Rush Street Interactive, Inc.

Good afternoon, thank you for attending today's Rush Street Interactive fourth quarter and year end 2021 earnings call. My name is Hannah and I will be your 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. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Lauren Siler with Rush Street Interactive. Please go ahead.

Thank you, Operator, and good afternoon. By now, everyone should have access to our fourth quarter and year-end 2021 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 here today will be forward-looking statements within the meaning of the 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 expect. 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 conditions. 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 measures are available in our fourth quarter and year-end 2021 earnings release, which is available on the investor relations section of the RSI website at www.rushstreetinteractive.com. With me on the call today, we have Richard Schwartz, our CEO, and Kyle Sowers, Chief Financial Officer. We will first provide some opening remarks, and then I'll turn the call over to questions. With that, I'll turn the call over to Richard.

Thanks, Lauren. Good afternoon, everyone, and welcome to the RSI fourth quarter and year-end earnings call. As we begin our second year as a public company, we are going to spend some time discussing our approach to profitability, priorities, reviewing our results, I'm looking forward to where we see RSI in 2022 and beyond. To begin with, I'd like to comment on the recent shift to investor sentiment and the focus on past profitability. We've been focused on building a sustainable, long-term business, with profitability as our central goal since founding RSI nearly 10 years ago. For those who have followed us through our public company life, to recognize our competency of purpose towards achieving profitability. In fact, we were adjusted EBITDA positive as recently as calendar year 2020. We have a track record of doing what we say we're going to do. We've gained market access in all key markets and consistently grown revenues quarter after quarter. We've delivered on our technology roadmap and consumer experiences. We've been transparent on where and when we plan to make marketing investments and why. We attract high-quality players and create player loyalty. As an increasing number of competitors reduce marketing and promotional spend, the cost for our side to attract players has diminished, and visibility for our marketing efforts has increased. We will continue to invest in new markets where we see opportunity, but only do so prudently with a clear line of sight to profitability. The founders that run this business own more than 50% of the company. They've built their careers being trusted stewards of capital for their investors and achieving long-term profits. We will continue to focus on strong returns here at RSI. In a few minutes, we will share some exciting data points about our profitability milestones. But first, I'd like to share some information on some of our most recent results. 2021 was an incredible year of growth and accomplishments for our company. We continue to position ourselves for long-term growth and success as we accomplish a lot. More specifically, during 2021, We grew our top line by 75% year over year and maintained our disciplined approach to investing marketing and promotional dollars into player acquisition. We launched online gaming in Michigan and West Virginia and online sports studying in Michigan, Virginia, Arizona, and Connecticut. We grew our monthly active users 67% compared to last year. while maintaining one of the leading monthly revenue per user rates of $346 per player. We've made significant improvements in our proprietary technology platform, particularly in our online gaming platform for sports study, where we've been recognized as having one of the leading apps in the industry. And we ended the year in a strong cash position with $281 million of cash on the balance sheet and no debt. leaving us well-funded to continue to invest in technology and products while supporting new market launches over the coming years. We ended 2021 with our 10th consecutive quarter of sequential revenue growth. We generated $131 million in revenue, up 31% over the prior year. Sequentially, from quarter three to quarter four, we grew revenue in every one of our markets. In addition, we grew sequentially in both casino and sportsbook, demonstrating our strength in both categories. As you may recall, over the last two quarters, we mentioned that with a number of new market launches that started in the fall, that we'd be in investment mode this quarter. And as we said, with the recent market launches, we increased our marketing investment in the quarter to $64 million, and our adjusted EBITDA loss for the quarter was $31 million. As most investors now know, there was extreme competition for marketing assets during the fourth quarter. We weren't immune to the impact, but we continue to be prudent with our marketing spending consistent with our focus on attracting high-quality customers. The good news is that we've seen some relief in quarter one in existing markets as there is less competition for marketing assets and our costs to acquire players have come down nicely in the last couple of months. While there's a lot of enthusiasm surrounding the recent launches of New York and Louisiana, we are also extremely excited about our expected entry into Ontario and Mexico in the second quarter, both of which include online casinos in addition to online sportsbooks. A combined population of these two new markets is around 145 million people, more than four times the number of people that have access to our casino product today in North America. We've demonstrated great success in markets with both casino and sports betting, and we expect to replicate that success in these new markets. While existing markets continue to mature, the newly launched markets of New York and Louisiana and the anticipated launch of Ontario and Mexico will keep us in investment mode for the next couple of quarters We will continue to be disciplined and dynamic with our marketing spend and look forward to the long-term returns in these new markets. As we've shared before, our strategy isn't simply to chase market share and the high volume of players. Instead, we focus on attracting quality players who will play and stay loyal to us for the right reasons. We offer a premium user experience to reduce player friction, and we target players who appreciate and respond to our product offering and customer service approach. We continue to expand the business by growing the top line while strategically investing in marketing and technology that we believe will drive meaningful revenue growth and long-term value. Heading into 2022, we are more convinced than ever that our consistent approach is the right one and will provide long-term value creation for our shareholders. We are introducing 2022 full-year revenue guidance of between $580 and $630 million, implying 24% year-over-year top-line growth at the midpoint. As a reminder, this guidance only covers existing markets for real life today. As I referenced earlier, investor attention has shifted recently to a strong focus on the path to profitability. For those that have followed us from the beginning, we know that profitability has always been a focus of ours, and that hasn't changed. While predicting an exact point at when we will report consistent, positive adjusted EBITDA would require greater certainty on the timing of new launches in new regulated markets, which always requires investment, there is content around our profitability that is useful to consider. We expect each of our markets that launched during or before the first half of 2021 to be profitable or near break-even for the fourth quarter of 2022? To be clear, when we think about profitability in a specific market, it includes all operating costs for that market. It includes allocation of all marketing costs incurred by the company and excludes our G&A costs. In addition, how do we not launch another market after Q2 of 2021? we would have expected to be adjusted to give it a positive as an entire business for the full year of 2022. There are a few takeaways from this that I think are important. First, we have a path to profitability in all markets where we are live. The pace at which we get there and the magnitude of profitability in each market is going to depend on whether it includes both casino and sports, our market share, the competitive intensity, and tax rate. Second is that even at a more modest market share than some others, we are able to achieve profitability of markets relatively quickly because of our prudence, promotional marketing spend, and strong player retention. Third is that over time, new market launches will become a smaller part of the total pie for us, and the impact of new market investments will be outweighed by the mature markets that are profitable. Next, I'd like to discuss market launches. We now operate real money gaming in 14 markets, five of which have online casino, 13 that have online sports betting, and six with retail sports betting. To put this in perspective and to further my comments about investments, at the end of 2020, we were alive in only six markets. Today, this makes us live with approximately 31% of the U.S. population for online sports and 10% for online casino. A great achievement, but a lot of opportunity remains ahead. In the U.S. state where we operate, in terms of GGR for the fourth quarter, we have 10.5% market share for online casino and 4.5% share for online sports betting. We are the clear number four in the United States, whether measured by GGR or reported revenue, with reported revenue being the better determinant of the ability to attract and retain players. Now I want to quickly recap our most recent market launches that I've been referencing thus far. We began the recent string of launches in mid-October with the launch of our online sportsbook in Connecticut in partnership with the Connecticut Lottery. The online launch in Connecticut was followed up by the opening of 9 and 15 retail sportsbooks in the state, also in partnership with the CLC as their exclusive retail sportsbook partner. A few weeks after Connecticut, we launched the Bett Rivers online sportsbook in Arizona. Then, early this year, we were among a small group of operators who launched day one in New York, and the same was true when we also went live day one in Louisiana later in January. I also want to touch briefly on how we look at early results and provide context from our vantage point as investors continue to evaluate and assess the state-provided numbers over the short term. To do this, I will use New York as an example. As many are aware, the overall market in terms of handle is off to a blistering start. As we expected, New York is on path to be among the largest of the online sports betting markets in the United States. That said, there's a large amount of promotional froth reflected in the early results from the state. And the early results are following the promotional spend. Similar to RSI's other state launches, we've been more measured with our promotional offerings and expect to earn market share over time as the high-quality customers we target enjoy the experience we bring to them. For example, in Connecticut, we've seen our handle share grow from 6% in the opening months and to 7%, 8% in December and almost 10% in January. In Arizona, where we started a little later than some and launched in October, our December handle is almost 80% greater than it was in November. New York is much newer, but as we all know, the bonusing has been significant. Although still relatively small, our handle share has grown each of the six weeks the market has been open, despite three more entrants coming in since initial launch. There is still a long ways to go in all these recently launched markets, but we're encouraged by the trends we are seeing to continue to believe the path to profits will be through the user experience, which is a combination of great product and operational excellence. Moving beyond the recent launches, we are thrilled that Ontario has been working hard on their framework and regulatory process, and have announced a targeted launch date of April 4th. Pending all the typical approvals, we plan to be ready to launch in Ontario with our Vet Rivers Casino and Sportsbook app. We've been focused on generating brand awareness in the province and building an early database of players through our social product and pre-registration. We've talked a lot about our success in Michigan with converting our pre-launch social players to real money players, and we believe we will have similar success in Ontario with people who want to be ready to join BetRivers when we go live. Ontario will look different than many of the U.S. states we have launched in since online gaming has been in the region for a while. But we are no strangers to entering a market later and building share over time. Columbia is a great example where we now have close to 20% market share of Handel. This past month, we announced another exciting international opportunity in Mexico. We have partnered with Mexican media conglomerate, Grupo Multimedios, for market access and to bring our online gaming platform to Mexico. Under the terms of the 25-year agreement, we will operate online casino and sports betting countrywide and be able to leverage Grupo Multimedios' vast array of media assets and distribution channels for promotional and content integration purposes. Our partners' portfolio of media assets encompasses television, radio, print, billboards, and digital, and includes Medio Tiempo, a digital sports property which attracts more than 7 million unique users per month and growing at a 29% compounded annual growth rate. Also, our partner owns Millennial, the number one digital national news information source in Mexico, with 27.7 million unique users per month. and its network of 22 television stations and 63 radio stations. Needless to say, we are very excited by this opportunity and anticipate launching our online casino and sports club during the second quarter of 2022. With regard to market access in the states with planned future launches, we are very pleased to have access partners lined up in both Ohio and Maryland, which we anticipate will be the next opportunities to go live in the United States. We are often asked about our thoughts about future jurisdictions for both online casino and sportsbook. While it is challenging to predict the legislative process and timeline of future states, we have been very pleased to obtain market assets wherever desired and remain committed to growing our presence in both online sportsbook and iCasino states as they regulate. Now I want to switch gears and talk about some of our marketing initiatives, investments, and the results we are seeing from them. To start, We recently signed several new brand ambassadors to Bett Rivers, including tennis great and respected tennis TV analyst James Blake, three-time Super Bowl champion and NFL broadcasting veteran Mark Soros, baseball legend Bobby Valentine, and Chicago television personality Brittany Payton, also daughter of former Chicago Bears great Walter Payton. In Canada, we have signed Dan O'Toole, a broadcasting legend north of the border. who has worked for Fox Sports in the United States. Together with Dan, we launched the Boondies podcast, which very quickly achieved the number one spot on all sports podcasts in Canada to the end of January and continues to be a top draw. We are very proud to have all of these ambassadors join our team as we create new and exciting betting content for our players to enjoy. We also announced an exciting multi-year exclusive partnership with La Liga, to be their exclusive wagering partner for our RushBed brand in Columbia. More recently, in conjunction with our launch in Louisiana, we also announced our new relationship as an official sportswear partner of the New Orleans Pelicans. As we previously stated, our ability to market effectively is critical to our success. We remain a data-driven organization using dynamic learning and analytics to acquire, convert, retain, and re-engage customers. Real-time insights from our business intelligence team allow us to continuously optimize our marketing spend based on a return on investment focused model. This model considers a variety of factors, including the products offered in the jurisdiction, the performance of diversified marketing channels, predicted lifetime value, and behaviors of customers across various product offerings. This efficiency dynamic approach shows through in our ability to attract and retain high-quality players. We grew our monthly active users during the year by 67%, and we grew monthly active users sequentially from Q3 to Q4 by 24%. All of this was done while maintaining what we believe to be an industry-leading art now of $327, despite entering two new online sports only markets in the fourth quarter. Just as exciting as the Q4 fiscal year 2021 trends are what we've been seeing so far in 2022, with monthly active users already up 27% from where we were in Q4. Our increased marketing investments during Q4 helped us to reach a wider sports audience during the most intense sports season of the year. and resulted in a temporary increase in CPA across our markets. However, the increased brand awareness that resulted from the increase in marketing investment is already bearing fruit in Q1 this year, where our CPAs have come down to significantly lower levels. Now turning to product and technology. First off, I'm pleased to let you know that as planned, we released the ILS app and PA Michigan, and West Virginia during the fourth quarter. We are seeing great reception to the product, and it's a huge improvement. It reduces friction at signup through geolocation and throughout the entire user experience. In fact, we are finding that new players using the iOS app are generating greater than 50% more handle for new iOS users that are not using the app. Also noteworthy is that we plan to have the iOS app available in both Ontario and Mexico, which will mark our first launches into casino markets with an iOS app available for all new players. In addition to a ton of improvements and functionality enhancements during recent months, I don't want to lose sight of how important it is that our technology team has built and continues to refine the world-class and robust products has allowed us to scale and launch in more markets in the last year than we had previously in the company's history. Congratulations to our continually growing technology team and all of their incredible work. I also want to update you on the success we've been seeing with our newly released multiplayer slot tournaments. As you recall from our last call, we have released this exciting new feature in Columbia and West Virginia And now we've added it to Michigan and soon Pennsylvania. To tell you how exciting this is for our players, the average number of sessions has gone up by almost 10% for those players engaged in tournaments. And those players who engage in slot tournaments spend greater than 30% more time per session at that resource. This is a double win. Players visit more often and they spend more time with us each time they visit. Now that we have mobile apps live in all of our U.S. markets, the next major milestone in our tech journey will be the release of a single app for the app stores across all states. This will improve our marketing efficiency and ensure a better user experience. We plan to have a single app released by the third quarter of this year. In an effort to diversify our business and enhance cross-selling opportunities, to both online casino and sportsbook over the long term. RSI recently acquired the technology platform and team of Run At Once Poker. We really were impressed by the management team, including the company's principal, Phil Galfond, who is one of the most respected poker players in the world. Our plan is to leverage the innovative poker mind from the Run At Once team, along with RSI's product team, is led by executives with many years of experience developing industry-leading and highly scalable poker platforms. Our goal is to improve upon the tremendous foundation and user experience the Run at Once team has created, and over time, integrate the poker vertical into our proven platform when the market is ready. The cost of the acquisition was $3.3 million in cash and $2.5 million in stock. There will be no near-term impact on our revenues, and it will add a modest amount to our ongoing G&A costs. Welcome to all of you at Run at One, and we're happy to have you join the RSI family. With that, I'll turn the call over to Kyle.

Thanks, Richard. Fourth quarter revenue was $131 million, up 31% year over year. Full year 2021 revenue was $488 million, up 75% year over year. As Richard mentioned, with the run of recent new state launches, we finished the year in investment mode as our fourth quarter adjusted EBITDA loss was $31 million, resulting in a full year 2021 adjusted EBITDA loss of $65 million. Adjusted advertising and promotions expense was $64 million during the fourth quarter of 2021, compared to $23.1 million in the prior year quarter and $45.4 million during the third quarter of 2021. As we discussed on our previous earnings calls, This reflects our commitment to accelerating marketing spend given new state launches, but in a rational manner relative to the industry. As Richard highlighted earlier, we're expecting to go live in both Ontario and Mexico in the second quarter. Assuming that happens, we'll be launching six new markets inside of three quarters, which is a big milestone for us. With regard to marketing expenses for 2022, we expect continued growth as we invest in new markets and support those that have already launched. As we've discussed in the past, new market launches are an investment period for us, and we've been making that investment in New York, Louisiana, and also Ontario already during the first quarter. Ontario and Mexico launch in Q2 as anticipated. We would expect those investments to continue, and we would expect a step up from our Q4 2021 marketing run rate in the first half of 2022, and then some moderation in the back half, assuming no major changes in the regulatory or state launch landscape. Our adjusted G&A grew to $11.6 million during the fourth quarter, up from $8.8 million in the third quarter. We continue to build out our technology teams and corporate infrastructure to support our continued growth and would expect this line item to continue to grow throughout the year in 2022. We continue to be in a great position with $281 million in unrestricted cash on the balance sheet and no debt. We have the financial position to allow us to continue growing our marketing investments and launch in new markets quickly. As Richard highlighted earlier, we're providing 2022 full-year revenue guidance. We expect 2022 revenue to range between $580 million and $630 million, implying 24% year-over-year top-line growth at the midpoint. As a reminder, although some of our analysts include revenue growth from future market launches, we are only including those markets which are already live. So specifically, our revenue guidance includes New York and Louisiana, but not Ontario, Mexico, or other markets that may launch later this year. With that, operator, please open the lines for questions.

Currently, if you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of David Katz with Jefferies. You may proceed.

Afternoon, everyone. Thanks for taking my question. You know, it's been sort of an eventful quarter in a number of ways. And I wonder what you think about the notion of, you know, scale versus, you know, being, you know, smaller and what the attributes are that, you know, or to your benefit as a result of that and how you sort of balance those issues about scale and, you know, candidly, you know, whether, um, you know, there's some, you know, horizontal or vertical integration at some point that may be productive, versus where you are today, which is working as you've laid it out.

Hi, David. Thanks for the question. I think the answer is that sportsbook and casino are both product verticals where you don't play against other players. You play against the house. And because of that, ultimately every player judges the operator based on the quality of the experience you offer them and the type of service you provide to them. So ultimately, I think the scale comes down to can you market efficiently and continue to acquire players? Sometimes companies of large scale are not being as efficient as you could be if you were at a smaller scale. I think ultimately our strategy is to look long term and to continue to find those opportunities where we know we're going to get back long term returns on those investments for new players. Why? Because the hardest part of this industry is figuring out how to retain the players once they arrive. Once you've invested in that, which we've done over the last 10 years, You end up getting a much larger percentage of those players staying loyal to you for much longer and, ultimately, you build your skill over the long term by having the great off experience. So when it comes to horizontal and vertical integrations or opportunities, you know they're always being considered. Certainly, I think that some product categories like daily fantasy benefit from scale more than casino and sportsbook like I just mentioned. I think at the end of the day, though, you're already seeing a rationalization in our industry, which we welcome, and I think is ultimately positive for companies like ours, that will allow sort of the best product and the best user experience to gain the scale long-term that we all want for our company.

Perfect. Thanks for that. And can I just follow up with respect to the product roadmap? And if you could elaborate just a bit more on sort of how do you see that evolving and you know, near term next year or so.

Sure. You know, for all my casino, we had a three year head start in terms of investment in that product relative to where we were on sports books. So we've really done a big effort this last year. And as I mentioned in the remarks, we've actually really closed the gap and actually been very strong and now achieving real parity with the market leaders in the quality of the product for sports betting. But what excites us more is that that's just the beginning. What we've done in the online casino category is we've innovated beyond what others do in the space, and that involves creating all kinds of product features ourselves, in-house, different types of bonusing engines and experiences that differentiate the player experience. We've pioneered it in online casino, and we're taking all that infrastructure that's already been built, and we're now adding it sports-centric themes and content to that experience to create a differentiated experience So fundamentally, we have the same features and functions that are necessary to be a leading product today. But we're not satisfied with that. We want to go push the limits on innovation. And we've already done that to a large degree in casino. And our team right now is focused on bringing those core functionalities that already exist and applying a new level of content, a new type of gamification layer on top of our sports betting engine so players that play with us feel a different experience than they get anywhere else. So that's the highest priority for our development teams in terms of innovation, and we're planning to roll all these features out later this year and next year.

Thank you very much.

Thank you, Mr. Katz. The next question is from the line of Chad Baynon with Macquarie. You may proceed.

Hi, good afternoon. Thanks for taking my question. Kyle, you noted that the revenue outlook, the revenue guidance for 2022 does not include Ontario and Mexico. But I'm still going to ask about those markets and try and get a little bit of help on this. I believe that a market like New York may have actually been negative revenue just because of the promotions and kind of how that works through the accounting that you guys report. When we think about a market like Ontario and Mexico that is different than in New York, are there reasons, I guess, could you kind of help us think about if those could actually be negative revenue markets or just because there won't be as much promotions as what we saw in New York? If you launch on time, that should contribute to the revenue guidance that you gave. Thanks.

Yeah, thanks, Chad. Appreciate the question. I think I'll Start by validating your first part of your question on New York, and I think you're right. Our expectation is that would be a headwind to revenue in the first quarter. I wouldn't expect that going forward, but in the first quarter, yes, due to kind of promotions running through. Ontario and Mexico, you're right, we haven't included that in guidance. I don't want to get too deep on that. I think we would expect those to first – have a path to profitability that's much faster than a sports-only state because they'll both include casino. And they also have a much smaller cost structure because of lower tax rates than New York. So I think we feel really good about getting those to profitability sooner than a place like New York. And then in terms of negative revenue, really any market that you launch for some period of time, whether that's weeks or months, you're going to have some headwind on revenue. But what we've seen in the past is markets that look like Ontario and Mexico having both verticals, that they move through that more quickly.

Okay, great. Thanks for that additional color, understanding that. That wasn't in the prepared revenue guidance. And then on the tech side, you talked about the iOS launches. Just wondering if you could provide a little bit more color in terms of the users. Did you see people convert over to iOS, or did you actually see incremental players and some of the non-iOS players are still playing, you know, on the HTML? Thanks.

Sure. No, we've seen both players. New users and existing users, but I will say that we focus a little bit more on the new users coming in. To give them a chance and we're comparing how they are doing versus existing players also using the prior version available web browser and we've seen as we reported a really strong improvement from those who come out and start with iOS app, which is what we expected. So we're going to be continuing to sort of Drive a larger percentage of our existing players to those apps in the months ahead.

Great. Thank you very much. Appreciate it.

Thanks, John.

Thank you, Mr. Bayman. The next question is from the line of Ryan Figdahl with Craig Hallam. You may proceed.

Good afternoon, guys. Kyle, maybe first question on guidance. So revenue guidance does not include new jurisdictions that are launching, but it sounded like the spend commentary did. I guess, can you clarify that? And then how should we think about spend relative to Q4 in the first half of the year in existing markets? So apples to apples on the revenue side.

Yeah, let me try and take those apart and see if I've got all your questions in there. So yes, you're right that the revenue guidance does not include any of the launches that we'll go live after today. So it includes New York and Louisiana, but not Ontario and Mexico. We aren't guiding to a marketing expense number or an EBITDA loss number, but we did want to give some color around marketing spend and what drives those costs and wanted to make sure it was clear that Q1 already and will include costs from Ontario. There's a lot of excitement and brand awareness that we're already generating up there ahead of launch. So we think that's a great opportunity. So we want to make sure you knew that was happening because it is a cost that we're incurring. And we also just wanted to give a little bit about the cadence of marketing expense, assuming that in Ontario and Mexico are both launching Q2, which is what we anticipate.

Got it. And then just on the Mexico launch, How's that contract with Grupo structured? I guess, is it a joint venture? Is it B2B2C like a couple states, or is it full control and some payment structure?

Yeah, so Mexico, obviously, big opportunity for us. It's a B2C relationship. It'll operate similar to other markets. I'd say, except for a notable exception, a big advantage for us with this is the relationship with Grupo. with Pupo Multimedia. So they have a fantastic variety of different media assets and distribution channels in Mexico. Richard talked about those. They're a really respected organization down there. Been around for a long time. So they're going to be a great partner for us to help us enter and operate down there. So we're really excited about that. Some real advantages we have in Mexico compared to Colombia. which has gone great for us.

Maybe just one follow-up on that, Kyle. Is it a fixed fee structure, or is it an affiliate kind of recurring participation based on sending users or some other metric? And then also, do they have an equity stake?

Yeah, we haven't disclosed any sort of equity stake, and we haven't gotten into the terms. It's a B2C relationship like our other ones, so really nothing Nothing new or exciting to share on that. Great.

Thanks, guys. I'll turn it over to the others. Good luck.

Thanks.

Thank you, Mr. Siegdahl. The next question is from the line of Bernie McTernan with Needham & Company. You may proceed.

Great. Thanks for taking the question. Just wanted to start out on the MLB strike. We've been getting some questions from investors just how big of a potential impact that could be. Just wanted to see if you had any impact or any thoughts on how big the MLB is either as a percent handle for the year or concentrated in 2Q and 3Q and how big of a swing factor could be within guidance for the year.

Yes. So, you know, obviously our guidance that we've given today includes includes the MLB season, no question about that. And that's an evolving situation. At this point, a cancellation of the first couple of series or a week of games isn't enough to make us think that we'd have to relook at our guidance in any way at this point. Obviously, just like other people with online sports betting sites, we're keeping a close eye on that. And we'll update if we think there's some change that needs to be made. But I'd also remind you that, you know, in any given quarter, sports makes up a quarter to a third of our revenue and casino makes up the rest. So we're not nearly as exposed there. But I think like everybody else, we'd love to see the MLB season get started as soon as it can.

Understood. And then another kind of current event, rumors that Apollo is looking to sell Yahoo Sports to potentially a sports betting company. Not sure if there's a comment there, if that could be an attractive target or not, but maybe take the opportunity to remind us if you think OWN Media would fit into your marketing strategy.

Yeah, sure. I'll take this one. Yeah. So I think anytime you have a media partner or asset that could help you drive traffic and and have some brand awareness in the marketplace is something that is important for us to consider. We consider all opportunities, all companies that maybe have opportunities. So that's certainly something that is worth companies like us and others taking a look at because certainly they've been in the business for a long time and have some great assets.

Understood. Thank you. Thank you, Mr. McTiernan. The next question is from the line of Jed Kelly with Oppenheimer. You may proceed.

Hey, great. Thanks for taking my questions. Two, if I may, can you just give us a sense how we should think about your gross margin cadence for the rest of the year, given, you know, New York's and Louisiana's launch? Should we expect a similar seasonality? And then just how should we view any impact from Illinois going to New remote or online registration?

Yeah, so I'll take the first one and then let Richard chime in on Illinois. So first, I'd say there's probably not a ton of impact of seasonality on our gross margins, although I'd say generally casinos higher margins. So in heavy sports quarters, you might see a little bit of movement there. I think what will drive our gross margins over time is is the maturity of markets and adding markets that have lower tax rates than places like Pennsylvania, where we have a decent amount of share there. I think specific to New York, as you pointed out, that will impact our Q1 margins. They'll probably decline a bit in Q1 from where they were in Q4, and then we'd expect them to improve as the years go on. You probably already know this since you asked the question, but just to be specific and clear about why that does impact margins. It's a big market, big opportunity, and there's a lot of bonuses involved with signups, although ours are lower than others. Your revenue can actually be negative for many weeks after launch, and then that turns positive over time as you work through the bonus dollars. And I mentioned this on an earlier question. In our case, we expect to report revenue from New York that's negative in the first quarter. So you have negative revenue, and then you have costs that are associated with generating that revenue and generating that GGR in New York, most notably the tax rate. So it creates a little bit of a headwind sequentially in the first quarter, but then that'll improve as the year goes on.

In terms of Illinois, we've performed really well in Illinois. And we've been able to hold our share, which is a reflection of our great user experience and players really trusting and enjoying the app that we offer. I think with mobile registration, it's going to be a big win for the state of Illinois and the industry, but it will increase the competitive intensity in the market, no doubt about that. We have a very strong brand here locally, which as we've shown, we have a strong brand. We perform well. So we expect to continue to do well in this new climate. Thank you.

Thank you, Mr. Kelly. The next question is from the line of Dan Pulitzer with Wells Fargo. You may proceed.

Hey, good afternoon, everyone. Thanks for taking my questions. So I wanted to follow up on Mexico and Ontario and just how we should generally think about the contribution directionally. You know, I think broadly we would assume that there would be positive revenue, but understand there's also a lot of startup costs. So, I mean, is it fair to say that these should at least be positive EBITDA contributors for the year, or is there something else that we should be thinking about?

So, let me just make sure I'm understanding your question. You're asking if we would expect them to be contributing positive EBITDA for the year 2022?

Right, acknowledging there's typically high startup costs when you enter into a new market. And also along with that, if you could touch on maybe how you're thinking about the competitive environment in those markets as you enter them.

Yeah, so I don't want to get into forecasting specific profitability by market necessarily. One of the comments they made earlier that I think is relevant to that question is, is when we are in a market that has both casino and sports, we get to profitability sooner. There's a good track record there. The tax rates or the effective tax rates after any promotions are both good in Ontario and Mexico for us. We'd expect that the gross margins in Ontario and Mexico in maturity are going to be closer to the high end of our gross margin range. So I'm sure we'll talk more about profitability in those markets on future calls, but we think they both have a great opportunity, but they will have those initial costs that you referred to where we spend a little more on marketing early on and where you're not generating as much revenue early as those players build and create more revenue and stickiness over time. If I was just to add a couple of things for Ontario specifically,

If it was a U.S. state, it would be the largest online casino market in the country. So it's grew by population. So we're talking about a very sizable market. We expect to have some brand awareness there because we've done substantial pre-launch marketing at a scale that we haven't done before. And importantly, I think there's a lot of discussion about the gray market. Existing sites are already operating there. And how we think about that is that In several of our markets, already in the past, we've come into markets where there already are existing online regulated casinos operating for several years. And we've done well and grown market share in each of those markets. I'm referring to markets like New Jersey, Columbia, and West Virginia. So I think there's an excitement for us that the quality of our product in the online casino really stands out. And that's why we're as excited as we are about Ontario and Mexico opening up, because it gives us a chance to leverage our strengths.

And then just for my follow up, you know, some of your competitors have talked about marketing and media spend. And I know you guys have been pretty, pretty restrained there historically. But, you know, have there been any changes or tweaks as you think about kind of the go forward as you as you spend your marketing dollars on where you spend it?

Yeah, so we historically we have been, you know, cautious and I would say a little more moderated than some of the others in our industry. And we are excited by, as I said earlier, that there's a rationalization of spend occurring in the marketplace. We tend to be very data-driven and nimble and dynamic and are shifting things frequently. And when we see opportunities to increase spend because we're confident we're going to get a return on those invested players, we do that. And so the hard part is what we've already done, which is getting the retention, like I said earlier, figured out. now it allows us to look at each market based on tax rate product vertical competitive intensity and be able to have a high degree of confidence when we spend in a market we know what our what our tpa targets are because cost per acquisition targets are that are going to get us the returns we want over the longer term so allows us to to be very i think thoughtful in our approach and continue to market and spend where it makes sense based on the returns that we expect to get

Got it. Thanks so much. Appreciate the caller.

Thank you, Mr. Pulitzer. The next question is from the line of Edward Engel with Ross Capital. You may proceed.

Hi. Thank you for taking my question. It seems like your cost structure is a little bit different than competitors, at least over the past two years, where a lot of your OSB-focused peers, they kind of ramp their customer acquisition in 3Q. And then 4Q ends up being a big payback quarter. I know the past two years have been a little bit impacted by new state launches, but longer term, should we expect 4Q to be kind of your biggest profit contributor for the year?

Yeah. Go ahead, Richard. Yeah, I was going to say, for us, consistency is something that we've built this business around. And really because of our strength in casino, we have a really more of a consistent seasonality that I think the sports first companies, of course, we have a large and growing sportsbook business that does rely to the novelty of Q4. But really what it comes down to, as was mentioned a few times already, is that when you invest in a current quarter, you're not going to get that return from that player for months or in some cases even long, many months and many quarters in some cases, depending on the market and the tax rate. So our philosophy is to... find the times when you can have a high awareness, get our brand in front of the audience, acquire those players, but really focusing on a high-quality customer, one that's with us for the right reasons, not bonus hunting, for example, because those aren't going to be the ones we're really targeting. So when we target those customers, we find that they're going to stay for the full year and beyond that, and our goal is to make sure that when it comes to a casino player, that they're going to be stable, consistent, and like to experience year-round. For the sports calendar, you are going to find that you're going to spend more in quarters like Q4 and Q1, where you have football and big basketball events that are really popular for the sports calendar.

I'd add, just when you're thinking about the cost structure, and you mentioned that there is an impact from these new new markets that are launching, right? And that is a big factor here in addition to some of the seasonal factors. But just to give a little perspective, after we launch in Ontario, we're going to have 140% more population in North America that have accessed our products than we did just at the end of 2020. And it's 70% greater population than we had just five months ago. So the way we're... attacking this and and going after it is impacted by by new launches so i mean that's a big increase it's a huge opportunity for us and it'd be silly for us not to be taking advantage of that although in a in a measured way as as we always have and as richard's talked about today um so i just want and i guess i'd add that that that population growth i'm talking about doesn't even include the mexico opportunity um with with a population of 130 million people so A lot of good things ahead, but I think in the nearer term, market launches will impact costs far more so than seasonality will.

Great. Thank you for that. And then if I could just squeeze one more in here, just kind of based on some of your commentary on sales and marketing costs and advertising costs and maybe new state launches, it feels like we should expect EBITDA losses in 2022 to exceed those in 2021. Is that fair? And then A bunch of your peers, pretty much everyone's kind of guiding the positive EBITDA by the fourth quarter of 23. Is there any reason why that wouldn't be achievable for RSI, especially assuming, or I guess assuming no states would legalize iGaming or something that California doesn't deregulate?

Yeah, I think so that's always the interesting thing about trying to predict profitability out so far, right? And I think maybe I'll reiterate what we said about the markets that we've been in up through the first half of 2021, that we expect those markets to be positive by the end of this year. And for the fourth quarter, we're very close to it on a market-by-market basis. And if we hadn't launched any more markets, then we would have expected the whole business to be profitable in 2022. So that just tells you how big of an impact the new markets are and kind of balancing that investment with your maturing markets, how you have to manage that. So I don't think I want to give a forecast for 2023 profitability. If we didn't launch anything more after Mexico, then I think we've got a real good opportunity for showing profitability in 2023.

Perfect. Thank you so much.

Thank you, Mr. Engel. The next question is from the line of Steven Grambling with Goldman Sachs. You may proceed.

Hi, thanks for taking the question. You've got Noah Naparstan for Steven. The first question I have is the EBITDA margins in the core. I mean, you mentioned, have you not launched in new states post 2021? You would be positive, but would you be able to give a margin that you were running at either nationally or any other core states like Pennsylvania or Illinois? before, you know, including allocating the fixed costs.

Yeah, so I'll start with just just I want to clarify something that you said, just so it's, it's entirely clear that the markets that we were talking about are launched up through the second quarter of 2021. So that that wouldn't include in that particular metric we're talking about, it wouldn't include Connecticut and Arizona or New York and Louisiana launches that have that have happened more recently. And we're not going to get into giving specific margins by state. I think it's instructive enough to show that as a business enterprise as a whole, we would have been profitable this year had we not launched any more states after the first half of last year. And I think you can expect that that would continue to build in aggregate and over time. offsets the investments we're making and new market launches. And that's how we build a profitable business over the coming years.

Thanks. That's helpful. And then just a secondary question more on the long-term margins. I mean, you described the dynamic where, you know, promos decline and so your gross margin would improve, but are there any other levers that you can pull as you think about long-term profitability?

Sure. I mean, it would, We're obviously in the very early innings, and there's a lot of momentum in the industry. We're early in our company's growth profile, so there's a lot of places for leverage. Over time, we're making a lot of investments in technology and the corporate infrastructure as we build the company and build out, so over time, we'll get leverage there. We're obviously ramping up marketing for these new launches, so that as you pointed out, that subsides as markets mature and as all the competition starts to rationalize. So that normalizes and that'll offer leverage also. And then I think the other piece is as markets grow for us and get more mature, that can improve the gross margin profile in any given market that we're in. And then we'd also expect that there will be pieces of our cost of revenue cost structure that we'll be able to reduce over time as well.

I would just add that in our industry, customers are expensive to acquire. So simply keeping your customers happy and playing with you for long term is really your best way to grow margin and grow market share over the longer term. It's a really simple concept, but it's really hard to execute on. But ultimately, any company you've seen globally over the past couple of decades that have achieved market positions of leadership, have figured out how to get that user experience at the top level. That's what we spend a whole lot of our time on here.

That's helpful. Thanks. Best of luck.

Thank you, Mr. Grambling. That concludes the question and answer session. So I will pass the conference over to Richard Schwartz for closing remarks.

Well, thank you again for joining us today. It was a pleasure speaking with you. We look forward to doing it again soon.

That concludes today's Rush Street Interactive fourth quarter and year-end 2021 earnings call. Thank you for your participation. You may now disconnect your lines.