Rush Street Interactive, Inc.

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Rush Street Interactive First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow with a formal presentation. Please note that this conference call is being recorded today, May 4, 2022. I will now turn the call over to Lauren Seiler, Associate Vice President of Investor Relations and Development.

Thank you, Operator, and good afternoon. By now, everyone should have access to our first quarter 2022 earnings release. It can be found under the heading financials, quarterly results, in the investors section of the RSI website at RussChuteInteractive.com. Some of our comments will be forward-looking statements within the meeting of the federal securities laws. Forward-looking statements are not statements of historical fact 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. Therefore, you should exercise caution in interpreting and relying upon them. We refer you to our SEC filings for more detailed discussion of the risks that could impact our future operating results and the 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 substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our first quarter 2022 earnings release and our investor deck, which are available in the investor section of the RSI website at restreetinteractive.com. With me on the call today, we have Richard Schwartz, Chief Executive Officer, and Kyle Sowers, Chief Financial Officer. We will first provide some opening remarks and then open the call to questions. With that, I'll turn the call over to Richard.

Thanks, Lauren. Good afternoon, everyone, and welcome to our first quarter earnings call. We are off to a great start in 2022 as we continue on the path towards building a sustainable and long-term profitable business. We continue to execute our strategy in a disciplined manner, balancing revenue growth with our prudent approach to generating sustainable long-term returns on the dollars we invest into customer acquisitions. Consistent with our goal to launch in new markets early, during the quarter, we launched our online Sportsbook app on the first possible day in both New York and Louisiana. In addition, across the portfolio, we continue to experience strong growth in customer acquisitions at reduced costs per customer. In fact, we acquired more than twice as many new US customers in Q1 as we did in Q4. and did so with a similar marketing investment. We have a solid history of attracting high quality players that produce meaningful revenues over time. So we are excited about this trend of adding more players at lower costs. As a result of our customer acquisition success and strong retention program, average monthly US active users grew 32% year over year. and 24% compared to the fourth quarter. In fact, we grew active users in every market during Q1 compared to Q4. In addition to our success in the US, outside of the US, shortly after quarter end on April 4th, we launched our online casino and online sportsbook app in Ontario on the first day possible and have been receiving a strong reception. We are now live in three countries and plan to launch soon in a fourth country, Mexico. First quarter results represent our 11th consecutive quarter of sequential growth. We posted $135 million in revenue, up 21% over the prior year. This growth came despite a headwind from New York, where as forecasted, we experienced negative revenue during the quarter. Naturally, negative revenue in one state reduces the collective positive revenue growth we generated in our other markets. We talk a lot about investments in new market launches. Accordingly, I think it's important to point out, excluding the impact of the New York launch during the first quarter, our adjusted EBITDA loss would have been just inside of $15 million. As we discussed in our last call, With an impressive run of successive market launches over the past seven months, plus the launch of Ontario and anticipated launch of Mexico, we've been making many investments in the long-term growth of our business. We are laser focused on adding and retaining customers in a disciplined manner, and we continue to allocate marketing capital with an eye towards generating appropriate long-term returns. With that goal in mind, we are still expecting to have all except our most recent market launches from the last couple of quarters, will reach profitability as measured by adjusted EBITDA by the end of 2022. To be clear, when we discuss market-level profitability, we define it as adjusted EBITDA before corporate G&A. In fact, we are excited to let you know that we already reached profitability for the first quarter of Michigan, after only our fourth full quarter of operations. demonstrating once again the value of online casino markets and our ability to ramp up in new markets while also achieving profitability quickly. A combination of improving profits in our now five profitable markets, our expectation that many newer markets will reach profitability by year-end, and lower amounts of new market investments relative to our rapidly growing base of existing business gives us confidence that RSI will be profitable for the second half of next year, 2023, on an adjusted basis. I expect to get there comfortably with our current cash position. Looking forward, with the Ontario launch on April 4th, we are increasing our 2022 full-year revenue guidance. At a high level, our revised revenue guidance implies 28% year-over-year top-line growth at the midpoint all in we currently operate real money gaming in 15 markets which includes six that have online casino 14 with online sports betting and six with retail sports betting this equates to us being live with approximately 31 of the u.s population for online sports but only 10 for online casino that means Even with all the growth that we've seen, there is still plenty of growth opportunity in front of us. In particular, the opportunity for continued growth in online casinos is tremendous, especially since we deliver a top-quality user experience with strong differentiation, have demonstrated larger profitability, and achieved it more quickly. Measured by handle in our live market, We estimate our overall market share in the US remains stable at around 10% for online casinos and just inside 5% for online sports betting. Yet, as a management team, we continue to view financial statement revenues as being the best indicator of the ability to attract and retain players. It is important to keep in mind when evaluating our performance that our strategy is centered on achieving profitability in markets relatively quickly. As such, on a relative basis, we are generally disciplined and prudent in initial promotion and marketing spend. We estimate the last year we bonused at 35% less than our largest competitors. We believe firmly that players will come to, and more importantly, stay with, the brands like ours that they enjoy and trust and to bonus them in a fair and consistent way. We don't believe loyalty is achieved by bonusing heavily for early action. and then pulling back on that bonusing down the road. Rather, we believe loyalty is achieved through the user experience and how we treat our customers. As a result, our strategy leads us to target new customers who we believe over the long term will place a greater value on experience rather than bonusing. Aside from targeting the right type of players, another key driver of player retention is a top notch customer service operation. This has been a focus of ours from the very beginning and one in which we continue to invest in from both an internal training and development perspective, as well as technologically in employing the tools needed to continuously measure satisfaction levels. Customers notice when we reduce friction for them, when we address their issues in a professional and timely fashion, and do the little things to delight and earn their trust. This is why we are very proud to have won the Customer Service of the Year Award at last week's eGaming Review Awards in North America, the gold standard for industry awards. In fact, this is the only online gaming award that we're aware of in North American market that focuses purely on the quality of customer service. RSI has now won it all three times it has been awarded in its history. We are very proud of this fact as we believe it reinforces our focus and dedication on engaging and retaining players, a differentiator for us that we see as a sustainable competitive advantage. After all, we have invested 10 years into our technology platform and product features aimed to reduce player friction, including automating many processes that we believe many of our peers still manage manually. In addition to our recognition for exemplary customer service, we were thrilled to have won the top award at the EGR North American Awards event last week for Operator of the Year in North America in 2022, as voted on by independent panel of industry experts. This award is a reflection of our growth, commercial success, operational excellence, innovation, product differentiation, and influence on the larger online gaming ecosystem. This is quite an achievement given the large number of competitors. We actually scored a hat trick at the event as we added a third award too. That award was for Social Casino Operator of the Year, a validation of the quality of our differentiated cross-platform free-to-play social gaming product that we've used over the years to acquire customers in pre-regulated markets. Of course, the awards of recognition by the industry is nice. However, more importantly, We think the recognition is reflective of our unmatched focus and effort on the hardest part of the business, retaining players. We measure our return on our investment by looking at financial statements' net revenue growth over time, rather than publish revenue reports by state regulators, which typically don't account for bonusing. To that end, I want to follow up on a couple of more significant recent launches to provide a sense of how we view these markets. I'll start with Connecticut, where we launched in October and have since opened nine of 15 retail sportsbooks in the state. During the first couple of months after launch, we were seeing 6% to 7% online AMBO share. In the last two months, we were running around 11%. Underlying these top line results, we continue to grow mouths in the state, which represent a balanced combination of growth and retention. Shifting to New York, the market is quickly becoming one of the largest online sportsbook states in the country. Though down from what we viewed as irrational during January and February, there still remains substantial promotional spend at a rate above what we've seen in other states. We touched on this last call, but I will repeat it again. We have taken a more measured approach on a relative basis though our spend is above what we have typically spent at other online sportsbook-only market states. However, even with a higher spend, our focus remained on targeting and attracting high-quality customers and retaining them by delivering a premier experience. In New York, we purposefully decided to focus on quality over quantity and not run with more aggressive sign-up offers like some of our peers. as we thought those offers would attract an opportunistic group of bonus shopping customers, who in many cases would not be long-term profitable customers. Similar to other markets, we expect to expand market share over time. During the first quarter, we saw this play out. Although still relatively small, since opening in January, we grew our New York handle share each month during quarter one. Next up is Ontario. On April 4th, we launched our online casino in Sportsbook in Ontario. It is still very early. However, we have seen a strong start over the first month. Obviously, Canada has a great market for many, many years. So many brands have existing strong awareness and large existing online gaming customer databases. Given that Ontario has offered licenses to those great market brands and operators, it is a highly competitive market from day one. That said, we are seeing a strong appetite for our regulated product, and we offer a very competitive and high-quality product that is resonating well with customers. We had a very seamless launch and strong start to building our brand and reputation in the market. We believe we have achieved our goal of establishing the Bett Rivers brand as one of the most trusted in the market, an attribute that we expect will help us grow in that market over the longer term. The most recent comparable market to Ontario in our view would be Michigan due to both markets offering both online casino and sportsbook. Interestingly, during the first 10 days in Ontario, we were running about 33% of the daily handle that we saw in the first 10 days in Michigan. But for the most recent 10 days, we are running closer to 50%. There are a couple of key differences that are worth pointing out. First, is that advertising content and promotions in Ontario are materially more restrictive than we've seen in other new markets. In large part, you aren't allowed to advertise any bonus offers or inducements for customers to sign up with your brand, meaning the initial rate of customer acquisition by regulated operators may be slower than in other markets. Second, is that with a well-established and long 10-year gray market, there isn't the same level of initial pent-up demand for online gaming at launch, as we've experienced in other markets. This means it's likely that it will take longer for this market to build, but the demand exists, especially for high-quality betting experiences like the ones we offer. Our strategy during the pre-launch period to generate brand awareness and excitement around our rivers has allowed us to get off to a quick start and establish ourselves as a premium option for customers. We are very familiar and comfortable with entering a market after others who have existing databases, and building shares steadily over time. And unlike what we saw in New York, we expect Ontario to contribute positive revenue from the beginning. Turning to marketing, we remain data-driven, applying a dynamic approach to acquiring, converting, retaining, and reengaging players. We are optimizing spend based on real-time data and insights around the specific jurisdictions in which we operate. marketing channel, predictive long-term values, and player behaviors to yield a return on investment focused model. This allows us to be nimble and reallocate spend to those channels that work most efficiently. The results we are seeing are what we would like to see. As I mentioned, we grew mouths from Q4 to Q1 by 24%. The approach is working as we are steadily attracting and retaining the types of high quality customers we seek. Given the four new online sports pick launches since last fall, which includes New York, an aggressive level of marketing investment in the state during Q1, ArtMail predictably came in a little lower sequentially at $265 for the quarter. A reminder as we look ahead in general, online casino ArtMail are higher compared to online sports pick ArtMail. In addition, in new states such as New York and Louisiana during Q1, It is not unusual for us to see negative art mail around a launch, which naturally depresses art mail in the shorter term. We also continue to see benefits from the convergence of content and gaming. In Q1, we laid the groundwork for our brand new Bett Rivers Network. With the network, our aim is to deliver unique voices in sports, lifestyle, and casino entertainment with exclusive content and podcasts. A key highlight during the first quarter was the signing of New York sports broadcasting legend Mike Francesa to an exclusive brand and content deal. He will provide network and social media content through hosting a twice-weekly podcast series, as well as hosting a series of digital videos that will appear on Vet Rivers and Play Sugar Owls' various platforms. Francesa will also be appearing at select sporting events throughout the year. where he will create special on-the-scene videos for fans. We also had our first major release of the Boomsies with Dan O'Toole podcast. Dan, a longtime Canadian television sports anchor for TSN's SportsCenter, has been featured in many of our Ontario ads. In fact, a launch of his podcast corresponded with our investment in Ontario in our Olympics campaign, which also featured Dan. During that time period, the podcast shot up to top of all podcasts in Canada on Apple Podcasts. We could not be happier with the quality and substance of both podcasts, and we see a bright future for both us. Listener response has been overwhelming. Between our major launches, we've also been building up our betting weekly studios, which focuses on niche sports and leagues and speaks more to the core better. All of these content efforts are geared towards brand building, satisfying a wide range of our core customers, giving our customers a chance to enjoy quality sports content or to get expert analysis for the sports they like to bet on. We look forward to giving our customers more quality programming and to innovate casino and sports content as we go, making our BetRivers and PlaySugarhouse brands not only reliable for their gaming needs, but also for branded content that they can enjoy listening to, watching, and engaging with outside of the app. We continue to invest in improving the quality of our online sportsbook and iGaming products. As an operator focused on the customer experience and continually reducing any friction, we see continual improvement in product and tech as a great source of consistent revenue growth. As we reviewed on our last call, we continue to see great reception to our recently launched iOS app in combined casino and sportsbook markets. This is reflected in the feedback we received directly from our users, and rapidly improving app store ratings are now more closely reflecting the positive experience we know our players experience betting with us. The constant stream of improvements we make to our user experience we know is both appreciated and noticeable to our players, and we will continue to focus on improving the user experience. As an example, in Michigan, our iOS app users are generating 50% more handle, but no supply on other devices. With that, I'll turn the call over to Kyle.

Thanks, Richard. First quarter revenue was $134.9 million, up 21% year over year. As Richard mentioned earlier, and as we've discussed at length in prior calls, with this run of recent new state launches, we were in heavy investment mode during the quarter, which we were comfortable doing. knowing that existing markets where we operate continue to perform and grow nicely. As a result, our first quarter adjusted EBITDA loss was $43.4 million. Our New York launch was the biggest contributor to our loss during the quarter, with almost two-thirds of our adjusted EBITDA loss coming from New York. As we previewed on our last quarterly call, we had negative revenue contribution from New York during the first quarter, providing a headwind of almost $6 million on the revenue lines. This combined with our New York launch marketing and brand building efforts during the quarter contributed significantly to our loss. The good news is we're now producing solid positive revenue in the state and marketing costs have been and will continue to be reduced meaningfully in New York as the NBA and NHL seasons conclude. Adjusted advertising and promotions expense was 66.3 million during the first quarter of 2022 compared to 64 million during the fourth quarter of 2021. As Richard noted, we spent a similar amount in marketing, yet acquired more than twice the number of players than we did in the prior quarter. We've had fantastic recent success in lowering our costs to acquire new players as we continue to refine our marketing efforts and also as a result of more rational behavior across the industry. The marketing increase over the last quarter reflects increased marketing efforts in New York, Louisiana, and even Ontario ahead of launch as we sought to generate brand awareness. in advance of our launch there. We expect marketing expense in New York to reduce significantly in the second quarter and going forward, but we'll also have increased costs in the second quarter in Ontario related to our exciting recent launch in a market where we're optimistic we'll see solid returns given that online casino is legal in this market. While we will remain flexible with our marketing initiatives, it's likely that Q1 will be the high watermark for the year in terms of marketing expenses. As we expected and discussed on our last call, our gross margins were lower during the first quarter, largely due to the impact of New York. We expect gross margins to continue to improve from here as the year moves forward. Our adjusted G&A grew to 12.4 million during the first quarter, up from 11.6 million during the fourth quarter. G&A is expected to continue to grow throughout the year as we build out our technology teams and our corporate infrastructure. Turning to the balance sheet, we continue to be in a position of strength. We ended the quarter with $232 million in unrestricted cash on hand, and we have no debt. We're positioned well to comfortably get to profitability and cash flow positive with our existing cash position. As Richard highlighted, we're increasing our full year 2022 revenue guidance to largely reflect the opening of Ontario. We are raising our expected 2022 revenue to range between 600 to 650 million, up from between 580 million to 630 million. At the midpoint, the increased guidance implies 28% year-over-year top-line growth. As a reminder, our policy towards revenue guidance is to include only those states which are currently live. Thus, our revised guidance adds in Ontario, but still does not include Mexico or any other markets that may launch later this year. In addition, Richard highlighted in his earlier remarks our expectation for profitability. We expect our losses to continue to decline meaningfully as we move through 2022. Improving profitability on a market-by-market basis and less investments in new market launches relative to our overall size gives us confidence in our ability to be adjusted EBITDA profitable for the back half of next year, 2023. And this includes our expected market launches in Mexico, Maryland, and Ohio over the coming quarters. We continue to execute well and see a clear path to profitability on a market level and overall business perspective. And we'll be excited to share additional details with you as we get closer to that mark. With that, operator, please open the line for questions.

Thank you. At this time, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 to ask a question. If you want to withdraw your question, just press the band key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Bernie McTiernan from Needham. Your line is now open.

Great. Thanks for taking the questions. I guess we need to start. Richard, your comment on Canada that it will take longer to build, was that an industry comment or an RSI specific comment? We'd love to get your thoughts or insights on how large you think the market currently is and how big you think it can get.

Sure. Yeah. So this is a view of the industry given the gray market existing there and the fact that you have to have restrictions on inducing any inducements to attract a new player to play at a site is going to take longer to get those players in because you aren't promoting like you do in the other markets in North America. The offer, promotional offer is free spin offer, bonus codes, anything of that nature are prohibited. So due to that restriction, you're going to have a slower time acquiring new players other than if you have an existing database from operating in a great market previously. In terms of the size of the market, it's unclear at this point. We only know how we're performing. Certainly you've seen some people anticipating numbers based on downloads and things of that nature. We don't put a lot of weight into some of those items, frankly, because Um, not all strategies are driven by getting downloads directly from the store and the way that those are measurable. Uh, and certainly we know that you can have a large volume of downloads, but not have a large number of depositors. So, uh, we, I think that's one of those things we're gonna have to wait and see the market size from when the regulators announced their numbers publicly.

Understood. And on the, the upcoming Mexico launch, is there a way we should be thinking about that market opportunity? Um, whether it's launch costs relative to Canada, potential revenue, maybe comping it to Colombia as well.

Yeah, well, I think what's exciting for us about Mexico is obviously we have a partner there, a media partner that we're very excited about, and they've been very helpful in a very collaborative environment so far with us and them. Unlike Colombia, in Mexico we will also be launching online casino and online sportsbook on the same day. So those are real two positives. The thing I want to make clear, though, is that our plan is to build that business over the long term. So we'll focus on ensuring that we have the proper user experience there, all the right payment methods are working the way we want them to. Don't forget, there's a lot of new vendors that we're using for the first time in that market. And so it's important to make sure the registration flows and the payment methods that we are implementing are working as designed. So we're going to really make sure the user experience is right before we spend and invest in the marketing. So I think the marketing, There is no specific date in that market like there are many other states we've operated in where everyone launches at the same time because that market is an existing market. There isn't a time sensitivity to have to launch and go with a full marketing plan initially. So we plan to ramp up as we see the user experience meeting our expectations.

Understood. Thank you very much and appreciate all the color provided in the prepared remarks. Really helpful.

Thank you. Your next question comes from Dan Politzer from Wells Fargo. Your line is now open.

Hey, good afternoon, everyone. Thanks for taking my questions. Just first, I wanted to clarify, in terms of the payback period, I know you mentioned you're profitable in Michigan after four quarters. How should we think about the payback period in the market where you have iGaming and sports betting versus the payback period in the market where you just have online sports betting?

Yeah, good question. I think We've been pretty clear and probably evident from the markets where we have gotten profitable first is when it has both casino and sports, we're going to get to profitability sooner, and it's going to take a little bit longer in a sports-only market. That's with all factors equal. Obviously, the competitive nature in a market, the tax rate, those are all going to impact overall profitability as well. But I think you're on the right track that when we've got casino and our path to profitability is a lot sooner, you know, and evidenced by Michigan being in just the fourth full quarter of operation getting there already.

Got it. And then I think since the last time we spoke, there's been some additional consolidation in the iGaming space. You know, as a leading iGaming operator, to what extent are you seeing additional opportunities come across your desk, and should we expect this case of consolidation to continue or accelerate from here?

You know, so we've shared this before that, you know, we're in the discussions often about consolidation, primarily because we have a lot of things that others probably find attractive, which is obviously strong online casino business, our own technology driving that online casino business. A large number of scale, I think we're a top four in online casino revenues in the country. The fact that we're diversified across the Americas. You know, the fact that we're, you know, pretty close to being profitable, getting much on a path with a line of sites was profitability. So I think, you know, certainly there's a lot to our product. I think a lot of our competitors sort of view casino is more of just an aggregation of library of games. And if you add more games, then you're going to be more successful, but we don't view it that way. We think there's a whole lot of proprietary technology you have to build into a casino experience to create something differentiated and to have unique selling points. So I think because of the head start, the advanced product that we have there, we're continuing to look for ways to grow in casino markets. But I do think we come up often in those rumors and things of that nature, given the fact that a lot of companies are recognizing that they too wish to be stronger in the casino category.

Got it. And then just one more quick one. Sorry, go ahead. Yeah, go ahead. I was just going to ask you if I could speak one more in just from California. There's been some, it's been a news lately and you know, is this a state where you have a path to market access or, or working on it or, you know, I guess any update there or how should we be thinking about that?

Sure. We've been investing in California market access conversations, have a lot of great relations with different parties there for a long time. And the truth is, is that, It's too early to speculate which direction it's going to go, whether it's going to be a mobile market. There's several referendums that will be held in November. And there's a third one that's, I know, being sought after for signatures. And the framework's going to vary dramatically based on that. So what we've done is create our self-optionality for ourselves by having some relationships that we think will be very meaningful and helpful should the direction of the legislation go one direction. versus others that if we go direct, we certainly have that opportunity as well. So I think we're just sort of keeping all of our options open, but we do have some very good relationships there that we've established and continue to maintain.

Got it. Thanks so much.

I'll pass it off. Your next question comes from the line of David Katz from Jefferies. Your line is now open.

Afternoon, everyone. Thanks for taking my question. I wanted to Just with the water under the bridge so far, just talk about scale and how you think about scale. And are there actually scale benefits so far, as far as you can tell? And how does that evolve in the future? Or is it the bigger the opportunity, the bigger the investment, and whether that math is better or worse?

Sure. I've said it before, but it's really clear. I've been in the industry for 20 years, and it's been pretty much clear across the board, no matter what market you're in, but ultimately online, the user experience wins. So marketing is necessary to attract players, but long-term players will migrate to those sites that they like the best. And so when it comes to a product like Sportsbook or Casino, the two primary revenue-generating categories in the industry where you play against the house, the scale doesn't really change the user experience. depending on the size of your operation, doesn't change how well you treat the player, what type of innovative experiences you can create, what kind of bonus structures you create. I think as long as the user experience is scalable and is scaling with the rest of the competition, for example, making sure that you have enough scale to invest in the proper data feeds, streaming feeds, things of that nature, which we've been market leading on, As long as you're able to offer the players experience by investing in those things and having the ability to justify those expenses, which we are able to do and plan to continue to expand our focus in those areas, we think the scale is less relevant than it is, for example, in a poker market where often the inferior product sometimes wins because it's all about liquidity and the number of players you have, whereas in the casino category in sports, because I mentioned, it doesn't work that way. So we're very optimistic and excited by it. continuing to build innovation on the product side is going to differentiate our user experience so that players have a reason to play with us when they have a choice.

Understood. Thanks very much.

Your next question comes from the line of Chad Banen from Macquarie. Your line is now open.

Hi, good afternoon. Thanks for taking my question. Your path to profitability comments were very helpful and maybe even ahead of expectations for the full back half of next year. When we think about a year or two beyond that, just thinking about kind of a stable EBITDA margin, has anything changed in terms of where you believe you can get to? And is that more driven off of further revenue growth from your users or from cost reduction and promo reduction to those players? Thanks.

Yeah, Chad, I'll take that. Our view hasn't changed, and I don't want to peg an exact timeframe to it, but we still feel very good about being able to get to EBITDA margins that are in the mid to high 20%. I think in addition to a tailwind of new states that should be coming online over the coming years, we're seeing more, and we talked about it on this call, we're seeing more markets approach profitability or reach profitability. We see many more of those markets getting there by the end of this year and into the coming years. So I think that'll allow us to see that operating leverage. But I think we're still pretty early in the industry and our company growth timeframe. So the leverage is going to come over time. We'll get that over technology investments, over the corporate infrastructure that we're putting in place to support the growth. And then There's been no shortage of discussion about us ramping up marketing in the near term. We've had all of these markets launch in the most recent quarters, Ontario this quarter. So over time, the marketing spend is going to normalize and level off, and it declines in markets that are more mature. So that will also help pretty significantly. And then maybe the last piece that I think you mentioned was just The margins will improve as gross margins will improve as some of our state mix changes. You know, we're pretty heavy in Pennsylvania, which has a much higher tax rate. But as this industry matures and we mature, there'll also be ways to find opportunities to take costs out of our cost structure to improve the gross margins, which will obviously flow through to the EBITDA margins.

Great. Thanks, Kyle. And then you were nice enough to call out the revenue impact and essentially the EBITDA impact from New York in the quarter. I was wondering if you were willing to do the same from a hold standpoint, if the lower sports betting hold in the first quarter impacted your revenue in EBITDA, understanding it wasn't meaningful, but if that was a couple million that you would have had in the quarter. Thanks.

Sure. So I probably won't get as specific as you'd like me to, but our hold in the quarter was – Probably, or not probably, but a little under where we would have expected it to be in sports and a little over where we expected it to be in casino. Probably not netting out to a big difference. I think people are generally focused on the sports hold and what's happening in the big events or in the different leagues. And we probably saw a little of that same impact that others have talked about, but not a needle mover overall from hold in the quarter.

Thank you very much. Appreciate it. Your next question comes from the line of Mike Hickey from Benchmark Company.

Hey, Richard, Kyle, Warren. Thanks for taking my questions, guys. I hope you can hear me okay. Just curious, Kyle, On your guidance, your updated guidance for the year, if you look at it ex-Canada, are you basically reiterating your view? And then on Canada, it sounds like most of these headwinds you probably knew were there before you entered the market, or was this something that surprised you and you sort of lowered? your expectations for the Canadian market, given the headwinds that you noted? Then I'll follow up. Thanks, guys.

Yeah, so I'll answer, and if Richard wants to add anything, great. I'd say in aggregate, so far in 2022, things have played out pretty much as we've expected in our existing markets. So to your point, our increase in guidance is largely due to the launch of Ontario. You know, we feel really good about continuing to grow our revenue this year, quarter after quarter. That's what we've done for the last three years. And, you know, part of that, just a reminder, more of our revenue comes from iCasino. So the revenue stream is generally a little more predictable and less subject to seasonality or the sports calendar. And from a, I'd say from a financial perspective, Canada has not been a surprise for us. I think we've been pleased with that. And so no surprises there.

I would agree with that. There hasn't really been any surprises. The only thing I will note is that some of the marketing restrictions and the process for you to transition from a gray site to a regulated site weren't very well defined until relatively close to the launch. But having said that, we recognize the size of the gray market there, and we're aware that this is going to be a market where you've got a lot of existing operators with brands that have a lot of existing players already from day one.

Awesome, you guys. Thanks for the caller. Second question from me is on marketing spend. Just sort of curious if you're seeing any change in behavior from some of your competitors. I think at least one has been pretty public that they're pulling back in the amount of spend. being more disciplined, maybe sort of getting to where you've always been. Just sort of curious on the competitive profile in new states or maybe existing states, if you're seeing more rationalized spend from your competitors. And then for you guys, obviously you had a big spend in the quarter. That makes sense. You said it was going to go down from there. That's great. But are you still tracking to budget on spend or are you, you know, Are you changing I'm guessing being more conservative here versus elevating your spend? Thanks, guys.

Okay, I'll take the first part of the question. Maybe a second. When it comes to rationalization, you know, yes, we are we are seeing a more rational approach to marketing. In fact, we track and notice that almost all of our top competitors have reduced to marketing intensity. since the Super Bowl. So this has been a consistent theme that we continue to see, and we're excited about that because it does give us opportunity to continue to see the great results that we've seen where we've been able to essentially double the new players for the same price that we were paying before. So we hope that we expect that to continue, and we're excited that we're seeing some rationalization in the marketplace.

Yeah, and so then I'd just add there, and Richard said this in the opening remarks, but we had really great success bringing in new players or FTDs during the first quarter. We mentioned that we added twice as many US first-time depositors compared to Q4 and spent only a little bit more. So we think that's great. And we've seen those attractive CPAs continuing so far in Q2. So I think that's all really exciting. I mentioned that it's likely that Q1 will be the high point of the year for marketing expenses in terms of what we spent during the quarter. But we'll also, you know, we're going to remain flexible with the spending. We take advantage of good opportunities. We pull back when those aren't presented. So maybe to your point about, you know, where we are relative to our budget, we haven't published a budget, so I don't necessarily want to give you an exact data point on that. But what I would say is we're always balancing When we see these great opportunities, do we push harder and spend more than the budget? Or do we save some of that to improve the opportunity for profitability? And that just might mean bringing some less players in. So I think our marketing team does a great job of looking at the returns that are available in markets, what we see from those players through those marketing channels. um what our margins are in those states depending on the different different landscape what the competitive uh set looks like um so we'll continue to be dynamic there and i think i think our team's proven to do do really well at that just to add one quick comment is that we've also largely avoided long-term marketing commitments which has allowed us to remain nimble and flexible and adjusting the allocations as appropriate we always felt that from the beginning

If you've invested these many years, many long-term deals, you won't get the same consistency and flow of players that you need to justify the ROI. So that does give us the flexibility that we're using to be able to take and choose the right opportunities that make sense for us based on the ROI.

Nice. Thanks, guys. Good luck.

Thanks. Our next question comes from the line of Edward Engel from Roth Capital.

Hi, thank you for taking my question. Based on what you're seeing in Ontario, it sounds like the promotional environment is a bit more rational than maybe some of the other U.S. markets. Could we assume that CPAs might also be lower as well? And then I guess similarly for Mexico where CPAs are lower, could we maybe assume that your path to break even in that market could be shorter than the traditional U.S. or Canada markets?

Sure. When it comes to CPAs, I don't think we're at a point where we're disclosing CPAs on a market basis, but what I will say is that obviously it's a large population in Ontario. Launching day one was helpful for CPAs. Having a product that really works well day one, strong customer service as a differentiator are things that really help us. Of course, the differentiation on a customer service, the players don't notice that initially. It's only after they sign up with us. What I would say, though, is that because you're not able to offer enticements such as the free play, aggressive free play bonuses, which typically are numbers that we offer are smaller than what many other competitors promote. It actually gives us an advantage to really market things that we think matter most to the user experience, which are the unique selling points for a player. So since you're not able to market enticements, we can talk to the players and plan on continuing to talk to the players about all the things we do that give them an experience that's differentiated and unique relative to other products in the marketplace. So it is helpful for us to market that way. I think it does reduce some of the focus of many of our competitors, which historically have focused very much on promoting a larger dollar amount than everybody else to try to get attention. So in this market, it's less about the dollar amount on the offer and more about the user experience that we plan to offer to the player. In terms of Mexico, it's early. We haven't launched yet there, so certainly we don't have specific details on that other than just, as I mentioned earlier, being really excited that we have a really well-regarded, well-respected partner there on the media side who's going to be leveraging a lot of assets they have to help us get off to a strong start. As I said earlier, though, we won't execute on all those assets initially until we have the comfort that the product experience is where it needs to be.

And maybe then just on the kind of the path to profitability part of the question, is As I mentioned before to a previous different question, we do see that path being shorter when we're in markets with casino, and they include both casino and sports, I should say. So I wouldn't expect Ontario and Mexico to be any different in that regard, that they'll get to profitability faster than if they were just sports-only markets. But as Richard said, Ontario is very early and Mexico hasn't launched, so I wouldn't want to yet peg it against a place like Michigan where we got there in just the fourth quarter. But I feel very good about getting to profitability in both those markets in a very reasonable time frame.

Great. Thank you. And then I guess even adjusting for New York, it looks like your cost of revenue as a percent of sales did increase a bit sequentially. I guess what's kind of the opportunity there to kind of improve efficiencies on the gross margin side over time.

To make sure I understood your question, you're saying that ex-New York, your math is getting to a little bit lower gross margins. Is that what you were saying? I think that's generally right. New York probably cost us somewhere in the neighborhood of 600 basis points of gross margin during the quarter. A lot of that is temporary. When you generate negative revenue and you incur operating costs to support that revenue, it provides a pretty good headwind. But most of that is temporary. A little of it would be permanent, depending on how big that market is relative to our others. But I'd expect the margins to continue to kind of sequentially improve as the year goes on here. and we'll probably get back up to mid-30% gross margins by the end of the year, something in that range. In terms of longer term and how we improve those margins, the margins are typically better in casino than they are in sports. Obviously, it depends on the tax rate. I think as we continue to diversify away from, not away from, but adding other new markets that that become bigger relative to Pennsylvania, which has a little lower margins, higher tax rate. That'll naturally improve things. And then there's a bunch of other initiatives that we have, some short, some longer term, where we'll be able to take costs out of our operating costs, improve those margins over the coming quarters and years. Great. Thank you for the callers.

Again, as a reminder, to ask a question, you will need to press star one on your telephone keypad. Again, that is star one to ask a question. There are no further questions at this time. I'll now turn the call back over to Richard Schwartz, Chief Executive Officer.

Thank you for joining us for this call, and we look forward to speaking again soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.