Rush Street Interactive, Inc.

Good afternoon, ladies and gentlemen, and welcome to Rush Street Interactive's second quarter 2022 earnings. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Lauren Seiler. Ma'am, the floor is yours.

Thank you, Operator, and good afternoon. By now, everyone should have access to our second quarter 2022 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 will be forward-looking statements within the meaning of this behavioral security clause. 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. We assume no responsibility for updating any forward-looking statements. Therefore, you should exercise caution in interpreting and relying upon 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 an isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable gap measure is available in our second quarter 2022 earnings release and our investor deck, which is available in the investor section of the RSI website at www.rushstreetinteractive.com. With me on the call today, we have Richard Schwartz, Chief Executive Officer, and Kyle Fowers, Chief Financial Officer. We will 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 second quarter earnings call. This quarter's results reflect a balanced performance between top line growth and efficient customer acquisition and retention with a focus on sustainable returns. We are well positioned to continue growing and growing profitably as we remain on target to be adjusted even to positive for the back half of 2023. We continue to see opportunity for further growth in existing markets, while also continuing to launch in new markets, such as Ontario, Mexico, and West Virginia, where we recently added online sports to our existing online casino product. When we combine our extensive market access with our sophisticated technology and world-class user experience, we feel great about how we are positioned within the industry and for the future. Revenue for the second quarter was up 17% year-over-year to $144 million. Monthly active users in the U.S. and Canada were up 35% year-over-year, with growth derived from both new and existing markets. We grew our average active users in all markets year-over-year other than just one, which was flat, a great sign that our brand continues to grow in our markets. Looking at adjusted EBITDA, we posted negative 18.6 million, a considerable improvement compared to last quarter. The improvement was driven by a combination of higher revenue, lower marketing costs, improving gross margin, and only a modest increase in our G&A costs. In line with last quarter, we were profitable in the five markets of New Jersey, Pennsylvania, Michigan, Illinois, and Columbia. And their combined profitability improved for the first quarter to second quarter, validating our continued progress towards corporate-wide profitability. In addition, West Virginia turned positive for us in the second quarter, after only four full quarters of operation. As a reminder, this is the same short time period in which we reached profitability in Michigan. As for the remainder of the year, we are tightening the range on our guidance to between 600 and 630 million, which reflects a few key considerations. First, we are taking a conservative view around any potential headwinds from our consumer heading into the busy fall season. But I want to be clear that as of today, we are not seeing any headwinds with our consumer when we look at things like average deposit, bed size, or even metrics such as handover player. Second, since the start of the last football season, we've added seven markets where we operate online sportsbook. This creates a lot of opportunity, but also some unknowns. as we learn how those markets will respond during a full football season and how the competitive dynamics and intensity will play out. And lastly, as we ramp up in Mexico, our approach will be disciplined and gradual. We expect a modest contribution and investment during the initial six months of operations in 2022. But over the longer term, expect this market to be a significant growth contributor for RSI. As we move into the second half of 2022, we are building a global business that continues to scale. With the recent launches in Ontario, Canada, and Mexico, we are now live in four countries. We operate combined online casino and sportsbook now in four U.S. states, Ontario and Canada, and all of Mexico and Colombia. In addition, we operate our online sportsbook in nine other states in the U.S., giving us a diverse set of growth opportunities. With that, I want to provide some thoughts on a few of our recent launches. First, in New York, we continue with our more measured approach in the market, which is evident in our second quarter results compared to the prior quarter. We remain focused on targeting and attracting high-quality customers and retaining them with a world-class user experience. as opposed to financially incentivizing short-term behavior. We look forward to the upcoming football season as more and more players have learned about the BetRivers platform and our customer-friendly approach. And our existing customers will experience the excitement of betting on football during the opening months of the season for the first time. Next, during the beginning of the quarter, we launched in Ontario. As a reminder, for the preceding 10-plus years, this has been a great market, meaning we entered a market where a number of operators already had established brands, and equally important, existing player databases. Although it was unclear until relatively close to launch exactly how the transition from gray to white market would play out, previous operators in the market were ultimately able to slowly migrate their existing players to the regulated market. This meant a portion of the operators started with a notable advantage. From our vantage point, we knew it would be important to invest in our brand awareness early with a broad TV campaign during the Winter Olympics in February. The awareness began to pay off when the market opened in April. The fact that Ontario is also an online casino market also plays to our strength as we really shine in casino markets given the innovation built into our product and user experience. Since operators can't promote inducements for players to register at their sites in Ontario, an operator like us that has a wide range of unique selling points has an advantage because we can promote our differentiated experiences as an effective way to attract new customers. In the near term, this is an approach that will result in a more gradual build to get players in the door, but ultimately will lead to consistent growth over the next number of years. We think we can grow substantially in Ontario over time and feel very good about our start there. We are seeing good progress in Ontario, where July's revenues per day is up over 30% compared to June, even with a lighter sports calendar. In late June, we went live in Mexico. A bit of history we think is informative. Colombia is a market with a population of about 50 million people. We entered our market without a brand, without a database, and without any experience in the region. And we operated for almost a full year with only online sportsbook before adding online casino. Yet, we went from a standing start to a top three player in the market and have consistently built share over time. In Mexico, we enter in a better position. It is a larger country with a population of approximately 130 million people, and we were able to launch out of the gate with both Casino and Sportsbook. In terms of building our brand, we have a great local media partner that is well-known and respected. In addition, we have a technology that's already proven in both North American and Latin American markets. We are really excited about Mexico and believe that our high-quality user experience will stand out and appeal to players in Mexico, as it has to Colombian players, enabling us to grow market share with a measured approach. Looking ahead, we are planning to launch online sports betting in Ohio in January. Ohio is a state that we are excited about, given the demographics, the sizable population, and adjacency to four other markets where we are already operating the BetRiver Sportsbook. So there is a lot of media overlap. Maryland is another exciting market where we are preparing to launch online sports betting whenever the regulators allow. And just earlier this week, we launched a retail location in the state with our partners at Bingo World, which is located just outside of Baltimore. Lastly, it's exciting to see Massachusetts become the newest U.S. state to approve sports betting. We have an agreement with a market access partner that is included in the recent legislation. and we will share more details about our plans in the future. Turning to marketing, we are seeing a more rational environment develop with what appears to be the continuation of a fundamental shift away from a singular focus of generating revenues at any cost. We saw this pullback start during Q1 and continue into Q2 with somewhat a pullback likely reflective of seasonality and a lighter sports calendar. However, even compared to the year ago Q2 period, our costs to acquire players are down by around 35%. Looking ahead to the fall when the sports calendar picks up again, we are mindful that we may see another phase of aggressive sports advertising during the football season, but we'll remain prudent with our marketing dollars. That said, We continue to be data-driven and plan to continue to invest in customer acquisition at viable cost levels and at times of the year when those customers are most prone to begin betting with us, such as the upcoming football season. We expect we will continue to grow our share by earning the loyalty of customers, by treating them well, being thoughtful, developing high-quality experiences, and reducing friction at every possible point. The recent shifts to a more rational environment plays to our advantage. A focus on earning rather than buying customers and really earning their trust is where our platform and customer service shines. For the long run, our approach has been and will remain to emphasize user experience first as opposed to how much financial incentive is offered to players. As new markets continue to launch, To be profitable, in our view, you need to get players in the door at a reasonable cost and focus on strong retention and customer service. We have built our platform and culture around this philosophy, and we believe it is paying off on our movement towards profitability and cash flow generation. From a product and technology perspective, we have spent the last quarter laser focused on improving the customer experience and scalability, While these initiatives may not always be evident on the surface to the end user, ensuring a frictionless and high-quality experience with minimal disruption is an evergreen effort on the back end. These continued improvements and the many features we've talked about over the last year have been validated by our significant app rating improvements over the last year. Our average app rating is up over a full point from this time last year. I'm also excited to let you know that we recently completed the acquisition of Poker Night in America, a leading content provider of live and recorded poker tournaments and events. Poker Night has a strong following and a deep library of poker TV content and media creation capabilities that will help to further build out the BetRivers network and engage our target audience on an ongoing basis. Recall that two quarters ago, we also purchased an online poker platform. Together, these two tokens will position us well for when we eventually launch online poker and the associated strong cross-sell opportunities that poker will bring to our casino and sportsbook verticals. The acquisition was paid for with approximately $2.2 million of cash and $2.7 million of RSI stock, but we don't expect this acquisition to have any near-term impact. on either revenues or profitability, but rather it will serve as a growth enabler for our business. With that, I'll turn the call over to Kyle.