Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rush Street Interactive Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note that this conference call is being recorded today, November 1, 2023. I'll now turn the call over to Kyle Sauers, Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2023 earnings release. It can be found under the heading Financials Quarterly Results in the Investors section of the RSI website at rustreetinteractive.com. Some of our comments will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not statement 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 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 condition. 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 measure is available in our third quarter 2023 earnings release and our investor deck, which is available on the Investors section of the RSI website at rushstreeteinteractive.com. With me on the call today, we have Richard Schwartz, Chief Executive Officer, who first provide some opening remarks and then open the call to questions. With that, I'll turn the call over to Richard.

Thanks, Kyle. Good afternoon, and thank you for joining us today as we discuss our third quarter 2023 results. We have spent more than a decade building and continuously refining and operationalizing our technology platform to support our product suite and operate frictionless experience for customers. Our goal from the beginning has been to develop an experience that retains customers. In today's landscape, we are unique, a digital-first operator with an iCasino customer-centric approach. We've consistently maintained that as the industry grows and matures. Consumers will naturally gravitate toward the best products. As a playing field levels with a tide of marketing and aggressive bonus in dollars slowly washing away, that is what we are seeing. Consumers are being more discerning and deciding where they want to play based on product and user experience. Our third quarter results offer further evidence that we continue to grow in very competitive markets with a remarkable success and resilience. Revenue for the quarter was $170 million, up 15% versus the prior year quarter. We are seeing that growth come from both increasing handle across products and higher sports hold due largely to our ability to innovate, which I will get to shortly. We're also growing our revenue much more efficiently as our adjusted marketing spend was 24% lower compared to the same quarter last year. The result is we were increasingly profitable on an adjusted EBITDA basis and significantly improved compared to a year ago. In fact, for the 9 months year-to-date, we've improved our adjusted EBITDA by over $70 million compared to last year. The majority of which was driven by revenue growth and improving operations. Given our outperformance during each of the 3 quarters of this year, we now expect to be adjusted EBITDA positive for the entire year well ahead…

Thanks, Richard. Third quarter revenue was $169.9 million, up 15% year-over-year, once again, with well-balanced growth across the business. We continue to see strength across the board in iCasino, sports in both our U.S. Canadian and LatAm markets, all of which grew double digits during the quarter. We posted our second consecutive quarter of positive adjusted EBITDA with the third quarter number coming in at just over $4 million. As Richard mentioned, we're much improved compared to last year as our adjusted EBITDA for the first 9 months of this year is up by over $70 million. We now expect to be adjusted EBITDA positive for the full year 2023. While we remain true to our approach of allocating more resources to those markets that include iCasino, the good news is we have been gaining share in most sportsbook only markets with a greatly improved product, which positions us extremely well when these markets add iCasino. In fact, while we continue to see strong profitability from our iCasino markets, as Richard pointed out, this marks the first quarter we were profitable in our sportsbook only markets and looked at as a whole. This is a trend we've been talking about in recent quarters and sets us up well going forward. We continue to see high-quality players attracted to our platform and our U.S. and Canadian ARPMAU of $374 reflects this trend as this is the highest ARPMAU we've seen in 8 quarters, up 4% sequentially and 8% year-over-year. grew 2% year-over-year and 4% in markets with iCasino, all while reducing adjusted marketing spend during the quarter by 24% year-over-year and 16% sequentially. Regarding hold, iCasino was in line with our expected range. As Richard mentioned, in online sportsbook, we're seeing our expected hold percentage move higher due to the innovations…

[Operator Instructions]. Our first question for today comes from Jordan Bender of JMP Securities. Please go ahead.

I'll actually stick my follow-up, Kyle, you just kind of referenced the guidance range for '23 moving up at the midpoint.

I think we lost Jordan there. Are we still live on the call.

Jordan, you might have muted yourself locally?

Yes. Sorry, can you guys hear me?

I can hear you now.

There we go. Sorry. You mentioned the guidance went up at the midpoint for the year. Can you just kind of talk about where competition falls into that number when thinking about maybe the top end or either in the lower end of that range, just given some of that incoming competition coming up.

Sure. I'll take that one. I think it's a factor, but there's a lot of different factors when we think about defining the revenue range. You've got, particularly in Q4 for us, sports hold is a bigger impact. We've got some markets that are growing faster than others. So we have to think about the variability there with potential currency impacts. And then we still have the anticipated upcoming exit from Connecticut that we've got built in some variability around that. So competition is a piece of it, but it's one of many factors.

Okay. And then in September, you guys are included in this. It seems like motion stepped up on a same-store basis from the prior year, obviously, with the NFL coming in that's expected. But the drive up higher, are we seeing a little bit more of a promotional environment out there? And then does that also translate into the iGaming side of the business.

Yes. Thanks for the question, Jordan. I think maybe to start with just the bonusing strategy. It's going to look different in different markets depending on the opportunity for us in that market, maybe what the competitive landscape looks like. in that market, even the taxability of bonusing. So I think we just need to understand that extrapolating out from one or a few markets when you're looking at bonusing doesn't necessarily apply to every market. I will point out that we were particularly low last year in Q3. So from a year-over-year perspective, does look higher. But we have been about where we where we have been on the sports side for the last several quarters. So it wasn't a big sequential change for us. And I think the landing of bonusing will continue to be dynamic and change for us and probably for all players, depending on how markets are maturing and how you're thinking about spending on external marketing spend versus bonusing for retention and reactivations. And then to the last piece of your question about iCasino, that's been a relatively flat for us. I think it was actually down year-over-year in terms of percentage of bonusing relative to GGR in the third quarter. So no major shifts there. And you can imagine that's a much bigger impact on the overall business for us given that we're 3.75-ish iCasino versus sports.

Our next question comes from David Katz of Jefferies.

The Delaware opportunity sounds like a pretty exciting one. Can you just talk about the scale and scope of how we might think about that relative to the size of your business? Or any sort of color you can put around its magnitude would be helpful.

Kyle, why don't you take that one? I think with the high data [indiscernible] we're excited about the market. But I think in terms of the actual impact financially, I think we'll turn it over to Kyle to mention.

Yes. So obviously hasn't launched yet, not included in any guidance. We'll certainly assess how that's going when we get to our Q4 call and have more color at that point. But we are really excited about it for the reasons Richard mentioned. Very confident about the product and how it's going to be received by players in that state. As Richard mentioned, there's some marketing dollars that are going to be put to work and that's new there. The market is pretty small right now. But over time, we think there's a pretty nice opportunity to expand. It's not going to happen overnight. But if you maybe just relative data points, if you just compare Delaware to our other live markets in the U.S., New Jersey, Pennsylvania, Michigan, West Virginia. And you just match up adult population, income levels, you could argue that Delaware is only 1/10 the size relative to those other states as it should be over time. So again, it's going to -- it will take some time, but we think it's a really great opportunity.

Just to follow up there, is it something we should be thinking about as negative profitability initially? Or do you have enough scale at this point where you can sort of operate neutral and build over time?

So I would not think about it as some big headwind in 2024 like most markets, it takes a little while to get up and running. There's some costs associated with that. But like other North American casino markets, that we've demonstrated. Delaware, it should get profitable pretty quickly. And it's going to take some time to grow. But I think just maybe thinking about the economic profile, gross margins in Delaware for us should reach kind of near our company average and the contribution margin should likely be higher over time because there's not going to be the same marketing intensity that you'd have in a single operator market.

Our next question comes from Chad Beynon from Macquarie.

I wanted to ask about flow-through or margins. The last 2 quarters, you've grown revenue about $20 million year-over-year. And EBITDA has increased between $15 million and $20 million during those quarters, respectively, year-over-year. So flow through in the 75% to 100%. In the fourth quarter, based on your guidance and Richard, based on your commentary that the year should be profitable, that would kind of infer that flow-through will actually be higher than 100%. So first question on that. And then more importantly, as we think about 2024, if there's no new state launches, how should we think about flow through given the leverage that you're getting on the current marketing spend and the fixed costs?

Yes. I'll take that one, Chad. Thanks for the question. I think on the flow-through here in the near term, it's probably getting too precise to pick a percentage. There's a lot of moving parts here. even things as simple as the currency fluctuation that I mentioned that was a $1 million pickup for us in Q2 and $1 million headwind in Q3 and at these levels with these single-digit profitability. It starts to have -- even things like that start to have a meaningful impact. When we get into next year, I think the way I think about it is we expect to continue to grow. Obviously, this is a growth market. We're a growth business, and that's independent of new market launches. Market are maturing, we'd expect to get leverage over our marketing spend, our gross margins should be able to improve in 2024 versus 2023 as those markets grow, we've got some fixed expenses. Our revenue mix should come from higher profitability states. And G&A, I think if you look at the way we spent this year and really the way we spent since we've gone public as a company, we've been honest with the way we've built the infrastructure of the business. So we may or may not get leverage over G&A next year, but it's not going to be a big drag for us.

And then given that you've been able to achieve profitability and some probably more sports-only states than we originally thought. Does that change how you're thinking about getting into some sports-only markets where you have a license, you have a way in, but haven't launched to this point.

I'll take that one. I think every market, we continue to look at on a case-by-case basis, looking at all the things like the tax rates, the likelihood like iCasino being added, et cetera. It sure, it gives us some confidence to know that we are able to achieve this profitability and achieve better results in the sports-only markets. But we still are looking at each one on a case-by-case basis and monitor the opportunities in each case. And so we have been selective, and I think we're making some really good decisions on which markets to enter and which ones not to, and we continue to evaluate them on a case-by-case basis.

Our next question comes from Dan Politzer of Wells Fargo.

Good afternoon, everyone. Thanks for all the detailed commentary. The first question, it sounds like you guys are gaining a lot of momentum and share. One, I wanted to just clarify, when you talked about gaining shares, is gross revenue, net revenue, handle. If you can just clarify there. And then what do you attribute this to? Is it product, the change in the competitive environment? And how do you see that share level evolving from here as it relates to the competitive environment may be changing in the next few months?

Yes. Sure, Dan. I'll just take the first part on clarifying. It's a good point. So we're looking at GGR when we were giving some of those share changes you don't have net in all markets, GGR. So we felt like that's the best way to look at that.

Hey, Dan. The second question, share isn't really something -- it's not a primary motivation for us. We're trying to get to the profitability in every market, get a quick return on invested capital. But it is nice we are able to reduce marketing spend and still grow share in a time when it's still in a very competitive marketplace, which I think does validate the quality of improvements we've been talking about on the product side. We just, in fact, saw report for those of you who follow it, just came out today on the sportsbook side, and we moved up a couple of spots, I think to out of 36 products in terms of the quality of the sportsbook side. So I think that's a great example of when you combine the product with the customer service we offer and automating a bunch of features that allow us to service customers with reduced friction. It does create a win-win for the players at us. And I think -- so we do feel that our quality of our experience continues to improve. And as we bring some market, which as I've noted in the past, we started by doing casino innovation, and we now just started to release some of our sportsbook capabilities and the sportsbook features are working. And players really notice when you offer them something that's unique and differentiated and high quality, and you start to get some momentum on those differentiation, features that we're bringing to market. So those -- that's sort of the answer to your question.

Got it. And just for my follow-up, I know you mentioned that there was a lot of -- you turned profitable overall for sports betting only markets. Obviously, that's not all markets. I guess can you unpack that a little bit and let us know maybe what are some of the leaders versus laggards there? And among those laggers, do you see a path to becoming EBITDA positive in those markets over time?

Sure. Yes, I'll take it. I think the -- I'm not going to give specifics on each market and start to break down profitability exactly by market. But I think, if you look at the markets where we have stronger revenue, bigger share and if you had a matrix of share and revenue with tax rates, that's probably going to lead you to a pretty good answer on which ones are most likely to be profitable. And then in terms of profitability over time as sports book only markets, we do believe that all of them can get there. Some of them are going to be a little more challenging. As you can imagine, New York would be at the top of that list. But we've made significant improvements in New York as well. So I think they can all get there, but over varying amounts of time.

Our next question comes from Jed Kelly of Oppenheimer.

Going back to some of the success you're having in OSB. Do you think that's coming more from the product or is that coming from smarter bonusing you're doing? And then I might have joined a little late. But on getting the Delaware contract, can you share with us any term anything in terms of like licensing or taxes or of a new share we should be aware of as we're thinking about building that into our 2024 model?

Hi, Jed, it's Richard. I'll take the first question and Kyle to answer the second one. As I referenced a little bit earlier, I think the product improvements on the sportsbook side are very meaningful. We've been talking about it for several quarters in last year, how much better the product is getting. And it's really delivering a much better experience for the users, and we've been able to bring some unique features to the market. We have the squares feature, which players really talk about winning where they get in the same data with any app on the same sort of spread that with any competitor, including us. But when they bet with us, they get an extra chance to win and no extra cost up to $10,000 lottery mechanic if they're square lands. So just giving players something fun, something unexpected, something different, is a capability that really helps to drive some users. We've also made a lot of improvements in the way we market our props. The PROP CENTRAL was referenced earlier in my notes, really is having a meaningful impact on exposing really important bets that people are looking for in a much easier way. So when you combine that with customer service and all the automation we do in the customer service team, it makes a big difference. And players are noticing. And I think another big factor is that as other promotions come down in the industry and ours and others are more similar, you start to have lesser of a difference between the bonusing and you're not having every operator bonus, if there's an injury, an ankle turn in the first quarter, they get back to money to the players. You're not seeing that type of aggressive bonusing anymore. And I think that's helping to sort of have players be more discernible about what experience they want and choosing the operators to offer them the trustworthy, reliable and high-quality experience, which is what we offer. So I think we're continuing to gain momentum from the quality of our experience, less about being transactional-based or offering more aggressive bonuses, which is how you operate.

And real quick, Jed, we've covered some of the Delaware, but just the highlights. Today, it's about a $13 million annual run rate. So it's going to take some time to build from there. We think there's a lot of great things we bring to the table that are going to be able to make that a bigger market than it is but we want to be mindful that it's a new launch for us, and it will take some time to build. We do think it won't be a big headwind for us in terms of profitability. We can get profitable there fairly quickly. It should have gross margins that are in kind of the company average range that we have today and then contribution margins for that market should be higher as we get to profitability.

Great. And then just one quick follow-up. How much have October holds factored into your 4Q guidance?

Sure. So certainly, we take the hold we know about today and the revenue generation that we have to date, but that's going to fluctuate from week to week, as you can imagine. So it is factored in for sure. And we've got a range factors for the remainder of the November and December as well.

Our next question comes from Joe Stauff of Susquehanna. Joe, please go ahead.

Hi, Richard, Kyle. I had a couple of questions on user growth fees. And I'm just trying to understand kind of just the level of penetration, say, in some of your older markets, iCasino markets in particular, whether it be Pennsylvania and so forth. And how much more opportunity you think there is regarding user growth. I think you gave a stat on Slide 16, you said, miles were up 4% in iCasino markets year-over-year, but I was curious if I assume that's both products. And if I exclude sports, wondering if your users were up kind of year-over-year, specifically for iCasino.

Yes. So maybe I'll take the first part and let Richard talk about the markets in general and growth opportunity in those more mature markets. But Richard said some of this, but we've definitely been focused on acquiring and retaining high-quality players. In total, as you mentioned, for U.S. and Canadian markets, miles were up 4% year-over-year in total. And we say iCasino markets, you're correct. That is -- that's people who are in those markets, they might be playing casino-only, sports-only or both. And then in markets -- or in all markets in total, we were up 2% in the quarter. So we had about 132,000 monthly active users in the quarter.

In terms of the opportunity in a market like Pennsylvania, to grow our users, we certainly think there's an opportunity as we continue to work closely with a land-based partner there. We're continuing to find ways to collaborate, cross-sell. We've integrated the platform systems together in a way that allows us to award loyalty points whether it play goes from land-based to online or the playing online going back to land-based in a way that we think is going to start to contribute to opportunities to convert some more players from land-based to playing both online land-based, knowing that if you do that, you achieve a greater loyalty loop among those players. So there's certainly things that we're working on. I don't think we've ever worked as well and close as we are these days with land-based property, and so we're continuing to have a lot of opportunity to show some results from that collaboration.

And just to clarify, again, in that 4%. Is there any way you can give us a look. You don't have to give us the exact number, but if I were to include sports based customers. Just curious, again, if iCasino users had grown year-over-year in third quarter.

Yes. I think breaking it down that far is further than we expect to do on a call like this, but up 4% in those markets, I think we're having great success in iCasino. Richard talked about market share in those markets. We're growing in those markets. So I think we're real pleased with the way the user count has been trending there.

Okay. And then if I could, just 2 follow-up, real quick ones. What is the timing on Connecticut exit? And are you interested in possibly I don't know, selling subleasing, whatever the right terminology is on your New York market actives.

On the Connecticut announcement, there's been no public announcement at this time. There's nothing further. We're able to comment on beyond what we talked about previously, where we thought by the end of this year would be the time line that we're operating with it. In terms of New York, there's not a -- right now to consider selling that asset, certainly something that's limited. is the largest online sports city market in the country. And we are obviously excited about the opportunity to potentially leverage that license framework to help secure gaming potentially. So for us, it's very strategic to be bold to have that asset.

Our next question comes from Ryan Sigdahl from Craig-Hallum.

This is Will on for Ryan. Maybe just a few quick ones for me. First one I wanted to talk about was you did a partnership with Genius Sports for Bet Vision, there's sort of watch and bet service. I think your peers are currently running it. I was curious maybe a time line for when you guys might plan to deploy that? And just any comments you might have on testing your experience with it.

Sure. Will, it's Richard. We've -- it's only had -- so there's only 3 or so other operators and us that are using it. We actually have already deployed it and so we're not really speaking about any data results from this at this point. So very early times and very early days on it. But certainly, we think the ability to offer streaming of is helpful, especially if you can offer some bets alongside that experience. So we're testing it all seeing how well it works. And if we can get some increased lumens on having something that's relatively unique in the space.

Great. And then maybe as a follow-up to that, I wanted to hop to Ontario. Last call, I think you guys said your ARPMAU compared to competitors was double that. Just curious maybe how has that changed during the quarter? And any other comments on the Ontario market?

Yes. Our ARPMAU continues to be really strong there. I actually don't know off hand if it's exactly still double or more than double. But it stayed very strong. So I presume others have looked similar. So I don't think there's any change there.

I think it's been consistent in terms of high performance and getting a higher share of wallet, which is ultimately what matters most in those markets is players are going to play multiple sites, but how much of the budget are they going to allocate towards better experiences and site to prefer. And we think the reflection of the high , ARPMAU is an indication that really prefer many, many cases to play with us. In terms of the market itself, it's a good maturity in terms of the conversion from black market or gray market to white market very fast. But it's at the point now we're all the existing prior operators if you are to player bases. So you're at the point now where you're going to start to see over time, I think the quality operators will start to stand out more from the pack, right? Because now you have a situation where everyone is converting, everyone is now on an equal playing field. And ultimately, we're excited by that market opportunity because we do think the experience we offer is unique and differentiated and when players try as they stay with us. And so our goal is to get a larger number of players not previously familiar with our brand to give us a try with the recognition that when they do, we have a pretty good shot at keeping them.

Yes. Well, I just took a peak. And without giving you exact number, ARPMAU has grown sequentially in Ontario every quarter since launch. So still very strong there.

Thank you. At this time, we currently have no further questions. So I'll hand back to Richard Schwartz for any further remarks.

Thank you again for joining us today. We expect the better part of 11 years, getting to the point where we are today. We have a leading technology platform in the industry and one we are demonstrating that customers love. We have multiple opportunities to grow our business, and we're disciplined in how we execute our growth. We are well capitalized. Altogether, we are where we want to be. well positioned for future revenue and profitability growth in the future. We look forward to updating you on our progress when we share our fourth quarter and full results early next year. Thanks.

Thank you for joining today's call. You may now disconnect your line.