PENN Entertainment, Inc. (PENN) Earnings Call Transcript & Summary

All right. Good morning, everybody. Next up on the panel is the CEO of PENN Entertainment, Jay Snowden.

I think what we've been doing, Jay, and it's been instructive for people of varying levels of knowledge of the PENN investment story or investment stories in general is just to focus at the beginning some of your top strategic priorities. And maybe for you, it would be interesting if we can focus on the top strategic initiatives and priorities for you in digital as one bucket, the second bucket in the land-based casinos, and then maybe the third bucket in terms of balance sheet and capital allocation views and then maybe we can dive a little bit deeper into those topics.

Yes, happy to. Maybe start with the land-based business first, just I think -- just given the magnitude.

We could start simple and then get more complex.

Yes, happy to do it that way. So land-based business, I think people know the story pretty well. We've got 40 assets across the country in 20 states and generate around $2 billion of EBITDAR and about $1 billion of EBITDA after rent. That business generates a lot of free cash flow for our company and has been very stable over the course of the last couple of years post COVID. We get that question all the time around stability, has been stable, continues to be stable. January, at the start of this year, there was obviously weather impacted most markets, that's been well documented. But beyond that, it does continue to be stable for us. And in addition to our core business of the portfolio that exists today, we also just broke ground on 4 new growth projects within that retail portfolio, 2 in the state of Illinois, which are actual relocations of our license to much better locations in the cities of Aurora and Joliet. We're very excited about those. We have a hotel that we're building at our Columbus property, which is one of our top-performing properties. We've needed a hotel there since we opened. So there was master lease reasons for why we couldn't do that originally, but we reworked those leases with GLPI, our landlord, and so we broke ground on that hotel. And then we have a new hotel that we're building at the M Resort here in Las Vegas as well that will roughly double the size of the hotel from just under 400 rooms to just under 800 rooms. So those projects, I think, if you're thinking about our core business has been stable from a revenue and EBITDAR and free cash flow standpoint the last couple of years. I think you should expect that to continue in the next couple of years. And then you probably see a bump up in terms of revenue and EBITDAR and free cash flow by virtue of those 4 new projects that will more than offset some of the new supply that's hitting some of our other markets. That's the way to think about the core business. The interactive business, we're really excited about. We just launched with ESPN BET, I think everyone is aware of that, in November. And obviously, we're 3 months in so there's only so much -- 3, 3.5 months in, there's only so much data that we have to share. But the data that we do have access to that we have been sharing, I think, is pretty compelling in that top-of-funnel demand has been very, very strong. Obviously, that's what drove all the promotional expense that hit us in the fourth quarter. We anticipated about 300,000 new users in the first 7 weeks. It turned out to be over 1 million. And we also launched in November -- mid-November and that was the 2 worst hold weeks of the year. So all those promo dollars also happened to be bet on games that turned out really good for the better. So that exacerbated that loss in the fourth quarter as well as hold percentage. If you fast forward into where we are now here in the first quarter, we just launched in North Carolina on Monday with everyone else. Feel really good about that launch. We've done so many of those state launches, went off without a hitch. And it's 3 days so I can't tell you what it's going to look like over the next couple of years, but we feel like it's going to be a top-tier state for us based on users that we're seeing so far in bets.

So North Carolina is interesting for you. Again, a whopping handful of days, but it's interesting in that it's a state where you're launching at the same time as your competitors. Is there any sort of interesting tidbits or observations in this relatively narrow sample size that you would call out relative to launching in markets, particularly with ESPN BET, after your peers that have been sort of maybe more firmly established in those markets?

Yes, again 3 days so not enough time. There's Monday, Tuesday, Wednesday and pre-March Madness, there's not a lot.

Take the best day of the 3, we'll multiply it by 365 and we'll use that as a run rate.

Yes, exactly. So what I would say, though, is that when we launched in November, and I think people sometimes forget this, we launched in 17 states all in the same day. No one had done that before. What we've seen is the results have sort of played out over the last few months is that the states that are newer to online sports betting, where you have customers probably a little less entrenched with habits in terms of which app they use and how much time they spend, we've performed a little bit better than in the states that were maybe older, like in New Jersey, for example, where people have been doing the same thing for the longest period of time. So I would expect that North Carolina probably would look more like the newer states because those are the trends that we've been seeing. It's interesting because -- and I don't know if everybody gets access to this data, I would encourage everybody to, there's third-party data that comes out from Sensor Tower, and it's really interesting because it's well, first off, it's objective. It's not based on what a CEO is going to tell you about things like retention. But it does show you that ESPN BET, really from December to January to February and now even into March, has been remarkably consistent in our weekly active users across the U.S. And if you look at what our market share is of weekly active users, not only has it been stable throughout that December to January to February to early March, but it also shows you that we know we're not in New York, right? So that's a big state that once we're there, that weekly active user number, of course, will continue to grow. But we're running in the mid- to high teens in terms of user share, okay? That's really important because you get these questions of there's these fluctuations right now of handle and revenue share. But we're seeing that of the users that were -- that came through top of funnel, retention has been very good, and this consistency in weekly active users is very encouraging. I'm certainly of the opinion, it's up for debate certainly because we're only 3.5 months into this, but I'm of the opinion that there's no reason to believe that over time, as your product gets better, we knew, and I talked about this before we launched at our investor event at G2E in Las Vegas, the one area that we knew our product wasn't going to be competitive at launch was on the same-game parlays. Well, during football season, that's a big deal. And during Super Bowl, it's a really big deal because there's nothing to bet on other than same-game parlay for an event that there's only 1 game for the entire day. And so not surprisingly, we saw our market share on Super Bowl week dipped down, and we also didn't market aggressively because it was our first Super Bowl with 17 states all on, so load management. But what is great is that right after Super Bowl, it ticked back up again from a weekly active user share perspective. I'm certainly of the opinion that as the product gets better, our internal team of engineers and product development folks, all they're working on right now between now and September is enhancements to our parlay offering, that we know that's the gap right now on the product side of things. And then all the folks at ESPN, our partners, ESPN on the engineering and product side, all they're working on is integration because that's really more on them. The integrations are easy for us. They have to get work done within their media app, within their fantasy app, and Bracketology. There's things that they -- we can't do that. That's on ESPN to get these integrations going faster. So that's their focus, our focus is on product enhancement. I'm of the opinion that when the product is comparable or close to comparable, given the power of the brands and what we've seen on top of funnel and what we see in weekly active users, people are in our app every week, just like they are the top -- the other 2 top players. We're just not getting our fair share of handle and spend per user, okay? We're getting people in the app. They're not spending as much time in the app and they're not spending as much money in the app. That makes sense to me because we know that the product that people want, 60% of bets are on parlays. It's a lot when your product isn't comparable in parlays, that's a big deal. So 30% of handle but 60% of bets on parlays. As we get our product closer to parity by football season, I think that you'll continue to see us chip away at that delta between handle share or revenue share. And by the way, when the parlay product gets better, those 2 should be pretty close to the same, the handle and revenue share. But the difference between that number and our user share should continue to close.

So 2 questions from a bunch of things you said there. Your satisfaction with the level of retention right now, given where the product is, what's driving that sort of better-than-expected retention? And then two, which is probably a more relevant question is, what is the timing for improved same-game parlay product? Obviously, you wanted to get it in front of the NFL season, you called it football season. Do you need to have a period of time where there's some experimentation before you step into a major league where same-game parlays are pretty important?

So we offer them now. We're just -- if you go to our home screen, it's -- the important bets are there, moneyline, over/under, point spread, like you can find the bets that you want. Scoreboard is there, promotional titles are there, and feature bets. Like it's all there. It's just -- it's not merchandised in a way that it needs to be to be competitive. If you go on to our top competitors, they've got pre-populated parlays on a carousel. You swipe right, tells you how many people have bet on that parlay. There's this fear of missing out on 10,000 people. We don't have that capability yet. So it's just inserting those capabilities into that home screen. We'll have a lot of that done by September. So you're going to see a lot of enhancements come in, call it, every 6 weeks, you'll see more enhancements come in. Being able to track the legs on your parlay bets on your mice, on your bet slip, that's launching like any day. So there's enhancements that are going to be coming along between now and September that will have us in a much stronger position from a same-game parlay offering perspective. So that's the goal from internally. Your other question around why are -- why do we believe we're seeing this consistent retention. Our app is -- it is a very good experience. The UI/UX is great and being able to navigate, it just -- it comes up a little short on the more sophisticated parlay betting. And so people are in there, but they're probably betting more of their moneyline wagers, checking out what our features of the day are, bets of the day, what promotions are we running with top talent. But Stephen A. Smith and Scott Van Pelt and Greene and all these guys are putting together their own promotional ideas. We're just scratching the surface of what's to come. But I think those are all the reasons. It is a great app. It's reliable. It's easy to deposit, withdrawal, like there's -- it just needs to become more advanced on the parlays.

One of the things Tom Reeg mentioned this morning and you know, Tom well, is part of -- a big reason of their iCasino success was that they went out and they hired somebody from BetMGM who did a good job there. Where are you in terms of the need to hire personnel that are specific to improving the parlay product? Or is it just all in-house and just listen, this stuff just takes time to ramp and get better?

There's certainly a piece of it that is the second part of what -- we have very talented people internally, engineers and product people. All they've been focused on over the course of the last 2 years is like major milestones, right? We need to go live on our own PAM and Canada, checked that box. That was 2 years ago. Now we got to go live on our own risk and trading platform in Ontario, checked that box. We did that. Okay, now we've got to migrate this whole technology stack down to the U.S. in the summer of '23, checked that box. We go live 17 states in 3 days. Oh, by the way, we're going to launch ESPN BET in November. Okay, so all of that focus has been on sort of table stakes, major milestones. Now we get to do the fun stuff, which is enhancements to the experience. So we have a very talented team. We have our product road map. You don't lay out a product road map for like 1 month at a time, like you're looking at what do we need to do over the next 12 months. So we may have a gap in terms of the leadership transition of a very short period of time but the product road map is laid out. People know what they need to get done between now and September. So there won't be any hiccups there. The profile of the person that we're going to be bringing in to run that part of the organization is somebody who -- by the way, the decision's made, I just can't announce it yet, okay? So the profile of the person is somebody who has a very strong background in building world-class products, digital products and has an engineering background. And their passion is in those areas where they will act as an accelerant to the things that need to get done in the areas of improving the products and the integrations with our partner at ESPN.

Great. And so obviously, if you were going to announce that, you would have announced it already. How are you thinking of the timing of that? And are there sort of product-related deadlines that you need to sort of be mindful of for this person to come and start? If you announce that person tomorrow, would he start 6 months from now? Would he start relative quickly?

I have to be careful on how I answer some of the questions, you could potentially triangulate.

Just feel free and just...

The person has already weighed in on product road map. So again, you're setting that product road map to get people on your engineering and product teams going. That's happening, okay? So the start date is actually a little less important than you would think, but this is all going to be -- you'll be hearing about this soon.

Okay, good enough. The engagement, the activation between ESPN BET and your existing land-based database, how different has that been relative to what was the engagement between that database and Barstool's? Arguably, you would think that there's maybe a significant better engagement activity, just given maybe Barstool is a little bit niche relative to your database, ESPN is much broader to a much better audience relative to that database. Can you talk about that a little bit?

Yes. It's very early, right? That database is being built real time and cross -- the opportunities to cross-sell them into other parts of the business like land-based casino or online casino is starting to happen. What we know about the profile of the ESPN BET better is that, not surprisingly, they're a little older and they also are a little bit, in some cases, more familiar with the casino side of the business versus just sports betting. Those are 2 things that we are seeing. And so we know when we get people who come in through that ESPN BET funnel to visit a property or to engage with us in online casino, that their spend with us goes up, in some cases, exponentially versus what they -- versus betting on a $10 parlay or a $20 parlay. When they visit a casino, that budget can go up to $100 quickly. So we like the early signs of omnichannel and cross-sell. We're just -- it's very, very early innings, as you can appreciate. We just went live in November.

Great. I know when we -- as investors, when we think about the digital business for you, we're so focused on sports betting, on ESPN BET and obviously, that's incredibly important. But you also have, within that business, you have these relatively high-margin market access fees, if you exclude the pass-through tax consequences as well as an iCasino business. Can you talk about those things, particularly, one, on the market access fees, can you talk about maybe how the economics may or may not change as some of those agreements come up for renewal? And then two, on the iCasino side, is that a much more secondary/tertiary set of initiatives versus online sports betting?

I'll hit the second one first just because it is fresher on the mind as you were asking the question. iCasino, I think everybody knows, is going to be a better margin business than online sports betting. It is now. It will be in 2 years and it will be forever. It's a very important piece of the business for us. There's no better way to drive an online casino business than a very robust online sports betting database. Your best opportunity is going to be cross-sell from online sports betting and then cross-sell from, if you have regional casinos, that database as well. So it's really prioritization. What we're missing in iCasino today, our product is actually pretty good. It's not sort of below market. We have the right number of slot offerings. We have digital blackjack. We have live blackjack. We have our own games that we produce as well. The challenge that we have today, and it's just a prioritization issue, is that we don't have a stand-alone iCasino app, okay? So if you're at one of our Hollywood-branded casinos in Pennsylvania or Hollywood, Greektown in Detroit, our messaging to you is download ESPN BET to play slots with us. It's a little messy, right? So understandably, that conversion from land-based database to our iCasino offering isn't where it needs to be yet. We will have a stand-alone iCasino app called Hollywood Casino, I would say, live within the next 12 months. Our goal is to have it live by end of year but maybe it trickles into early Q1. That will be a big deal for us. It's a big priority. But we are prioritizing the online sports betting offering because we have all this great demand. We've got people that are in that app looking at it every day, and we are confident that as we continue to enhance the products, there's going to be more stickiness and better retention. And the better retention you have in OSB, the better you are going to have success or more success you'll have cross-selling over to online casino.

Great. Market access fees?

Yes. So that's -- there's not a lot to talk about there. I mean, when those come up for renewal, it depends on what is the current skin partner looking for? Do they want to have a partner or two and just have all their access done with that company or that partner? Do they want to just go try to wheel and deal for the best price in those markets? They want to renew at maybe slightly better terms -- I mean, those are all things that will play out over time. I think our -- we have several really good partners, DraftKings, BetMGM, Fanatics, we're partnered up with quite a few of them. We have more access than any other gaming operators. So I think we'll be able to put some compelling packages together in front of people.

Great. And then back to sort of the topic of capital allocation and balance sheet. How are you thinking this year in terms of allocating capital and using your balance sheet capacity and free cash flow? And then as you look to '25, presumably, digital will have a significant swing year-over-year in terms of EBITDAR performance. You still have some CapEx related to the 4 projects that will bear fruit in 2026. But you're still left with a balance sheet that has ample liquidity, relatively lower levered. How are you thinking about buybacks and particularly at current valuation share price levels?

Yes. We would love to be able to do both, but the investment in the short term, call it 2024, certainly is in the investment in our interactive business and ESPN BET. We filed a Q after our last earnings -- sorry, it was in the K, actually, right? Felicia, you certainly can speak to this. But we have to go back and -- exactly. There's bank covenants that we had to get waivers, and those waivers preclude you from being able to do everything you want to do during that period of time. That period of time for us is 2024. So we've been active buyers of our own shares in the past. I see us as being active in that on a regular -- sort of regular case. And certainly going forward, that would be part of our capital allocation strategy. But at the moment, that -- our investment is in ESPN BET. And though leverage ticks up, I mean, that's really a matter of -- it's calculated on a TTM basis. We don't have any liquidity concerns. We've got ample cash. We've got an untouched billion-dollar revolver, and we feel like we've got a good handle on what -- we already put out the forecast on interactive guidance for the year. We feel good about that as we sit here today.

Great. And then back to New York, I mean, how do you make that profitable, especially if you're like, I don't want to say between 8% and 15% market share or something like that? Is it -- is the best case scenario there to push in terms of EBITDAR generation, but you need it to support the other parts of the business?

I view it as -- I think breakeven is probably where you're going to be. It's really hard at 51% sports betting, no deductibility for promos to make meaningful money even at scale. We felt it was important to be there because it's a huge state, the largest population of any of the legal states in the U.S. today. It's a database builder for us. Don't lose sight of that. I think that's going to be, over time, our #1 asset is our database, which is growing rapidly right now and all the things that we'll be able to do with that long term, that's a conversation for another day, and it's probably more of an AI conversation. But I also think that New York could be great in that online casino is likely to happen there at some point. And...

Will we be alive by the time that's legalized?

I mean, you and I have been doing this for a long time and trying to handicap decisions, state legislative decisions is challenging. So we'll see. I think breakeven, build up the database and be there at the time when iCasino legislation gets passed, those are all really important things.

And do you see, I don't know, any state, any evidence that online casino, iCasino is cannibalizing the land-based casinos?

We get this question a lot. There's a lot of -- there's been a lot of analysis done that is pretty -- one side of it is adamant...

We got 1 CEO posted a dissertation on LinkedIn. Is that on any kind of regional casinos? But yes, what are your views on that?

I think that what's clear, if you look at Pennsylvania and Michigan, at least from where I sit and the data that we have is that when you legalize online casino, it grows the market in total. Is there a little bit of cannibalization of land-based? Probably. But if you're in the online casino business and you have land-based casinos, we welcome that. We think the pie getting bigger, and we think that as our products get better both on the land-based side and on the digital side, and we get our stand-alone app, that our share of that bigger pie will grow. And so we're in favor of online gaming legislation, even if there is a little bit of cannibalization. It's not meaningful. If you look at the profile of an online casino player, it is quite different than what you see in brick-and-mortar. Somebody in their mid- to late 30s who are mostly playing table games, and you go inside of a casino, and it's early 50s mostly playing slot machines and female. So it is a different demo. But is there some crossover? Of course, there is. There's -- anybody who says there's 0 cannibalization, that's nonsense. There has to be some. People do play both.

Got it. And in terms of -- you mentioned the comment about legislation is maybe hard to sort of predict. But what states are you maybe more optimistic on, whether it's on the online sports betting or on the iCasino side, say, over the next couple of years?

Yes. Sports betting, I don't think I'll say anything that others don't keep an eye on. Georgia looks like there could be some potential momentum there. I think Texas will be an exciting one. It's probably just a matter of when, not if. I think we're positioned really well there with the horse tracks that we own. We've got Sam Houston Racetrack in Houston. It's the only racetrack in Houston. We own Retama Park in San Antonio, and we have a license in for Manor Downs in Austin. So we're positioned very strong in Texas, not going to handicap when that happens. And I think on the online casino side of things -- and in sports betting, maybe there's Mississippi finally goes mobile, Alabama, and Arkansas. So there's -- but not huge population states. I think Georgia and Texas are probably the most interesting. Missouri, of course, will happen at some point. On the online casino side, I think something will likely happen in the Midwest, whether that's Indiana, Illinois, Iowa. And I think once that happens, it probably starts to domino pretty quick from there just because neighboring states and cannibalization. And I also think that most of these states do one thing terrible, which is manage their budgets. And so just like we were pre COVID, you're back to deficit mode in most of these states. They got bailed out during COVID, a lot of federal stimulus money comes in, have a surplus, that's gone. And so when you're running a deficit, you've got to find, in most of these states, new streams of revenue. And I think iGaming, especially in states that are already legal with online sports betting, is kind of a no-brainer. It's just a matter of who goes first, who goes second, and then it probably starts to go a lot quicker.

Great. It's probably a good time for questions. Anybody in the audience have questions for Jay? Great. Jay, Felicia, thank you very much for attending. Appreciate it.

Yes. Thanks, Joe.