PENN Entertainment Q2 2024 Earnings Call Transcript

Yes, it's a great question, Carlo. Our assumption around customer acquisition, obviously, is completely built into the guidance for the rest of the year that Felicia provided. And the environment right now is actually quite good. It doesn't mean that we're going to be super aggressive. It means that with the guidance that we provided, we think that we can continue to drive top of funnel. Understanding, of course, that the most valuable and most efficient top of funnel we have is our partnership with ESPN.

And the deep integrations that we not only have today but are going to have by the start of football season, lot of enhancements in the ESPN media app and then, of course, Fantasy, which we have a few slides on. So I would say that with the environment being healthy right now, that allows us to continue to focus on top of funnel mostly through our relationship with ESPN, we'll do some spending around that.

But again, that's all built into our guidance for the rest of the year. And remember, we have a digital database of almost four million, and a lot of those digital customers only bet on football. So there's a huge reactivation opportunity for us, and we think with the much improved product that we have and all of the new features that Aaron and I and Todd talked -- will talk about, I'm sure, throughout this call, we feel like we have an opportunity to drive better engagement, deeper loyalty and retention and monetization as we move forward.

Todd, do you want to grab that?

Sure. Thanks, Jay. And Carlo, great question. This quarter, obviously, there was a little bit of noise. In the South, we did have some disruption related to some weather impact from primary theater markets. We also had a little bit of impact from hotel construction at our Lake Charles property. And then in the Northeast, just a little bit of some accounting adjustments, some favorable last year, unfavorable this year as well, some table game hold percentage. I think when we think about the remainder of the year, the margins that we're carrying right now, we feel comfortable going through the remainder of this year.

As we look into next year with the improvements we're seeing in technology, a lot of our technology initiatives are offsetting some of the payroll creep we've seen. I think you may see a little bit in Michigan. That was pretty highly publicized. But again, we do a case study on that. We're offsetting a lot of that with the revenue growth. So from a net revenue standpoint, I think we've weathered the storm with a lot of the new competition introductions. And we're looking at a pretty stable environment, not only for the back half of this year, but going into next year.

Correct. Thank you.

Joe, do you want to clarify the second part of that question again? I wasn't following that.

Okay. Got it. We'll take a stab at that. I think the first part of your question with regard to the ESPN BET users and this pickup in our database, the lion's share, 90-plus percent of the ESPN BET pickup, are really new to PENN, which is great for us. We detailed in our last quarterly call how many of them live proximate to our properties, which is, I think, lays out a great opportunity for us and especially as we convert more and more of our retail sports books and rebrand them to ESPN BET, you have the name and brand recognition.

So cross-sell becomes even smoother. So that's all been good news. And we would anticipate going into football season, that will continue to be the case. Obviously, we have a huge land-based database that we can market to for ESPN BET in the states where it's legal. Of course, iCasino as well. But we have an opportunity to continue to grow through the integrations that we mentioned earlier and all the cross-sell that we're getting from ESPN. So really good news in terms of incrementality to PENN and the brand -- and the awareness of that brand of ESPN.

The Pennsylvania skill base, it's a very interesting topic. We have been very vocal in our position that those skill-based games are they sound, look, smell like a slot machine. And there's a lot of concern around that. Obviously, we continue to fight against what has been a rapid expansion of skill-based games in Pennsylvania through the court system. We think that we have a very strong position there. Our industry is very much aligned on fighting against the expansion of skill-based games, not just in Pennsylvania, but around the country. So we'll see how things play out in Pennsylvania. But I think that my comments speak for themselves in terms of our position.

No. We would be completely guessing on that one, Joe, not really comfortable putting out a date range.

Yes, happy to. Most of that growth because we're talking NGR here was on the sports betting side. There is growth on the iCasino side as well, but we really didn't have a whole lot of promo spend against iCasino last quarter relative to what it was in Q2. So the biggest delta that you see there in growth in revenue is driven by more efficient revenue from -- on the growth side being that it's flowing through to net as our promotional costs from the initial launch continue to come down. And I think us just continuing to get smarter in terms of the promotions that we have out there for new users as well. So really a combination of those two, but more driven by OSB.

Yes. We find it to be very interesting. It was unexpected from our perspective, but definitely interesting. I mean, you really -- as you think about PENN's view on this, you should expect us to be observers. We have a lot going on in front of us right now over the coming quarters. So I would say when you're talking about a potential tax surcharge in early '25, like that's -- it's not even on our radar. It doesn't mean that I hesitate to ever say never.

It just means that we're really focused on continuing to improve the products continuing to drive top of funnel and loyalty and retention. And so we would not be a first mover on something like that. We're going to stay very close to it, we'll observe, we'll see what the reaction is, assuming that it does launch in early '25. And then we'll probably have more to share with all of you on our quarterly earnings calls throughout 2025.

Good morning, everybody

Yes. I hit on it a little bit earlier, Joe, in terms of how we're thinking about driving acquisition and top of funnel. We have this -- we're in this great position where we've got the deeper integrations with ESPN and their core digital products with ESPN Media app as well as Fantasy. Fantasy is all brand new going into this football season. And even the deep links that we have in the ESPN Media app, they're going to be now no longer just in game cast, but on the scores tab, on the home screen, really anywhere where you see a score of an event of the major sports, you're going to have that six pack of odds and deep links with ESPN BET.

So we're in a very fortunate position where, obviously, that will drive top of funnel that will drive a lot of engagement with our app. And so that is extremely efficient for us. And that's going to be the biggest driver of acquisition. There is some other acquisition outside of ESPN that we'll continue to pursue, but the lion's share of acquisition for us is going to be through that ESPN channel. I would anticipate that the acquisition environment will, from our perspective, be healthy, but be cost-effective as well.

And we talked a little bit about New York in our prepared remarks. And we're going to continue to take a different approach in terms of launching in New York versus what we did when we launched across 17 states in the fourth quarter of last year and really lean a lot more on the product improvements, the integrations, of course, the connection that ESPN has with millions and millions of New York-based sports fans.

And so that's going to really be our approach where we think that based on everything that we covered and I just highlighted that we'll have a steady flow of top of funnel. But the biggest opportunity to be very clear and I mentioned this earlier also is going to be around reactivation. We have this significant database. A lot of them are -- in the app, you see that the Sensor Tower data, but we just -- we need to continue to drive better retention and higher share of wallet.

And we think with all the product enhancements that we're launching between now and the end of the month and then, of course, throughout the football season. When you get to later in the fourth quarter, we talked about being able to have account linking done with ESPN, that's going to take personalization to a whole different level. So the great thing about our relationship with ESPN is it's a driver of both top of funnel as well as ongoing retention.

Well, I guess, at a high level, Joe, you'd expect this answer that we don't comment, we haven't commented and won't comment on market rumors and speculation. What I will say is that as a company and as a Board, we're always have, always will evaluate opportunities to enhance value. And we'll continue to take actions that we believe are in the best interest of the company and our shareholders. With that said, we're very confident in our strategy and the value that it's going to deliver for shareholders over the short term, medium term, long term.

So that's the way I would answer that question. And I don't -- I would say, don't believe everything you read. And with regard to your specific question on assets, just remember that our assets -- land-based assets are all part of different leases. And so it's not as simple and easy as, Joe, you just sell off an asset. So I don't want to comment any further than that because then you are commenting on something that you said you're not going to comment on. So I'm just going to leave it at that.

And I think, Jay -- I mean, Jay touched on a lot of them. I think we're super excited about the integration with ESPN. We're talking about Fantasy this year. Jay just talked about account linking that's going to come in November, which -- if you think about ESPN's digital and social reach today, I think last month, it was 181 million users. So when you think about knowing the fan avidity, personalization, uses preferences of all those people and then being able to target them, whether it's introducing them to sports betting or people that are already sports betters giving them personalized offers and then moving them seamlessly between the apps with no friction, it is a massive opportunity.

And what we know is no matter what platform that you bet on today, you place your bet and you're on ESPN tracking your bet and consuming information to try to piece together where you're at in a parlay or whatever. And being able to place a bet -- on ESPN BET and then seamlessly package together the way to track that bet and make it more efficient and frictionless, we think it's going to be a huge competitive advantage for us and something that no one else can do. And we're really focused on that. That's very exciting. And the teams are already working together in a way where it doesn't even feel like they're a separate team.

So it's coming from ESPN, I think that's super exciting. I think the opportunity, someone mentioned in the previous question, with the land-based casinos and the size of that database, which I don't actually know if we share that, but it is actually quite massive and being able to take people from that environment, move them into ESPN BET and then further move them into our iCasino products is super exciting, too. So beyond that, focusing on product experience, making sure that when people interact with our products, it feels good, it's frictionless and it's fun to use is what I'm going to be focused on.

Yes, I'll take a stab. Todd, fee free to jump in. Really no change from what we have said previous quarters. We saw very consistent trends in the second quarter, as you see in our results. July, remember that you have calendar shifts. People seem to forget that oftentimes. So you traded in the month of July, you lost a Saturday, Sunday and picked up a Tuesday, Wednesday, that's going to impact your top line results. And August, you benefit from a calendar shift. So my expectation would be that year-over-year August looks better than July. We really -- it's interesting because we've been hearing from some of the lodging companies as well as from air travel that they're seeing some cracks in that lower end consumer.

We're not seeing anything incremental in regional gaming or in our digital trends. So I mean it is interesting dynamic that if people are staying -- they're traveling less, whether it's air travel or they're staying in hotels less, that tends to be beneficial for regional gaming. People are staying closer to home. It's a drive. And gas prices are actually quite stable right now. So it all adds up to, I think, what could be just a good, stable environment for us. We're not seeing anything from an incremental standpoint that concerns us right now.

Yes. The only thing I'd add that a little more detail, that's 50 to 99, even the 100, 399, 400 plus, all very stable throughout the quarter year-over-year. And then just a little bit, I think Carlo touched on this in his question, but we did see really decent play from our unrated segment. So that kind of offset anything that we saw in the lower segment, that 0 to 49. But even that was stable. And even though it's early in August, we're seeing really positive trends the first few days of August.

Great question. Well, so what I'm most excited about, and I got a view of this as we were doing the partnership with PENN is the underlying foundational infrastructure that powers ESPN BET is incredibly sound, super sophisticated and is the foundational piece in which we're going to build everything on top of. And so this isn't an engineering project to come in and fix something that's broken. It's something that we're going to build on top of.

And so right now, and I mentioned in our remarks, we sort of lagged our competitive set in terms of full features and functionality and being able to quickly build on top of that foundation to iterate the product, I think, is super exciting. I think marketing and acquisition is just part of the business. We're going to continue to get smarter and better there.

And I think some of our results show that we're already doing that. So to me, it's about building the best product and then really taking advantage of the integration opportunities with the ESPN, which will also require some technical sophistication. And of course, that's one of the best teams in the world as well. So just super excited about all of it.

Yes. Really, it was a combination of the two. Our promotional reinvestment as a percentage of handle came down from Q1 to Q2. Obviously, we had a slide that we shared there on the hold percentage. So it was a combination of those two things. We anticipate when you kind of look out to 2025, our promo reinvestment rate being between 2% and 3%, like right in that mid-market range.

We don't expect to be high or low. We just want to be really at market as a percentage of handle. It's hard to anticipate exactly what it's going to be in the third quarter just because you do have the New York launch. And again, we're it very differently. It might tick up a little bit, but nothing material and then probably come back down again in Q4 is what I would anticipate.

Yes. We'll probably spend more time on this topic at G2E at the investor event. So I won't say a whole lot other than to say nothing's changed in terms of how we're thinking about '25 and '26 from what we said in the last quarter call.

Yes, happy to. Market is very similar in terms of gray market today and regulated soon. We don't have an exact date on that, Chad -- okay, we don't have an exact date on Alberta, and I don't want to speak obviously for the government or the regulators there. But I would say we're thinking sometime towards the end of this year, early '25 is kind of the rough time frame. We would anticipate that the success that we've seen in Ontario with theScore and theScore Bet, we would be able to replicate that in Alberta.

TheScore is a very popular brand throughout Canada. It's not just a Toronto or Ontario thing. So given the success we've had in Ontario, and given that Alberta will have very similar tax rates as we understand it and be both OSB and iCasino. We think it's going to be a really important North American market for us, probably a top three or four market for us.

Yes. Say a couple of things about hold percentage is I think it's important to note that we really haven't changed our assumptions from last quarter to this quarter in terms of what's built in for guidance for the rest of the year, still in that 7% to 8% range. So if the trends that we have delivered of late the last quarter and July as those results come out, there could be some opportunity for upside there potentially. So again, it's a different time of year. You tend to hold a little bit better during the slower season of baseball.

And so we'll see how that plays out, but we feel really comfortable in terms of what's built into guidance and where we think we could end up trending as we close out '24 and heading into '25. I think as we think about the opportunity sort of medium term for us. FanDuel has been in a class of their own from a hold rate percentage -- from a hold rate perspective because their parlay percentage, excuse me, is best-in-class in what we're seeing already, keeping in mind that our parlay offering is going to be significantly better at the start of football season than it's ever been.

And I say that with regard to same game parlay, parlay just data feeds and player props, all sorts of things that without getting into too much detail, it's going to be a significant improvement in enhancements from what people experienced last year when we went live during football season. So we think that at PENN with ESPN BET, exactly what Aaron said in his prepared remarks, that we want to be the America Sports Book, and that's going to mean that you're really catering to the masses, and there's a lot of casual betters in there who love parlays, we're seeing that already.

And I think for the Illinois example for us to be sort of sitting at a number two position in terms of parlay as a percentage of handle when our parlay offering hasn't been as competitive as it's about to be at the start of football. We think there's a lot of opportunity for us to continue to close gap between us and FanDuel in terms of -- parlay, excuse me, as a percentage of handle.

And with that will come an improved hold percentage. I'm not saying that we're going to get to FanDuel letter is not going to give you a time frame. But clearly, there's a big opportunity for us to continue to close that gap over time as we improve the experience for those that like to bet on parlays and overall, just bet inside the app.

Do you want to take Todd?

Sure. Yes, Bernie, listen, great question. I think the promo was the primary driver, but you start looking at just seasonality is a huge piece of this. So again, that converted customer -- from ESPN to converted customer from our PENN Play database that's moving over, all that comes over pretty frictionless. So they're just going into the app. I think that's benefited to all of us. And then the improvement in hold percentage kind of again was the big driver there.

Keep in mind to Todd's last point on hold percentage. One of the real benefits that you get from higher hold percentage is that a lot of our expenses -- third-party expenses, data feeds and geolocation, etc...

Payment processing.

Payment processing, those are driven by handle, right? So when your handle is maybe more stable, but your hold percentage is higher and your revenues are higher. It's a great mix in terms of how that flows through the P&L. And we would anticipate that dynamic for PENN continuing given the upside I mentioned earlier on parlay percentage and hold percentage upside. Yes. Maybe we'll spend a little bit more time on that in October at the G2E event. It's a great question. I don't want to speak for ESPN. What we shared is what was public. But maybe we can get some more information from them or have a representative there to answer that question in more detail if that works, Bernie.

Thanks Jaydeh.

Sure. This is Todd. Great question. And we will talk more about this also at our G2E event. But basically, we're seeing really nice adoption from all levels. And that was one of our priorities as we're going in, we didn't want this just to be for that younger cohort. So we've seen that go across all levels regardless of age and level of play.

And so you get this great advantage of greater time on device, removing friction from every transaction, taking people out of line, keeping them at whether it's a slot machine or a table game, rich and the team have just done a remarkable job of with each iteration, making it easier and easier for adoption. So I think as we go through, we're probably over about 80% of our EBITDA driving properties right now, and we'll look to see where we go next. But it's both on the revenue side. And then I think I touched on earlier with technology used to offset some of the payroll expense.

That's correct.

Yes, you should assume that we're live in New York before college football week one, which is the end of this month. And when we go live, and we try to time it up as you can appreciate that the -- all of these feature enhancements that we've talked about would be live when we go live in New York. So again, great first impression. That's why they're so close together, but we anticipate New York end of this month before college week one.

Yes. Ryan, I think you'll see there was actually some that went live yesterday, and you're going to see it sort of happen over the course weekly between now and the end of the month. But everything that we have in those few slides, that talks about products, ESPN BET product enhancements, all the enhancements around parlay and same game parlay and player props, all those integrations. What we laid out in our deck here is what you're going to have when we go live for football this year.

So in the next few weeks, there's a lot of testing that goes on behind the scenes. We want to make sure that we're very comfortable when we go live that it's going to be seamless and very user-friendly. So that's where the work has been over the last couple of months. But you'll start seeing these go live really weekly between now and the end of the month. Okay. We'll maybe take one more question, Angela.

Your acquisition question, I think we'll tap that at G2E. That's a little bit more detailed. So I want to give a thoughtful response to that. With regard to New York, tax rates high, as you know. And so we're going to be very thoughtful, as I mentioned earlier, around user acquisition and really lean in on the ESPN that ecosystem, tremendous millions of fans that are connected to ESPN and their products that we're going to really work to cross over into ESPN BET.

I don't want to give a time frame on exactly when that's going to inflect to profitability only because we need to see how things go. So again, that might be one that we can answer a little bit more intelligently at the meeting in October because we'll have been live for 1.5 months by that time in New York. And also, of course, we'll have some KPIs to share with all of you from the first two weeks of football season. All right. Thanks, Steve, and thanks, everybody, for joining the call. We look forward to speaking with you, many of you at G2E in Las Vegas in October, and again, talking to you in November on our next earnings call. Thanks.