Rush Street Interactive, Inc. (RSI) Earnings Call Transcript & Summary

All right. We are back. And with so much, I mean, we're talking about the uncertainty in the broader macro environment. But one of the places that continue to see strong trends and even have a road map for, I would say, even potentially rolling through any kind of consumer pullback is really iGaming. And next up, we have one of the premier iGaming platforms with Rush Street Interactive. And I'm excited to be joined by both Richard Schwartz, Chief Executive Officer; and Kyle Sauers, Chief Financial Officer. Thanks so much for joining us.

Great to be here.

Thanks. Good morning.

One of the big questions that we get from investors is really around what drives competitive differences and moats in iGaming and sports betting, online sports betting. So I guess I'd love to have you just start off with talking about how you think about competitive advantages and then how that, will dictate kind of the ultimate path to profitability as we look further out?

Sure. I mean, user experience really is the most important thing in our sector. I think in the early days of this industry, marketing was -- really led the way with a lot of efforts to market and acquire players. But it was really about retaining the players you acquire. And you don't do that unless you offer a world-class user experience, which is a combination of the product and the customer service together and creating a seamless experience for the users and reducing the friction that they experience when using these products and sites. Many banks and other payment methods aren't really fully operational yet supporting this industry. So there are issues that even the very best sites have as players navigate them. And so being able to address those issues in a timely way, with thoughtful people helping the customers along the way, is really important. There's also limited licenses in many markets. So those of us who have secured licenses in all the major markets in an early period of time like we have are in a strong position to make sure that we capitalize on the growth in the different markets. We continue to see a lot of growth in existing markets. And obviously, we're launching a lot of new markets still. So when you combine the market access with -- we our own technology as well, so we can differentiate and innovate ourselves. We don't have to sort of share our innovations with other competitors, which is what happens if you were to use a third-party solution where we have a great idea, we share with the development arm, a third-party supply. They build it, and then the other. competitors of yours have the same product. That's not something we were rather interested in doing. So we're really focused on how do we increase the user experience, treat the players well, earn their respect and trust and build experiences that can't experience anywhere else. And if you do that and you deliver value to the player, they stay with you. So for us, it's all about retention.

So one of the things that you mentioned there was product and user experience is kind of a key differentiator. In an environment where the market is saying, "We want to see profitability" or they're dinging folks for maybe investing in the future growth. How do you balance what the market is saying versus spending to improve the consumer experience, and where are you spending?

So I think profitability in this industry comes on one thing. It's player retention. If you keep your players playing for years instead of months, you're going to be profitable longer term. And so for us, it's about making sure we enhance the user experience, which I said, which is by investing in more technology resources and not just technology but product resources. Really trying to come up with the next big thing in the industry. And so if you deliver those experiences, then you will get to the profitability. In terms of investment, we do have to seek to balance the profits from our existing markets with investments in new markets. We know when new markets open, the players are very valuable as the early adopter players in new markets. You definitely have to be there in the beginning, and you want to be investing and acquire those players, develop a footprint in a new market. But subsequently, it's about making sure that player base that you have, most players are trying 3, 4 sites. So currently, in this -- in the last year or 2, many players are with brands not really because they're loyal to the brand, but because they have thousands of dollars of free money available to play.

Right.

And when they burn through that free money. They're going to choose the site and experience that treats them right. That's what we've been aiming to establish ourselves as is when players play with us, they notice a difference in the way we treat them. And if you deliver that when the wallet share starts to sort of refine around the best experience, we expect to be one of the big players in that market.

So I think it's a good longer-term perspective and also helps us frame kind of what's going on now. Maybe continuing on just the year ahead, obviously, over the past year, you've expanded some partnerships. You've moved into new countries even, and you have won some opportunities to launch in new countries. What do you think are the key milestones and the key things that you're focused on in the year ahead?

So aside from the innovation on the product side, which I already just spent a few minutes talking about, it really is about new market distribution. Naturally, a large number of U.S. workers have not yet legalized or have legalized that are not yet live. The next one's coming up will be Ohio, which is one of the largest states of our population in the U.S. We're very excited about that. On January 1, we'll be launching. Maryland is another market that's legalized. We have a license for that, and we're preparing to launch whenever the market allows us to -- the regulator allows us to. But on top of that, we've really made a decision in this company several years ago that we were going to be a global business. And this is not a new industry only for the U.S. In fact, in the United States came late to this industry.

Yes.

So we focus on Latin America, and down there where Colombia was the first market we entered about 50 million people. We came in without a brand, without a database, without any experience really in that region. And we went from 0 market share to #3 in the market. About 20% of handle comes from us now. So we've shown an ability to enter new markets globally starting from 0 and be able to be profitable and successful there. So we're now planning to expand to additional countries. In fact, just earlier last month, we launched in Ontario. It's the first time in Canada. And then later this month, we're planning to launch in Mexico. So we have major markets, very large populations. If you look at a market like Mexico, it's 150 million people. You'd rather be there -- and by the way, casino and sportsbook are both legal there. We have a great media partner locally. So unlike Colombia, where we had to start from scratch, here, we start with a local company. It's very well-respected. And we have a technology that's already proven into that region. So we're really excited about that market, where if you look at a market like Iowa, which had 4 million people, sportsbook only, it certainly doesn't match. So our focus has been getting ready for the larger markets with less competitive markets and markets where we think large profits are possible.

So on that point, I guess, how else does a market like Ontario, we'll start there because you have launched there, there was kind of an existing base of competition. How do you think about changing your approach or altering your approach to go after that market? And then, I guess, what have you seen so far from a competitive response?

Sure. I mean, every jurisdiction in our industry is unique. And I think the companies that do well long term are going to be those that adapt and change their strategy for every market based on the needs of each separate market. In the case of Ontario, there was a great market operating for 10-plus years, which meant a large number of operators already have brands established in that market. And equally important, they had database as a player has already built. It was unclear until relatively close to launch, exactly how that transition was going to occur from the gray market to the white market. Turned out it was pretty easy for the gray market sites, especially migrate their player bases over to a regulated market, which meant that some of the operators started with a large advantage. So a company like us did branding early in the marketplace during the Winter Olympics. We were all over the national TV establishing a brand that until the Olympics in February, no one had ever heard of us. So that give us a strong head start in terms of brand awareness, which does help long term in terms of decreasing the cost acquiring new customers. And subsequently, when the market opened, we had locked up a lot of assets that we thought were very valuable. What's really exciting for us about Ontario is it's a casino market as well. And we really shine in casino market. Our unique experience on the casino side has a lot of innovation built into the product and user experience. And so as we've seen in small markets like West Virginia and the U.S. where we started with 0, every quarter, we keep growing market share. We're over 10% now. We think in Ontario, we're going to get a chance to grow substantially over time. The big issue with Ontario that I haven't mentioned yet is that in addition to making easy transition, these are sort of restrictions on the ability to offer inducements for players to sign up, which is standard in every other North American markets. You can't offer on TV,, "Here's a $200 offer or a $2,000 offer to sign up." It has to all be about just the quality of the experience. So for us, we like that actually because we don't offer the largest sign-up bonus. Sometimes in New York here, some competitors of ours offer $3,000 to sign up in New York, and we were offering $250. So for us, not allowing others to shout out they're offering $3,000 or $250 is an opportunity for us to really focus users on what matters the most, which is the differentiation and the experience. And so for us, we expect in that market, while it might be slower to get players in the door, there's going to be consistency. And we're going to have ability to grow that business over the next number of years. So we like that opportunity. But every market is different, and I think that's a unique angle of Ontario was that you weren't allowed to do inducements. Whereas in Mexico, you are allowed to do inducements immediately. So that won't be an issue at all in terms of entering that market later.

What does the data that you've looked at or as you've talked to your media partner, how does that inform you about how that consumer might be similar or different and how that market might compare to what you're seeing in Ontario or the U.S., both in terms of market size, promotions, et cetera?

So in Mexico, there are existing operators. There's one operator, in particular, who's been dominant for a long time, which for us is an opportunity because it means it's really -- most of the player base is centralized in a single operator. So if we have a solution that's strong, we have an opportunity, I think, to grow our market share there. It depends on what part of Mexico. Like any other large country, that's different to them -- there's different scenario. So in the case of Monterrey, where this partner is based is one of the wealthiest -- is wealthiest part of Mexico. It's very close to American mindset. They're big fans of American sports layer. So I think for that market, we'll be launching pretty aggressively because our partner is very strong in that area. We'll have a chance to really focus more on what you do in the United States and things that matter here, whereas I think in the southern parts of the country and other parts, you're going to be focusing on different strategies. So one of our key markets internationally is to make sure you have partnerships with payment providers distributed around the country because you want to have players a chance to deposit. It would drive cash as easily as possible because that's one of the biggest opportunities. And international markets is making sure that you have the right payment method to match the local needs in those markets the financial deposit and withdraw methods vary depending on the region. So we've had to make sure we address each one of those regions.

Great. So can you talk about a little bit more who your core customer is? And how does that stack up versus the average of the space?

Sure. So we're unique in that we have 2 approaches to customer acquisition and retention. One is that we focus on the sportsbook player, and we cross-sell them to casino. And that's -- this is a proven mechanic strategy that's worked globally for 20-plus years. It works extremely well in the United States for us and our competitors. What's unique about us, though, and that works, like I said, well for us. And we do that very well, just like everybody else does. What's unique about us is that we also target a female audience and a casino-first audience. There's a large number of people in this country who gamble in casinos, men and women, who don't want to bet on sports. And so you can't cross-sell from sports to casino, if they're not betting on sports in the first place. So our strategy was to focus on that audience, really focus on the online slot machines, which really are underappreciated in the investment community. If you look at the sports betting alone versus online slots, I'm not even talking about online casino. There's online casino that was a combination of table games and slots. You hear a lot about table games, but the slot machine online is larger itself than the sportsbook businesses.

Yes.

So we really specialize in creating that unique experience for online slot players, where our players are in the community with other players, they communicate, they're chatting with each other, they're playing trivia games, they're socializing with each other. They're creating these unique experience we built on top of it. So that attracts a female audience much more. We said we showed in our most recent deck that 55% of our audience of the casino are females, which would be a big difference for most of our competitors, where really all male-centric because most of the players come from sportsbook and are cross-sold. We also focus on older demographic. We've -- people that are serving -- more advanced in their careers, maybe have less free time to shop around for bonuses and more -- care more about a premium customer service experience. They want the Four Seasons experience out of a website. And so when you can deliver a service at a high level like that, you're going to attract an older demographic that maybe has more money than time just to be entertained with. And so I think that's an audience that we like.

And from a competitive standpoint, what wins in online slots? And how might that be similar or different than a slot machine in the casino?

So it's a large number of differences between the online experience and the retail. And I think a lot of companies that come from the retail-only background really just think, well, I'm going to just put the games online, they're going to work. And we -- one of the things is that we -- most people's strategy in casino just to aggregate as many games as possible. That's what we do in land-based casino, typically. But in our experience, that's great, but we started with that assumption that we would have the same as everybody else would have, and now how do we differentiate. So we've built all kinds of things like scratch cards and wheel spins, bingo games and slot tournaments, things that players are playing our -- and the community. People are playing our products, and then they're getting other ways to win, other chances to win. Dynamic, it's fun, it's unexpected. They start winning. There's a Mr. Monopoly-type of a character that [ dances ] across the screen and drops money off of the players randomly. And for a casino player, they like that. They don't get that experience anywhere else. So it's about delivering unique, technology-driven innovations to a player experience. When they're playing with us, they feel like this is different than every other casino that exists online. Another major difference, I would argue, is that in the land-based industry, a lot of the casinos really try to sort of lower the return to play over periods of time. So -- and if you're on the strip, for example, you're going to have a -- it's going to be worse odds for a player typically than it will be even on a local casino where people play every day or every week. Online, it's a hyper local community. People play very often. So we really make a strategy really some of the odds favorable for players because it's not retention of the players, making sure they can have a long experience playing with you. If it's about retention, you don't want to burn out a customer or you want to have responsible gaming tools, T.hey can set their limits and be with you from -- customers for 5 years rather than 2 months. So I think a lot of the land-based customers are really about -- land-based operators have a mindset typically of let's grab as much as we can as quickly as we can, but that makes sense in a land-based world where you're trying to capture a weekend visitor. Wherein a case like ours, we're going to have a daily visitor for months or years, you want to sort of slow down the spend and make sure you offer them the value and experience to enjoy the long-term benefits of being a member.

So long term, would you think win rates in online slots would typically be lower, but the spend would be longer and greater over a duration of time?

So win rates, I mean, there will be better odds for the customers, I mean, that's right, which is a lower return to player -- a higher return to player for the customer. So you do expect that -- with the revenues to be larger because you retain the customers over a longer period of time. It's all about retention I said at the very beginning. The operators that now retain the players, a limited number of customers in every jurisdiction . And if you're going to be geolocated in every jurisdiction, you have a subset of customers, .you have to retain those customers. So it's about how do you manage the life cycle of customers smartly. We invest very heavily in BI and data analytics to really understand a player and to know when we expect them to have an opportunity for us to deliver some value to the customer to keep them play longer. With this Mr. Monopoly type of character I described to you is really interesting. We have an algorithm that really define exactly when that player is likely not to make another deposit. And we hit that player with a very exciting bonus at that moment. And so here's something that's unexpected and enjoyable. And it does -- from our data, does extend the life of a player with the site when you're able to deliver the real-time bonuses at the right times.

Maybe I'll jump in just because I think one of the biggest topics that's on everybody's mind is really around the promotional environment. Have you seen any change in the promotional environment? And what are your expectations as we look at the year ahead? Do you think that we'll finally start to see some of these $3,000 or whatever it is now giveaways subside? And then as you look at new markets, are you seeing any change in behavior there, too, for customer acquisition?

I'll let you go first, and I can weigh in.

Sure. So yes, we are seeing differences. We've always bonus players at viable levels. We've always been focused on profitability from the very beginning. We invested less than $50 million in our business from the very beginning to deliver the value that we have for the shareholders. And you do that by being disciplined the whole time. We're very excited that others are sort of being forced into an environment of being more disciplined because it means that we're not changing what we do. But others have to change drastically what they do. And when that happens, we think that we have opportunity to grow share and be successful because the players are with us right now, not because we're giving them $3,000, which is what many of our peers have been doing or several our peers. They're with us because they like how we treat them. The way you earn loyalty is by treating customers well, being thoughtful, developing seamless experiences, reducing friction, offer them things to do that others don't offer. And so ultimately, we do think that the environment has been changing. And to us, it's to our advantage because now that everybody else will have to focus on not buying customers but really earning the trust of the customer. And when that happens, we're very happy, that's how we design our company from the beginning.

Yes, I would just add, I think there's 2 pieces to that competitive intensity. One is the promotions and the money that's given away or the odds boost or whatever that might be. And as Richard points out, we've been more modest than others, and we think that attracts the right type of player. And over the last year, it's been 1/3 less than the top competitors in the industry. But the second piece is what are people spending on external marketing dollars, right? Maybe that -- maybe I'm stealing your next question.

No. Go ahead.

But that's a big part of it as well. And that got very intense in the back half or back quarter of last year, and that has subsided a lot. We've talked about that, and it allows us to acquire customers at a more favorable rate. And certainly, there's a lot more attention paid to expenses and a path to profitability in this industry. And as Richard said, I don't think we need to change our behavior dramatically yet our dollars will go further and our share of voice will be larger relative to the competition who might be spending less or not putting as much pressure on those marketing assets. So we think that puts us in a good position.

Can you tell whether that external marketing coming down is just a seasonal thing, maybe a weaker sports calendar, and it's going to come ramping back up as we go into the football season? Or can you look out and say, "We can already see the TV spots, the cost of those are maybe subsiding a little bit. We're just seeing fewer people in the market."

Maybe I'll start.

Yes. Go ahead.

So I think it's really a fundamental mindset change where you're not being rewarded just generating revenues at any cost. And that was happening a year or 2 ago. So I think that mindset has changed, and I don't think it's coming back anytime soon. So in terms of seasonality, Q1 was a popular season. You have March Madness, you have the NBA, NHL playing, you had the Super Bowl. So I think there was still a pretty strong calendar and yet you had a lot of pullback even then from Q4 to Q1. You're continuing to see in Q2. For football season, it will be interesting to see. I think still you have a lot of companies that had some long-term commitments. We didn't -- purposely, we didn't do 10-year commitments at $100 million-plus deals because we thought things might change, and they have changed. Others are kind of locked in some very large deals. So you will have still some advertising pretty aggressive, I'm sure, during the football season. But another thing that's changed, I think, is that there's only 5 or so companies that have most of the market share in this industry. And yet you have 45 companies competing. So there's a lot of these other companies that are competing have been -- most of them are well-financed and have people -- they've been investing, but they haven't been delivering the results. And so I think you're going to see a lot of pullback in consolidation of the companies that really aren't making much of a dent. Many of the competitors really have less than 1% market share in any market. And so I think a lot of the companies are still spending, competing for advertising inventory, and assets are going to no longer be competing. And that will free up additional assets for someone like us. So there was a time where we would want to market last year during Q4. And if you didn't just accept on the spot whatever the offer was without ability to even modify any term sheets or any legal things, you were -- say there's 20 guys lining up to take the same inventory as we want. So you weren't able to really have a new leverage or be able to negotiate favorable or even reasonable in some cases terms. That's changed a lot. So now we can be more selective. And also people coming back to us now say, "Okay, there's inventory available. We know you don't want in the past. Let's talk." And so that's a great opportunity for us to acquire players more affordably, which is what we've been doing.

That's great. Maybe one follow-up on that. And maybe this is for Kyle. Given the price action, and it seems like everybody has been kind of lumped into that same bucket of questioning the path to profitability. How are you different in terms of how you've been allocating your spend and how you think about that path to profitability?

Yes. So I think we've always been very focused on it. Certainly, getting access to the public markets was key to us to be able to get a really solid balance sheet, be able to put money to work for all of these new markets that are opening. We -- there was a ton of them at the end of last year. We've had quite a few already this year. And that takes capital, right, and to ramp up our marketing expenses, both in existing markets, but probably more so in new markets. So that took some capital, it takes some investment, but that's always been with a very strong eye towards profitability. I think we've been selective and smart about how we built the business, both from a corporate infrastructure and a technology team accomplishing a ton but at more modest levels. So we'll continue to grow that, but we'll grow into that even faster through revenue growth. So I think that gets us leverage over time. As Richard mentioned, we haven't entered a bunch of long-term contracts on the marketing side. So we have a lot of flexibility there. We will continue to invest. There's -- even in markets that have been around for a couple of years, there's a lot of great customers to attract to the platform that can be super valuable. So we'll continue to invest in marketing, but we don't need to pull back dramatically, and we have a lot of flexibility in the way we invest. And we expect to be profitable in the back half of next year, and we expect to see kind of a continuing cadence of improving profitability on the way to getting there.

What would be the biggest factor that would move that time frame up or push it back?

Yes. I think if for -- I'm not expecting this to happen. Let's say, Ohio and Maryland all of a sudden weren't going to launch. Those are costs you don't incur or if a bunch of new states all of a sudden were legislating and approved, and they were going to launch in the first half of next year. I think if we see a fairly typical cadence of new approvals and new launches fits perfectly into that timeline. We see all of the markets that we launched in Q2 or before of last year, we expect all of those to be breakeven or profitable by the end of this year. So I think that tells you a lot about how we see each market improving and getting to that state of profitability. We've got 5 markets that are profitable already. And so then you pair that with a fairly modest investment in the corporate infrastructure and technology side, I think that should demonstrate to people that we can get there and that we can -- whether the market is great, whether the economy softens, that we've got a lot of ways we can -- a lot of levers we can pull in terms of the cost structure on the marketing side to adjust.

Great. On that point, I mean, one of the things that we're wrestling with kind of across our whole coverage is the sensitivity of the top and bottom lines to different macro scenarios. There's not great history in terms of definitely not in the U.S., but even in the U.K. where smartphone penetration in 2007 was not where it is today. So how do you think about the relationship between the top line and user spend in online sports betting and iGaming and how those could fare in a potential downturn?

Yes. Do you?

Do you want me to start or?

Sure. I agree with you. There's not a ton of data out there, right? I think it's helpful to be in an industry where all of the markets that we're in are still growing, many of them growing very rapidly. So that would fight the -- whatever down trend we might have from any economic recession, right? And then you've got additional markets that are continuing to come online. So that adds to the growth. So I think that's very helpful. I think another piece of it is to the extent that's happening, the state pocket books won't be quite as strong. That actually might be helpful to the legislative landscape and the way states are looking at either adding sports or adding casino on to states that already have sports, which is a super easy add from a compliance perspective and would be fantastic for us. And so I think that could be a silver lining and all that.

So one thing I would just add is that I've been in industry for over 20 years. And in Europe before the U.S. opened up, there's -- we've seen several recessions there. And you did see the online gaming was really strong during those periods of time. I think it's a big -- it's convenience, people are at home. They don't have to drive after location. I don't have to pay for gas or eat out at restaurants. They can sort of enjoy their entertainment value at home. And it has -- is a part of people's life in a lot of cases, one of the most favorable entertainment methods they have to enjoy themselves. So I think it's something that has proven itself in the past in European markets to be successful during even tight times.

I know we've only got a few minutes left. So we're going to -- if you have questions, you can raise your hand. Otherwise, we'll keep going up here. All right. Maybe on margins, can you just remind us how you think about long-term margins? You alluded to some of these -- some of the states are already turning profitable, but where should that shake out long term? I know that people point to different things, and you have your own projections. Maybe if you can remind us what that looks like?

Yes. Yes. So what we've talked about and what we still see for the long term is kind of mid- to high 20% EBITDA margins. And so what are the levers to get us there? I think if you just start at the top, one of the things we talked about was the level of bonusing. So the conversion of GGR to actual net revenue is an important piece because there are costs that you incur to generate handle and generate GGR, that if -- the New York State tax is a good example of that, right? The better you convert and the less you have to spend in promotional dollars is important there. We're very good at it today. But I think as markets mature and you have less new players with free dollars for initial deposits as a percentage of the total, that has an impact. And as behavior changes in the competitive landscape, that should improve that conversion. So I think that's the first thing. On the gross margin line, there's quite a few things that will benefit from -- in terms of just scale. So as we grow, we'll get benefits there. Another piece is this market is maturing, whether it's payment processors or geolocation or KYC, the competition will continue to increase. That should be better for the operators, so that's beneficial. We also have a decent amount of our business coming from Pennsylvania, which is a higher tax rate. So as the portfolio of different markets continues to diversify, that should improve things as well at the gross margin line. So then when you get to expenses beyond that -- we talked a little bit about marketing before, very firmly believe that as a percentage of our revenue, marketing is going to go down over time, less markets launching as a percentage of total, which is where you spend a ton upfront. An example, in New York, we spent more in Q1 than we'll likely spend for the rest of the year. And that's not unusual in new market launches that you've got that upfront cost. So that starts to dissipate a little bit. And then we already talked about our underlying cost structure. We've been more modest but as the company grows, we'll get leverage over that as well.

And maybe to wrap it up, I'll just try to ask a broader question just in terms of how you're thinking about the demand backdrop. Are you seeing any change in consumer behavior? What's your expectation as you look through the rest of the year as you were setting your own outlook?

Yes. So we haven't seen a change in behavior. As I said earlier, I think consumers really enjoy the convenience and the product that we offer. And we continue to see strength in the consumer from our view of the world. And we've heard that the other groups in our industry that are -- have land-based casinos have indicated, they haven't seen much change in the behavior either. But I think that we're better positioned in a way because our players are at home, like I said, and they're very convenient, easy to use environment to be able to have their phone with them while they're watching sports on TV, and they're enjoying that experience. So they lose, they bet for $40, $50, $60, that's not going to -- that's a much more affordable experience for entertainment than we'll be going out somewhere.

Great. Well, we're just about out of time. Next up will be travel and leisure. Please join me in thanking Richard and Kyle. Thank you from Rush Street.

Thanks.

Thank you.