MGM Resorts International (MGM) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thanks for joining the Strategic Decisions Conference at Bernstein with MGM Resorts. Today with us, we have Bill Hornbuckle, President and CEO of MGM; along with Jonathan Halkyard, the CFO, who recently joined the company; and Jim Freeman, SVP of Capital Markets and Strategy. Gentlemen, thanks for being with us this morning.

Good morning, Vitaly. Thank you for inviting us.

So why don't we just jump into Q&A. Bill, maybe just some high-level questions maybe directed at you. I think the previous strategy of MGM, I think, was one of kind of recycling lower return capital and then investing it in higher return assets. And then the MGM 2020 cost cutting plan, which is a central focus of altering the company. Now with kind of the MGM 2020 Plan largely in place, the assets, bricks-and-mortar casino assets largely sold off to the REIT in the U.S. How would you summarize MGM's future strategy from here?

Look, it did start, as you know, a few years back with the real estate strategy. And so we continue to drive asset-light. We have continued, particularly through the pandemic, and part of this was instinctual when we got going here, to really be focused, to be disciplined about how we're operating. And so to take full advantage of the things we have put in play in 2020 and beyond, no crisis should go without some opportunity in it. And we took advantage, if you will, of the opportunity to kind of rethink, restructure the company, to make sure we could not only deliver on 2020, but we have a stated goal of another $450 million in opportunity we think we'll be realized as we come out of this thing. I think everyone is seeing the velocity of which we've come out. The second quarter has been amazing. And I think there's some steam left to this thing that will continue on. Overall, what the strategy has done is put us through an amazing liquidity position. We still have a little bit of work to do with real estate. We potentially have opportunities with our CityCenter project and our property and our ownership there. But as we come out of it, I think we think about how do we diversify the company? Where do we go? How do we balance our revenue, whether it's Asia, digital or here, so that we have a little less reliance on what happens here and potentially more reliance on the digital opportunity, both domestically and internationally through BetMGM. And ultimately, in Asia, getting -- re-going again in Cotai, and in Macau, to the extent that where we left off and subsequently, Japan in a future date. But it's been about balance. It's been about diversification. We're operators by nature, fundamentally. And so we're keenly focused on driving this thing back to the full recovery. I think instinctively, we know where everything is and what to do. We've had -- with Jonathan's addition to the team, I think we've balanced ourselves out. We've got Corey Sanders back as Chief Operating Officer. And so we feel really good about the immediate future. I think longer term, the liquidity we've been able to create, principally through, obviously, the real estate deals, puts us in a great position to think more opportunistically in the next year or so about what to do next. Jonathan, I don't know if you want to put any more color to that?

I would add a couple of comments. One is that it certainly advantaged the company that we had completed the real estate transactions we did in late 2019 and early 2020 so that the company was able to weather this crisis and emerged, I think, in many ways, stronger than it entered it. Bill mentioned the improvements to the cost structure that have taken place. Those have been further augmented by improvements we've discovered during the pandemic and are carrying into the recovery right now. And as it relates to the company's liquidity, we certainly -- we ultimately look at the return of that capital to shareholders as the case we need to beat. And we began with share repurchases in the first quarter. Those continued into the second quarter, and that will be a part of our plan going forward, to return that capital to our shareholders as we move through this asset-light strategy.

Great. So maybe jumping into kind of the different business segments. Maybe starting with sports betting, iGaming, which is, right now, obviously, the hottest area of focus for, I think, for MGM, but also for the entire industry. Several questions, I think, constantly come up. I think one is with respect to the addressable market. And you guys had a very in-depth presentation on BetMGM a few months back, which is very helpful. One of the questions I keep getting is the confidence level around the addressable market. And you guys have come up with some estimates of $32 billion market, which incorporates iGaming, sports in the U.S. and then a $4.5 billion market in Canada. What is your confidence level around that addressable market? And where do you think the upside or the downside risk may be on the scale of that market?

Look, I think in the long term, Vitaly, we're very confident. I think the real question will be timing and how quickly we get there. We had said during Investor Day, which I hope many of you had the opportunity to view. If not, you can go back and see it online through our site. All that being said, $32 million (sic) [ $32 billion ] is based on the fundamental idea that 200 million people would be sports betting. And about 100 million people, or about 35% of the population, ultimately, will have access to iGaming. We're halfway there almost already, particularly as it relates to sports betting. And iGaming has got some more work to do. But the real value to this business and the economic opportunity is in iGaming. Sports betting is going to create and has created a great deal of momentum. There's a great deal of customer interaction, both between our M life database and what we've seen materialize in brick-and-mortar. And so we know there's long-term value in all of that. But I think iGaming becomes the economic secret to this business. We're in 5 states. We're in all of them. I think you've seen what we've been able to accomplish. We're 1, 2 or 3 in any of those given states. We lead the way in iGaming. And I think Michigan has become that example. With the idea of an omnichannel product where you have retail, online, combined with a loyalty program, enables you to really get some synergy going and get some momentum going. And they're keys to all of this. Being first to market is a big key. Obviously, ultimately, product and UX experience is critical to customers. But I would say with great confidence that the 200 million and 100 million are achievable on that. Right now, we're in 13 states. We've got eyes on 20 within the next year, and we have access into 24. And so -- and the bigger ones. Give or take, obviously, California and Texas are yet to be determined. We've all seen what's happened now in Florida with the Seminoles. And so there's going to be an opportunity for some there. We all know what's happening in New York. And so it will continue to open up. And I think the opportunity to get to those numbers is very real.

And I tend to agree with you that the iGaming opportunity in terms of profitability is definitely much, much, much better. I guess one of the concerns around iGaming is if we look at legalization pathway so far, we've had over 25 states legalizing some form of sports betting. Not all of it online, but some form, and it will probably be more robust. But on the iGaming front, as you mentioned, you're in 5 states, those are the states that have legalized. There may be one around the corner. How do investors, I guess, get comfortable with kind of the legalization pathway for iGaming? Is it just lagging the sports betting? Is it just legislatures need to get more comfortable with what iGaming actually is? Or is there something else that's going to either propel it or create a hindrance?

No. No, I think your first commentary is the appropriate one. I'm getting more comfortable -- second, we think about how all this is emerged. You had PASPA. Ultimately, you're now looking at a couple of dozen states that have sports betting. iGaming is one more step in all of this progression, if you will, and ultimately, the integration. We have seen states like New Jersey, obviously, Illinois is up for consideration. Michigan, where once you're in the business, once you get confidence around the business' ability to control responsible gaming and other social issues that come up, you gain that confidence. And you're more excited to continue to go and to progress. And so it will take time. Like all of these things, it will take education to understand, particularly from an automated perspective, the types of things that are in play from a responsible gaming perspective. And there are many that can be done and put into play. But it's more about education than anything else. And it's a process. No one is going to go from nothing. I'll use Tennessee as an example, to the brick-and-mortar all the way to iGaming. It's going to be a journey in every state. Every state has a little different backdrop, a little different story. So it's not for the weak of heart. And it's not for the short of wallet. But ultimately, it continues to grow. We've seen what's happened internationally in this space. And while there's always dialogue around it, it continues to grow in a meaningful way.

Great. And just I forgot to mention this upfront. Investors are on the call. If you have questions you'd like addressed, on the right side of your screen, you should see a link which will allow you to see kind of questions that some investors are posing. Vote on those questions and also post your own, and we'll try to get to some of these. Many of them will probably overlap with what we're going to discuss anyway. But if you have questions, please feel free to post them. Just jumping back on to sports betting. I think if we think about the long-term, kind of, structure of the market, right now, we have kind of the big 3 operators. We have FanDuel, DraftKings, BetMGM that seem to be the dominant operators in that first tier. The second tier has a couple of other operators that are more national. And then we drop off. But there's still a wide assortment of operators in this industry. The industry is not yet that concentrated. How do you see the evolution of this market over the next decade, let's say, both on iGaming and sports betting? Is it still going to remain kind of a very robust market with many participants with kind of the 3 operators at the top? Or do you see much greater concentration developing in this market?

I would say much greater concentration. Look, the investment into this space is not against them all. It will take us 3 years, I think, to ultimately generate EBITDA and cash flow. The CPAs are in the $400 range. We have an advantage, given M life, given, I think, ultimately, the universe of people we can generate through MGM Resorts and the idea of an ecosystem that brings our CPA down. But all that being said, it's hundreds of millions. And the other thing that's been pretty -- in Michigan, I think, is an example, place like Tennessee, where we gained great share. Being first to market is a big deal. And so we saw it in New Jersey, where we were not. Where to this day, we continue -- although we've gained massive share, particularly in iGaming. We now own the majority stake. I want to say majority but leading stake. Being first to market is critical. So if you're just getting going, it's going to be a long battle and a long trudge. I see it much like the telecom industry. I think there'll be 4, maybe 5 key operatives. And then I think there'll be some real consolidation in between. You've obviously seen some of the media companies try to step in, whether it's ESPN or others, get into the space in some way, shape or form. I think that will continue. I have -- I think maybe a little different view on some of that than others. I mean, sports betting is still done on a device in your hand, not on the television screen. And so the cost of access and the cost of opportunity with some of those things, again, will keep folks out. But not for lack of trying. It's probably 15 operators now in the U.S., give or take, depending on the market you want to look at. But I think that gets down to a half a dozen. And there'll probably be 3 or 4 that are truly succeeding in the space, and the balance will ultimately get -- disappear or get gobbled up.

And you mentioned M life, which is obviously an important competitive advantage. The 2 other operators of scale that are out there that have kind of, I guess, a similar loyalty program of scale would be Penn and Caesars. How do you view the importance of that M life database with respect to BetMGM? What kind of -- and you touched on this in the investor call as well, but what kind of conversion are you getting? How important is that aspect of your strategy?

So in the last year, 18% of BetMGM sign-ups have come through M life. And interestingly, inverted, 44% of M life's new customers have come through BetMGM. And so the idea of this ecosystem, where once we get beyond -- obviously, in the fantasy sports world, the male-dominated, young male, and we get into broadening the base, we get into iGaming, we get into different demographics. The simple idea, and we've seen it in social gaming for now several years with PLAYSTUDIOS, where, although small in context of some of the competitive set, will drive over 1,000 rooms a night if we choose to open up that channel through social gaming, to our properties. That's a meaningful piece of business. That same thing is beginning to happen through BetMGM. And so the idea of that ecosystem is massive at scale. I think it opens up to a broader market play, particularly as the market goes beyond just the demographic, I mentioned for fantasy, and opens up to iGaming, opens up to the notion and the reality that I can engage with the company 365 days a year, if I choose to. I can come to a brick-and-mortar environment, 10 times a year, 3 times a year in Vegas, be recognized, be rewarded and have a holistic experience, whether it's iGaming or around sports. I can come see a Raider game, I can come see a hockey game, hopefully someday, I can come see an NBA game. There's just a lot of opportunity to bring those synergies together. And the cost of acquisition is just that much lower. We've seen it in Michigan already, where our CPA is substantively lower. And so we think it's all in the long term, a competitive advantage. And we think just the product idea is really where the advantage rely as the market continues to expand. You start approaching the next 100 million sports betters. It's not all going to be about the guys who -- the afficionados who know, it's going to be about people who want a casual sports experience tied to an entertainment experience, which is called a place like Las Vegas. And so we think there's substantive advantage in that in the long run. But again, we've seen it play out in very real terms with PLAYSTUDIOS.

And one of the concerns I think investors have around this industry to date so far has been the level of promotional expense, marketing expense and the hard dollar cost, but also promotional expense, where while revenues seem to accelerate, there's also a considerable acceleration of promotional expense and free play, et cetera. How does that evolve over time? Obviously, it likely will come down, but how does that evolve over time? Are we just in this early stage? And then the way to think about it is every time you enter a market, you start at a very high base, you acquire the customers, customers are sticky. And then you're able to tone down your marketing expenditure. And how long does it take to kind of get to a more of a steady state?

Great question. So what we have begun to see and what we believe, and we've ramped all this, in sports betting, it's anywhere from 20 to 22 months, give or take. We think the average acquisition cost of a customer will come down over time. It's -- we're sure we think maybe 20% to 25% of them stick at the end of it. They'll average about, on sports betting, about $90 a year. We think in iGaming, about $160 a year. And so if you start doing the TAMs on that, that's where some of these numbers and the $30 billion come from. And we have tracked to begun to see that very clearly in more mature markets. Now it is still early days. But I think what's important is it is tracking in that direction. I believe you have to be disciplined. The idea that we're all going to go out and do massive sponsorship, massive media deals, over time, that will take its toll on the business if you're not disciplined. And so for example, we are not a national advertiser. We advertise in those markets that we have product, where others potentially are. At some point, we may make critical mass where that makes sense. But for today, it does not. And so it's just about how you think about your business, how you truly want to interact and how quickly you want to get to profitability. In our case, we think that MGM late '23, early '24 goes profitable, and then we begin to see a growth from there.

When we look at some of these states that have legalized or in the process of legalizing, some of the bigger ones, New York, Florida, have gone down the path of having either a monopoly-type operation or a very high tax rate operation. Do you have concerns that as more and more states come in and they evaluate what other states have done, that we trend more towards kind of a suboptimal market in some of these states, and some of the -- especially the bigger states that everyone is hoping will come online?

Look, well, obviously, it's a concern, I'd be ignorant to say otherwise. For every New York, there's an Arizona, where the tax bracket, the opportunity with tribal or not, is such that it's meaningful. And so it's going to be where we make our mark. In a place like New York, independent of where this ultimately ends up, obviously, the tax is, in essence, being bid through a consortium or a platform that we put together with, hopefully, other participants. Beyond, there is a concern. To think, though, particularly if you can get iGaming operative in an environment. But to think that, that ecosystem of customers, particularly in our scenario, we have an advantage of understanding folks in Arizona and getting to come to a place like Las Vegas, it's more about creating a larger scale ecosystem. But yes, do we have a concern that the lottery -- which you've seen, and you've seen it in Rhode Island, you've seen it manifest itself in a couple of the states that went down to 50% lottery. That market, their market share, their per cap, per population numbers are subpar, very subpar, where versus you have an open and freeing scale market that has a reasonable tax and a reasonable opportunity to promote, it's just been net beneficial to the states. They've just made more money. It's our job to convince them of that, to show that to them. And ultimately to prove that out. But it's not without its complications, just to be fair to your question.

And then the other question around risks is around the bricks-and-mortar business in the regions, in particular, where you have -- where you will have iGaming. Obviously, we've been in the COVID environment for the last 15 months, and things are getting back to normal. So maybe there isn't clear exact data. But what is the risk or the concern around cannibalization of bricks-and-mortar from iGaming?

I have zero. I have zero. I've heard this argument all the way back to Riverboats. I've been around long enough to know Riverboats and everything else in between, about regional casinos, et cetera. And having always been and based in Las Vegas, having always been an operator of these large-scale resorts. It continues to grow every single year by and large, if you look at it in the last 20 years in macro. I think there's an opportunity and a scale and a tool to introduce and get more customers engaged at a different level. Give you a good example. In M life, we stuck our in-house of the IP host after customers, which should help us get your best customers into BetMGM through M life. We've done, in the last quarter, 550 new customers, average in each customer is over [ $10,000 ]. Average. And so the opportunity to tie all of this out into grow share and grow market and to introduce product on an extended basis I think far outweighs potentially any risk you have. And other than Las Vegas, which on to itself, if you think about our company, particularly, it's not -- it's too many people. It's not a large internet gaming market here. And in every other place, we have one property. And so when we look at Michigan, where we have done this, it's been accretive on both sides. Now it's early days. It's, to your point, in the middle of a pandemic. So who knows where this all balances out. But I will just say, over and over, history has proven, to the extent we have access, data and the opportunity to promote product and people, we win. And I think this example will be no different.

And then maybe one more -- one final one on kind of the digital business. You operate -- BetMGM is a joint venture with you and Entain. I won't get into the M&A aspects of this because you probably can't talk about it anyway. But when we look at the other operators, the bigger operators in the U.S., they're all kind of unitary operators. They don't have partners. They have the tech stack and they might outsource some of the technology, but they're operating the business themselves. BetMGM is a joint venture. How do you view kind of the positives but also the drawbacks of having that type of structure in this market?

The positives are pretty straightforward. It brought a great leadership team who understood the space, and go back to one of your core questions, will this business ever make money? They've proven they'd do $1 billion in cash flow, give or take this year. They know how to make money in this space, both through sports betting and iGaming. They came with great content. What drives part of this is that in the casino space, they have -- they have 600 games that they can offer up. We generally have anywhere up to 300 games on site. 200 of them, people would recognize, they understand the industry, from ITT and other places. And 200 of those games, people would not. They're in-house products that provide great value because there's no licensing fees. And so for us, they came with great management, they came with great user experience. They came with great inventory. They have a very good technology stack, e-commerce environment, and we continue to improve upon that. There's 2,500 people-plus in [ Hyderabad ] that are fully focused on the U.S. opportunity right now, so in terms of user experience. And if you think about what we did, we created a European-based user experience, and we've converted it under now 3 different layers and 3 different opportunities as you go in time into what's become a really good user experience for U.S. sports. When -- in the early days, we struggled with -- we're betting on soccer and then format the environment, how opportunities presented. We're trying to use that same format. We've now migrated all of that to U.S.-facing products, sports and ideas. And so they come with all of that, and we're excited by that. Getting things to the market has been quick. We struggled in the beginning. I think the first year was a bit of a struggle between understanding regulatory, understanding what needed to be done and submitted in places like New Jersey was a bit of a push, but we figured it out. And I think as soon as we did, you began to see us about a year ago gain real share. And we're continuing to gain that share. And so it's because of their speed to market, I think because of their management team, the expertise that they bring. Obviously, on the other side, it's 50%. We don't own the whole thing. And so we're not crazy about that idea. I'm not looking to give up more. I'm looking to get more. I think the first opportunity that we presented and provide for ourselves is talking to them about going into Canada. That wasn't part of the original intent. It was U.S.-based. Now it's North America. And I'm going to continue to try to expand upon what opportunities BetMGM can have, both singularly and potentially through other vehicles that we might come up with. But overall, the strategy to come up with a large-scale product that, by the way, will help markets. The folks you mentioned who use other people's technology generally pay between 10% and 12%. We don't. When this all settles in, we have margins that exceed 30%, hopefully, it will be partially because of that. And so that's interesting and exciting to us, and it makes the business more sustainable. And while I'd love to own the whole thing, I do own the other part of this equation, which is the total universe of brick-and-mortar and getting people into those environments. And so that's as compelling to us, and frankly, if not more so in the long run.

Great. Thanks, Bill. Why don't we switch gears and talk about the bricks-and-mortar business, Vegas and kind of the U.S. regionals. Obviously, there's been a tremendous pickup in activity, both on the regional front and particularly in Las Vegas over the last few months. I'm going out to Las Vegas next week. The Bellagio room rates where I'm going to be staying are much higher than I had anticipated. Occupancy levels...

Should we call Jonathan?

Pretty full, yes. And so it looks like Vegas is -- maybe not back fully yet, but it's definitely there, especially on the leisure traveler side. What are the current trends? What are some data points that you can maybe point to that are more recent in nature with respect to both Vegas and the regional casino businesses?