomes, this demonstrates a greater legislative effort being made in this area. As we have mentioned prior, the facts are straightforward. The online casino market and even the online flat market by itself has the potential to be significantly larger than the sports betting market. But more importantly, it could benefit RSI in an outsized way given that we often earn three to five times the market share in online casino compared to sports betting in those same states.

On the marketing front, we increased spend heading into the winter months, specifically in our casino markets. We also increased spend in New Jersey, specifically supporting our rebranding of BetRivers in the states. I remind investors that we have previously pulled back spend there in anticipation of the rebrand. For the full year, marketing spend was down about 140 basis points compared to last year when measured as a percentage of net revenue. And this is with an investment-heavy first quarter of this year. If we were to look at marketing spend as a percentage of net revenue over the last three quarters, we’ve seen an improvement of 560 basis points year-over-year. Looking forward, we remain disciplined in our approach. We see this in our results.

Marketing efficiency as measured by our cost to acquire players improved by one-third in the second half compared to the same period last year. We are data-driven and focused on what we get for the spend. We continue to focus on earning and retaining customer loyalty by treating them well, being thoughtful and by leveraging our development expertise to create seamless experiences and reduce friction at every possible touch point. We will remain efficient in both existing and any new markets we enter. We have built our platform and culture around this operating philosophy and we believe it is imperative to achieving sustained long-term profitability. Turning to product and innovation. Our teams have made tremendous progress once again this quarter.

Many of the improvements we make each quarter are building on efficiencies and making the user experience more seamless. Things like player onboarding and payment options and speed, areas where we’ve been leaders in the industry, but we also continue to innovate and bring new features to market. Our casino lobby now supports custom lobby layouts for different player segments. This allows us to provide a more personalized experience and create the games and banners displayed in the lobby according to players’ game preferences and lobby usage behavior. We’ve also introduced machine learning to further advance our recommendation engines to improve the lobby experience for our players and get them to the games that’ll excite them and improve their entertainment experience.

In sports, our single-game parlay product is dramatically better and we significantly improved the merchandising of our parlay products to put options front and center for our players and offer a chance for larger payouts. These efforts have translated nicely as a percentage of single-game parlay bets this NFL season increased by 30%. On our last call, we previewed a new feature that was soon to be released, our proprietary squares game, something that came to what you all likely to participate in Super Bowl parties. This new fully integrated feature allows us to offer free randomized squares to our players for games they bet on and to boost the size of the winnings based on betting criteria we can configure each promotion. In the case of NFL games, casino game partly wages trigger the boost the payouts.

Squares has been tremendously well received, subsequently to launching squares, which was partway through the football season, 25% of football betters who had never played the parlay itself. Our average bet size in football is up 10% and we saw strong reactivation activity. On the heels of this success, the squares innovation has been transitioned to basketball, where we just launched a functionality for NBA games. With that, I’ll turn the call over to Kyle.

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Kyle Sauers: Thanks, Richard. Fourth quarter revenue was $165.5 million, up 27% year-over-year and up 12% quarter-over-quarter. Full year 2022 revenue was $592.2 million, up 21% year-over-year. This marks our 15th consecutive quarter of revenue growth. For the full year, we experienced solid revenue growth in all of our markets, except for one of our smaller US states. As a result, we grew nicely in both online casino and online sports during the year. We continue to see positive signs in our player acquisition and retention as measured through monthly active users. Fourth quarter North American miles were 149,000, up 22% year-over-year. The increase reflects our successful efforts in player acquisition and retention across online casino and sports betting, plus the addition of new jurisdictions compared to the same period last year.

In terms of player engagement and monetization, average revenue per monthly active user was $327 during the fourth quarter, which is stable compared to the same period last year. We remain very pleased with our healthy art mouths as we continue to attract and retain high-quality players to the platform. As a reminder, the new states we launched last year required various levels of investment during 2022. However, we’re beginning to see some benefits. As Richard touched on, we continue to target adjusted EBITDA profitability for the second half of this year. Our fourth quarter adjusted EBITDA loss was $17.3 million, which is a 45% improvement from the fourth quarter last year. For the year, our EBITDA loss was $91.8 million, which is an increase over 2021, primarily due to the new market investments we made in the 11 markets that launched during 2021 and 2022.

In fact, those 2021 and 2022 vintage launches accounted for about $80 million of our $92 million loss during this past year. As these markets mature and build, our marketing expenses come down and our margins improve. Our anticipation is that these 11 market launches in aggregate will be contribution positive for 2023. Advertising and promotions expense was $63.2 million for the fourth quarter, down slightly from last year’s fourth quarter. As we previewed on our last call, our marketing spend for the fourth quarter was up sequentially from the third quarter. That being said, we expect this figure to go lower over the coming quarters as we move closer to adjusted EBITDA profitability. For 2023, marketing costs should be lower than 2022 both as a percentage of revenue and in absolute dollars.

We expect to spend more during the first half than the second half as a result of the recent launches in Mexico, Maryland and Ohio and Ontario market that is still less than a year old and the rebranding efforts in New Jersey that Richard mentioned earlier. We remain committed to spending rational amounts to acquire players, monitoring the value of those players and the channels through which we acquire them, investing more when we see solid returns and reducing or eliminating marketing where it doesn’t make economic sense. Gross margins improved sequentially, again in the fourth quarter and ended the year at 30.1%. Gross margins should improve again in 2023 where we expect to see a full year benefit of several 100 basis points. G&A costs increased slightly in the fourth quarter to $13.3 million, up from $12.7 million in the third quarter.

We continue to make prudent investments in the growth of corporate and our technology and product teams. So we expect G&A to continue to grow modestly over the coming quarters. Our balance sheet remains pristine. And as Richard highlighted, we believe we’re fully funded to profitability. We ended the year with $180 million in unrestricted cash and no debt. We’ve initiated full year revenue guidance for 2023. We currently expect revenue to be between $630 million and $700 million. As a reminder, our guidance includes only those markets that are live as of today. We continue to execute well on our growth strategy, while managing our costs appropriately. We have a strong balance sheet, no debt and a strong position in our new and existing markets.

As such, we have the flexibility to make investments where we can generate the best possible returns for our shareholders and reducing or eliminating initiatives where we don’t see solid returns. All this gives us a continued clear path to profitability. With that, operator, please open the line for questions.

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Q&A Session

Operator: Our first question is from Chad Beynon with Macquarie. Your line is now open.

Unidentified Participant: Hi, good evening. This is Sam on for Chad. Thanks for taking my questions. First question, I wanted to touch on the World Cup and what you guys saw in Latin America as it relates to customer engagement, acquisitions and how it played out relative to your expectations? And if there is any major differences with what you saw in North America during that same time period?

Richard Schwartz: Sure, Sam. Hey, this is Richard. Yes, as you could imagine, the impact for our business was much stronger in Latin America, particularly Columbia where the interest in the sport of soccer was tremendous. It was a great opportunity for us to acquire a large number of new players and engage existing customers and it was a very successful World Cup for us. We feel we’re running on all cylinders in the Colombian market. And in fact, we would say that the quality of the customers were strong and everything about it was a real positive experience. I think I just want to caution, we have once before that in — during the World Cup, the rest of the soccer leagues take a break for several weeks or multiple weeks and that does impact also — has an impact on some of the revenues, because you’re not having the same schedule you normally would have.

Having said that the strength and the growth of the World Cup does make up that difference. So overall, it’s as a real positive for us in that business in that market. In the US, it was a lesser impact for us, but still positive.

Unidentified Participant: Okay. Awesome. Thank you for that. As a follow-up just wanted to touch on hold generally for both iGaming and sports. Wondering how much of an impact it had on your quarter, positive or negative. And if you see hold as a potential upside opportunity for the business over the next couple of years, as it relates to single game parlay for sports and just sort of how you’re thinking about it long-term and balancing customer retention and so forth?

Kyle Sauers : Yes, I’ll take the first part. Just on the specific impact or really lack thereof in Q4 and then maybe, Richard will weigh in on longer term and strategies and player experience. But as I alluded to, we really didn’t have much of an impact, positive or negative, from hold in Q4 either casino or sports, they both fell into the range of possibilities that we expect when we’re doing our planning and when we offer guidance. So nothing really exciting to share there.

Richard Schwartz: In terms of the long-term goal, there is always an opportunity to look at margin opportunities for improvement. I think we’ve always been very clear though that we think this limits to how aggressive you want to be with some customers. Certainly, we value the long-term value of the customer and retention for years, not months. And we do think that experience brings awareness for some customers. And if you’re too aggressive towards the setting of the margins that you end up having a shorter lifecycle with you is actually diminishes that amount of profits from those customers. So I think it’s an item to balance, we look at it very carefully and it’s a subject that we often talk about and there are opportunities certainly to increase some betting on some higher margin sports products, in particular, the parlay — the single game parlay is something that we focus a lot of energy on.

And we’re starting to see some positive results in that area from our efforts

Unidentified Participant: Awesome. Thanks for the color.

Operator: Our next question is from Jed Kelley with Oppenheimer. Your line is now open

Jed Kelley : Hey, great. Thanks for taking my question. Just circling back to online or iCasino, could you give us an update on the legislative — potential legislative. I think New York is having like a potential meeting in Midwest. So could we get an update on that? And then just going into your Latin American growth strategy. Can you just give us an update on how your share gains are progressing in Mexico relative to competitors? Thank you.