PENN Entertainment Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 16 speakers on the call.

Operator

Greetings, and welcome to the Penn Entertainment Second Quarter and ESPN Transaction Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Frank. Good morning, everyone, and thank you for joining Penn Entertainment's 2nd quarter and ESPN transaction conference call. We'll get to management's presentation and comments Now I'll review the Safe Harbor disclosure. Please note that today's discussion contains forward looking statements. Forward looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially.

Speaker 1

For more information, please see our press release and for details on specific risk factors. With that, it's now my pleasure to turn the call over to the company's CEO, Jay Snowden. Jay, please go ahead.

Speaker 2

Thanks, Joe. Good morning and thank you for joining us. Last night, we announced my flagship exclusive long term agreement with U. S. Online sports betting with the worldwide leader in sports, excuse me, ESPN.

Speaker 2

I'm here this morning in New York City with my executive management team, including our CFO, Felicia Hendrix, our Head of Operations, Todd George And Chris Rogers, who oversees Business Development and Strategy at Penn and work very closely with me on the establishment and structure of this partnership with ESPN. I plan to focus my comments this morning primarily talking about this transformational agreement and the future launch of ESPN Debt. So we'll take questions when I conclude my prepared remarks about any and all aspects of our business. We look forward to combining Penn's operational expertise, Fully owned and cutting edge proprietary tech stack, expansive market access and rapidly growing pen play database will create a best in class user experience and allow us to significantly expand our digital footprint and online market share, while simultaneously and efficiently growing our customer database. We are particularly excited about the level of integration ESPN bet will have In the broader ESPN ecosystem, with 105,000,000 plus monthly unique digital visitors, an audience of more than 370,000,000 social platforms.

Speaker 2

Over 25,000,000 ESPN plus subscribers and the nation's number one fantasy database, ESPN has unparalleled reach within the world of sports. We look forward to receiving exclusive promotional services across all of ESPN's platforms, Programming and content, including access to ESPN's popular roster of sports media personalities. I'd like to spend a bit of time Through its customer centric approach and is truly synonymous with sports content in this country, we are firmly convinced that we will be getting significant value for our marketing dollars By allocating those funds to the single best brand and platform in the U. S. To reach sports fans and potential betters.

Speaker 2

With a robust menu of promotion and integration across all of ESPN's platforms, including: 1, traditional linear advertising 2, Digital Media 3, In Program Integration 4, AUGS attribution 5, database marketing opportunities and 6, access to some of the biggest personalities in sports media. This is not a typical media sportsbook commercial agreement. This is an exclusive and comprehensive alliance that will redefine the sports betting landscape with a highly aligned partner that long term like us wants to see ESPN bet at the top. We have seen firsthand the power of integrating media with betting from our experience with theScoreBet in Ontario. Despite Operating in one of the most competitive jurisdictions in North America with over 70 operators, many of whom competed in that market For years and years prior to full utilization when the market was gray, we have been able to achieve sustained double digit market share In both online sports betting and online casino in the province by leading with Ontario's top digital sports media brand, theScore, and utilizing our best in class technology, which has been built from the ground up with the North American markets and comprehensive media integration is not only in mind, but as top priorities.

Speaker 2

This is a proven playbook and will be effective here in the United States as well. Between ESPN's portfolio of premier sports rights, massive social media following, deep fantasy database and best in class sports media app, We have the opportunity to dramatically transform the way fans engage with sports content and betting here in the U. S. Markets. Importantly, with this deal, ESPN now becomes a highly aligned long term strategic partner for Penn.

Speaker 2

As outlined on Slide 10 in our investor presentation, which was posted on our website last night along with our 8 ks, Penn has granted ESPN approximately $500,000,000 of warrants to purchase 31,800,000 Penn Common Shares that will invest ratably over 10 years. Upon ESPN bet meeting certain U. S. Online sports betting market share performance thresholds, ESPN could receive bonus warrants to purchase up to an additional 6,400,000 Penn Common Shares. ESPN will also have the option to designate a non voting Board observer and upon completion of year 3 of our agreement, They'll be able to designate at their discretion a member to our corporate Board of Directors subject of course to regulatory approvals.

Speaker 2

Over the last several years, we have made significant investments in technology and we are confident that our newly launched products Combined with the unrivaled brand and reach of ESPN will catapult ESPN Bet into a strong podium position in this space. We believe we can achieve substantial EBITDA in our Interactive segment over the coming years and this will translate to very strong free cash flow generation for the company and value creation for our shareholders. We have learned a lot over the last few years about the recipe for success in the sports betting industry, which we have highlighted on Slide 8 in our investor presentation. It all starts with brand recognition among sports fans and as I noted earlier, There is not a brand more powerful in this space than ESPN. We also know that access to customers is vital.

Speaker 2

Between ESPN's unrivaled reach, Of course, product and customer experience, excuse me, are also paramount. And this is why we have been so focused over The last several years on developing our own state of the art technology, which we fully and successfully migrated to across the United States last month. Finally, our relationship with ESPN will allow us to create deep media integration that will provide highly efficient customer acquisition as well as increased engagement, loyalty and friction free access to betting on the sports, teams, players and events they love. All of this will lead to compelling cross sell opportunities into online casino, retail gaming and more. In short, we believe we have all the necessary ingredients to win.

Speaker 2

In order to reach this goal, we will be continuing to make strategic investments in our Interactive segment for the remainder of 2023 and into 2024. As we sit here today and for lots of reasons, including competitive ones, I'm not going to get into specifics regarding the impact of this partnership on our guidance for the remainder of the year. What I can tell you is that we anticipate launching ESPN bet sometime this fall around the middle of football season, certainly before Thanksgiving. We are committed to spending $150,000,000 in annual cash payments to ESPN for marketing services over the initial 10 year term, which we expect will generate a very strong return on investment. Additionally, we will likely spend a similar amount on off channel marketing, meaning outside of ESPN.

Speaker 2

We also anticipate an additional amount of promotional spending as we launch the ESPN bet products and welcome newly engaged fans as first time and reactivated depositors in the ecosystem. During this product launch, we anticipate our leverage to increase slightly to approximately 5 times over the next several quarters, after which time you should expect us to quickly delever organically given our free cash flow generation. Bottom line, we are in this to win and we'll continue to invest where we see attractive CPAs and where we can produce strong returns. Now pivoting for a moment. We are still seeing stable consumer and overall business trends and healthy operating margins in our core business.

Speaker 2

Guidance for our Retail segment remains unchanged for the remainder of the year. So even with additional investment in our Interactive segment, This is not a bet the company type of transaction, but we are extremely excited about this partnership and strongly believe it will be a transformational one for Pennant. As highlighted on Slide 9, looking out a few years, we believe this business can generate an incremental adjusted EBITDA segment of approximately $500,000,000 to well over $1,000,000,000 per year. I would like to point out that these EBITDA ranges include $150,000,000 in annual cash payments to ESPN, which in our view is a very efficient allocation of the marketing dollars we would have otherwise spent to support the sports book. The online sports betting and online casino space is a sizable opportunity and we are fully committed to leveraging our numerous built in advantages, now including the power of the ESPN Media assets to help fully realize this opportunity.

Speaker 2

We plan to host an Investor Day before the end of this calendar year, We will provide you with more color regarding our near term and longer term strategy as well as key metrics and financial targets regarding our new partnership with ESPN. As part of this transaction, we are selling Barstool Sports back to its founder, Dave Portnoy. Dave, Erica, Big Cat, Everyone at Barstow have been great to work with over the last three and a half years, and we're the ideal partners to help us launch and rapidly scale Our digital footprint across 16 jurisdictions in the U. S. With the sale, Barstool will now be able to return to what it does best, I really can't thank Dave, Erica and Dan and the rest of Barstool team enough for their partnership and helping us to get to where we are today in terms of online sports betting.

Speaker 2

We gained a tremendous amount of knowledge and experience with them over the last several years. More importantly, Barstool helped us grow our digital database by over 1,500,000 people since launching the Barstool Sportsbook 3 years ago. Our new relationship with ESPN will enable us to build on this successful foundation as we move forward. It's truly a momentous day for us at Penn. For the folks at Barstool, we certainly can't wait to roll up our sleeves and get started with our partners at ESPN starting today.

Speaker 2

Before opening the line for questions, a few words about our 2nd quarter earnings. We continue to see solid and stable property level performance across our portfolio with each month showing sequential improvement. 2nd quarter finished strong with our best month of the quarter in June and that momentum has carried over into Q3, We just closed the books on a very strong July and had a good first weekend excuse me, a good first week of business here in August as well. During the quarter, as I briefly mentioned earlier, we successfully completed the full scale migration of our U. S.

Speaker 2

Digital sportsbook and online casino offerings to our proprietary in house technology platform, which was a huge milestone achievement for our company. This state of the art tech platform continues to drive strong results for theScoreBet in Ontario And our improved product will provide the foundation for meaningful growth in the U. S. Once we rebrand to ESPN bet later this year. I want to thank and congratulate the nearly 500 members of our interactive team who seamlessly executed this massive technology project With a lot of skeptics, more than 18 months following more than 18 months of hard work.

Speaker 2

And as always, I want to give a special thanks to all of our We are executing our operating leaders and team members throughout our organization for continuing to provide a best in class experience for our rapidly growing customer database at our properties around the country. We look forward to numerous cross sell opportunities to come with our new online products. And with that, Frank, I'm happy to open up the line for questions.

Operator

Thank Our first question comes from Barry Jonas with Truist Securities. Please proceed.

Speaker 3

Hey, good morning, guys, and congrats on the deal.

Speaker 4

Jay, is it possible to give

Speaker 3

a little more color about how this Came together overall?

Speaker 2

Not really. I'd prefer not to get on the inside baseball is how it came together. I would just say that as we got to know the folks at ESPN, led by Jimmy Pitaro, It felt good. And we've met a lot of people at ESPN and what I've been blown away by and the folks that we've spent time with is They share a passion for wanting to be the best at everything that they do. And, ESPN bet is no different.

Speaker 2

They've been working on this behind the scenes For some time, it's very clear when you meet with them, the excitement, the energy, the passion and the alignment on what the future will look like is very exciting, But I'll leave it at that.

Speaker 3

Understood. And then I guess just from a demographics perspective, how does the new ESPN vet positioning Compared to what you previously had with Barstool, I guess I'm just trying to understand how to think about your overall omnichannel strategy there.

Speaker 2

Yes. No, it's a great question. Obviously, the ESPN brand compared to the Barstool brand, Barstool SKUs on the younger side, the Average age in our digital database is around 29 years old. I think that's great. We have 1,500,000 people in that database that weren't there before we launched Barstool Sportsbook, so we've got a great foundation of younger customers that have also frequented our casinos on the land based side and we've been able to I'll sell into Icasino.

Speaker 2

And I think with ESPN, you're talking about a brand that everybody in the world knows about. It's not an old brand. It's not a Yum! Brand is an everything brand. There's a lot of affinity for that brand.

Speaker 2

And so we think it's going to be extremely complementary to what we've built over the course of the last 3 years. And, yes, we're excited. We think this is an opportunity to really appeal to the masses. And One thing that's become crystal clear, Barry, over the course of the last, call it, 3 years, we've all watched market share in online sports betting continue to consolidate Really amongst the top 2 players and you've got to have scale to compete. And there's a certain recipe to get to

Operator

Our next question comes from Carlo Santarelli with Deutsche Bank. Please proceed.

Speaker 3

Hey, Jay. Thank you for taking my question. Jay, just going back to the comment that you made about Kind of leverage topping out at 5 times. It would imply that maybe spend this year is not As significant on the initiative and clearly if you're launching sometime in November that very well could be the case. But as we move into 2024, in addition to the committed spend, how are you guys Thinking about kind of the promotions and going about customer acquisition, and do you have any kind of, I don't know, guidance that you could perhaps Give that would give us maybe a better sense of what we're thinking about on a 2024 basis?

Speaker 2

Yes. I don't want to get into too much detail on 24 yet, Carlo. We will hold an Investor Day before the end of the year and give you a lot more detail on that. I think Getting to launch is really important to us and we want to launch flawlessly and probably hold that Investor Day after we launch. We have some more visibility as to how things are trending.

Speaker 2

What I would say in terms of the promotional spend is sort of think about it this way that You're going to have, let's call, a November launch, whatever that date is. We don't have the firm date yet. Obviously, the team's working really hard on this, reskinning of the app to ESPN bet. But if you think about it, there's going to be that's where the lion's share of your promotional expense is going You're bringing a lot of new people into the ecosystem with the first time deposit match and the like. And so it usually takes Approximately 2 months to burn through that deposit match.

Speaker 2

And so November December, I think, on the promo side would be pretty high. And then you've got a lot of really big sporting events after that getting into NFL playoffs, obviously the Super Bowl in February and then March Madness And Mark, so I think from a promo perspective, you're looking at the lion's share is going to be in that Q4 and Q1 timeframe. As it relates to general marketing spends, you should think about us sort of, as I mentioned earlier, matching In off channel, meaning outside of ESPN, how much we're spending with ESPN. And it's not an exact scientific number, but that's the way we're modeling things out. And All those assumptions that I laid out for you still get us comfortable being around 5 times even as we're at the peak level of spend and that will come down obviously as you head deeper into 2024, but the free cash flow that we generate And organically, we'll be able to delever that back down into the force pretty quickly.

Speaker 2

But we're going for it. We're certainly not going to be cheap about Our approach and the focused on not we don't want to have regrets around how we launch the products and how we launch the brands.

Speaker 3

So the $150,000,000 committed marketing through ESX will apply an incremental $150,000,000 through other Vendors, other customer acquisition channels, etcetera. And then promotions will be a separate bucket to that, Correct?

Speaker 2

That's all correct, Harlow. And the $150,000,000 is not a perfect number, but just to say roughly, yes.

Speaker 3

Okay. And then if I could just one follow-up kind of on the core business. Your margins broadly held in fairly well, simply up a little bit. Obviously, there's some seasonality there, but kind of continued to hover Around this 36 level and clearly top line has seen some pressures. How do you guys kind of think about I heard you say earlier, you're kind of the retail brick and mortar guidance for the balance of the year, etcetera, is unchanged.

Speaker 3

Is this kind of margin level fairly sustainable in the climate that you see right now as we move through the back half of this year, seasonality aside?

Speaker 2

Well, let me just answer your question by saying generally yes is the answer. Todd, I'll let you jump in there in terms of what we're seeing in the business and why we've been able to Really keep those margins in that 36% sort of level over the course of the last several quarters.

Speaker 5

Thanks, Jay, and thanks, Carlo. Yes. Listen, it's sustainable. And I think our we continue to compare ourselves to where we were in 2019. And I think the growth that we've seen from them with this really it's a new day.

Speaker 5

So looking at where we are from a labor standpoint, looking at where we are from a Looking at where we are from a marketing standpoint, not just for us, but for the competitive set, it's more rational. It's entitlement programs have kind of fallen away. So we're very comfortable as we move forward with those being the 2 expense drivers that we're in a good place. And then with our technology enhancements, we think that will continue to add to our margin profile. So very comfortable as we move forward that These margins are what we can look to in the future.

Speaker 5

Obviously, there'll be some seasonality here and there.

Operator

Our next question comes from Bernie MacTiernan with Needham and Company. Please proceed.

Speaker 6

Great. Thank you for taking the questions. Maybe just to start, I mean, clearly, the market is having a very positive reaction to this announcement, but some of the pushback that I'm hearing It's just a market share and the thought that other partnerships between media operators and online sports betters Hasn't worked historically. So what gives you confidence that you will be able to Jay talked about pull position and really driving market share, driving scale, what gives you some of the confidence that you'll be able to achieve those market share expectations?

Speaker 2

Yes. No, look, it's a fair question. I love addressing it because there's really no comparison to ESPN in the world. So that's number 1. I think This relationship that we've spent some time talking about last night and materials and this morning, here's the reasons as I think about it why I know it's 1, it's exclusive 2, it's ESPN branded, which I think is very, very important.

Speaker 2

It's fully integrated. It includes access and endorsement from top ESPN talent. And I think really importantly Is that this is a strategic relationship. So you think about how is this going to be more valuable for ESPN over time is Helping us achieve higher levels of market share. The higher levels of market share make the warrants that they own of Penn valuable and You get over 20%, they become much many more warrants and much more valuable.

Speaker 2

So, if there is if we're having conversations around what's The dilutive effect of the warrants over 20%, I think that's a great day for everybody. And we're very focused with ESPN on long term getting to those levels. So it's interesting. I oftentimes look back to the U. K.

Speaker 2

Market and you just look at what did market share look like in the first 3 years versus the middle 3 years versus the last 3 years, it's going to shift around. It's not done. I think this narrative For this notion that the market share that's established is sort of permanent here in the U. S, that's to me that's crazy talk. I'm not saying that it's going to be Wildly different from what it is today, but it's going to ebb and flow.

Speaker 2

It's going to move around. It's going to be fluid. And what we announced this morning or last night and this morning is something new and different to think about that probably wasn't in the consideration set up for anybody a day ago. And so it's going to have an impact on what that overall market share looks like and we think we're going to be a major player.

Speaker 6

Great. Thank you. And then just a follow-up to Slide 9, calls out expectations for EBITDA margins In the high teens, we'd love to just get your thoughts in terms of what you think how the how this operating plan is different from the prior one in In terms of the potential margin potential for the business and then the market share the illustrative market shares are those We're getting some inbounds in terms of that year 3 termination, just how investors should think about the market share required to keep this partnership going

Speaker 2

Let me hit the margins question first. And most importantly, You need scale to drive margins in this space. We all know that. Trying to drive 20% margins at 5% market share is going to be impossible in online sports betting. So that's number 1, I think most important.

Speaker 2

And We also keep in mind on that Slide 9 that you're referencing in case there's any confusion on this, the margin assumptions we have there in the footnote, This is based on GGR, okay. So if you're comparing what we're showing here to what others have said that they think they can get to long term On a margin basis, most of what if not all of the analysis that they're showing you is on NGR, net gaming revenue. So If you extrapolate the margin assumptions we have here on a GGR basis and look at it, what would that mean on an NGR basis, We're probably a little bit below what others are saying and that's just putting in some level of conservatism because for no other reason, but just to be conservative. I think if we're at scale and we're on the podium in every state or most every state, which we plan to be, then we think we can probably get close to the margins that Others have said that they can get to on an NGR basis, but we'll take a conservative path for now. I think as it relates to Market share assumptions, well, repeat that part of the question.

Speaker 2

I'll make sure I tackle that one correctly, Bernie.

Speaker 6

There's a year it's a 10 year partnership, but potential termination rights after year 3 of certain market share thresholds aren't met. And so we've been getting some inbounds or investors asking what those market share thresholds are?

Speaker 2

Got it. Sorry. We haven't disclosed it and we're not going to. That's agreement with ESPN, but I would just say that, probably safe to assume that the bottom end of the range on Slide 9 is going to be a level that We're starting to get excited about both ESPN and Penn and below there is not really exciting. So just sort of think about it that way.

Operator

Our next question comes from Chad Beynon with Macquarie. Please proceed.

Speaker 7

Good morning. Congrats on the announcement and thanks for taking my question. Jay, I wanted to ask about the rights Portfolio, it's a 10 year deal with ESPN and there's been some other companies buying up rights to different Sporting events and different contracts, what gave you the confidence that ESPN will continue to be a leader with the content that they currently offer? Thanks.

Speaker 2

Yes. Look, I'm not going to sit here and speak on ESPN's behalf with regard to their Their sports rights, what I would say is I think they've been crystal clear publicly and how much they value the ESPN brand long term and how important owning sports rights are for the success long term. And so we feel great about that. And if you look at the agreements they have in place with the major leagues, today, the NFL, NHL, MLB, NBA, It looks really good and it goes out pretty far. And so you can do your own research on that.

Speaker 2

But I think most importantly is There's a high level of conviction from everybody we've met at ESPN that sports rights are a big part of who they are and what they do and that won't change.

Speaker 7

Thanks. And then on the tech side, you mentioned up in Ontario, you're a double digit market share leader In sports betting and iGaming, so that clearly speaks to the brand, but also the tech. You recently adjusted the tech down here And this is certainly an important part of the equation. So anything else you can just talk about where the tech stands today, the menu of offerings that you've Recently launched and when you launched ESPN Better in November, kind of how your tech stands against some of the other market share leaders in North America? Thanks.

Speaker 2

Yes, happy to. And we've been live on our own tech stack in Ontario for over a year now And things have gone great. We continue to iterate and we've got the same full menu of options of Parley and Endgame, the UI UX is fantastic. We think it's very competitive with other top tier Online sports betting platform offerings and we feel like when we go live here in November with ESPN bet, we'll be able to say the same thing. The beauty of what we have here is that we've built this from the ground up and it was really built for the North American markets And we're going to be able to continue to iterate.

Speaker 2

Obviously, we've also proven out and we have the capability to do a lot of Full integration on the media side, we currently in Canada, in Ontario, you can be on the sports the score media app, excuse me, and you can populate your bet slip and see the odds of games and place your wagers. And As soon as you're ready to actually make the wager, it seamlessly takes you into theScore bet. It feels like it's all the same app. And obviously, that's The path that we're going to head down here in the U. S.

Speaker 2

As well with ES, KNES, KN bed and bedding slips. And so some of that will take a little bit of time, but We've done a lot of it already. It's a matter of just prioritizing the product roadmap and the upgrades. But we feel great about where we are at launch And we feel really great about where we're going to be 6 months later 12 months later.

Operator

Our next question comes from Joe Greff with JPMorgan. Please proceed.

Speaker 8

Good morning, Jay.

Speaker 9

Do you guys have

Speaker 8

minimum investments for advertising on ESPN beyond 150

Speaker 2

There's no obligations other than the 150 a year. We could choose to do more than that and we may if we're seeing great results, but That is the obligation. They have the ability, of course, if they want to, to take advertising dollars during commercial breaks from competitors and that's really ESPN's call on if they do it and how much of that they do. I'm not worried about that. I think it's going to be very clear if you're Tuned into ESPN programming that they are fully behind ESPN bet.

Speaker 8

Great. And I'm not sure if you answered it exactly and maybe you don't want to, but the provision where both parties can terminate The agreement assuming a certain market share threshold, did you actually give a specific threshold?

Speaker 2

We did not, Joe. I mentioned earlier that we're not going to, but We're not doing this deal to be 4% or 5% market share players. That's not going to be acceptable for us. It's not going to be acceptable for ESPN. And so You should assume if those are the ranges you're in, that's not going to work out long term, but we think we're going to be certainly within the range that we provided here on Slide 9 in our investor presentation and we think we can go beyond there long term.

Operator

Our next question comes from Orion Sigdahl with Craig Hallum Capital. Please proceed.

Speaker 10

Good morning, Jay. Curious, will ESPNBet offer iGaming in states where legal to leverage that OSB iGaming cross sell that peers have had

Speaker 2

Well, the answer is that we will have a Hollywood branded iCasino offering Within the ESPN Sports Betting, ESPN Bet Sports Betting offering and platform in all states where online casino is legal. We've thought a lot about online sports betting. Obviously, we believe we have the best brand in the world to lead with. On the online casino side, So we thought a lot about that. We thought it was a good time for us to pivot to really focusing on Hollywood Casino and the Hollywood brand.

Speaker 2

The Hollywood brand for us on the brick and mortar side is roughly 2 thirds of our properties. We've invested a lot of capital across the portfolio. And we feel we're very proud of that Hollywood brand and we think that it creates a really nice linkage From digital online casino, the 5 markets that we're live in today, that's going to grow over time. And we think in markets where we've got Land based casinos branded Hollywood, it creates a really nice cross sell opportunity, not just digitally, but also on the brick and mortar side.

Speaker 10

Jay, just clarification, I do have a separate follow-up. You said within something, is it within the apps, it will be a cohesive experience or is it, I guess, will they be separate apps?

Speaker 2

No, no. I mean, we will have at some point a standalone Hollywood Casino app. We're not there yet, But it will be integrated. So if you're in the state of Pennsylvania, for example, and you're within ESPN betting on sports, You'll be able to wager by clicking on the casino icon and go to Hollywood Casino seamlessly within the same app and platform the way that you can today between Barstool Sportsbook and Barstool I Casino.

Operator

Our next question comes from Shaun Kelley With Bank of America, please proceed.

Speaker 9

Hi, good morning, everyone. Thanks for taking my questions. So Jay, just want to go back to some of the Financial parameters here like a little bit. Maybe if we could start with just if we think about your initial plan here for maybe the initial budgets that we were given, was there some amount of marketing and build up already contemplated in sort of how you're building to 2023, just as you knew you were moving back on to your tech platform. And trying to kind of get a sense of really where I'm going with this is how much of, let's call it, this total $300,000,000 or certainly some of the big spending in the 4th quarter was already contemplated.

Speaker 9

How much is incremental and how much was sort of already built into what you were

Speaker 2

Yes, I would say a good portion of it is incremental, although we did have A pretty solid marketing plan for launch this football season if we hadn't gotten to the finish line with ESPN for ESPN Bet. So I don't know, maybe a third of it was already built in and 2 thirds of it now incremental when you consider the Investment and some of the additional off channel marketing investments, something like that.

Speaker 9

That's helpful. And then maybe sort of the TJ question behind that. As we think out to 'twenty four and beyond, you kind of mentioned you're in this for the long Paul, and you're certainly going pretty big here. So can you just help us think about maybe the depth and duration? So if you talked about, let's call it, this 5x parameter, which I assume is lease adjusted net debt.

Speaker 9

If we think about that, does that hold throughout 2024? Sort of how long in your own mind do you need to kind of start to see cost leverage in this? I mean historically, Maybe we've seen 12 to 24 month paybacks. I think those have actually accelerated a little bit on promotions in more recent Cohort to states, but how do you think about it? And when do you think you start to really show or turn the corner here for what you want this business to be?

Speaker 2

Yes, it's a great question. We'll cover a lot of that, Sean, in our Investor Day, before the end of the year. But I think at a high level, Sort of think about where we are in the journey versus maybe the other top players is we're probably With this announcement today, a year ish behind in terms of that inflection point. Others are sort of getting there soon in the Q4. I mean, I think Q2 was profitable for a lot of operators, not a ton of money, but profitable.

Speaker 2

But I think you're going to see people, at least based on what they've committed to, Show some real profit in the Q4 of this year. We obviously will not as we're launching the product this year. And we're going to be really focused on Customer acquisition and retention and cross sell over the course of the next 12 months. And I think going into football season next year, we want to We feel like we've left anything out there on the acquisition side. We're continuing to be aggressive going into football season given that we're going to miss the 1st couple of months of football season this year.

Speaker 2

But I think things will start to settle out for us and we'll have a good handle on how things are going to look in 20 25 and beyond from a profitability standpoint, but they will certainly be profitable. And I think it depends on what level of scale and where we are on the podium As to what 2025 and beyond look like, but that'll certainly be the year where you really start to see the returns starting to come through the P and L.

Operator

Our next question comes from Steve Wieczynski with Stifel. Please proceed.

Speaker 11

Hey, guys. Good morning. So Jay, you kind of just touched on my first question, but something we've One of the questions we've got from investors over the last, call it, 16 or 18 hours is, are you guys Late to the game, meaning if you don't launch till the middle of the NFL season, how difficult is it going to be for you guys to gain market share? And maybe not so much this year, but over time given a lot of potential customers will already be tied into other platforms.

Speaker 2

Yes. Look, we received that question a lot before we launched in October of 20 1 T with Barstool Sportsbook and we came out of the gate pretty strong back Then at over 10% market share that was sustained for, I don't know, close to a year. And so I don't we've been at the past that was overturned 5 years ago. We've sort of been in the online sports betting space for 3 or 4 years. A lot of markets, it's been a year or 2.

Speaker 2

It's not been decades. I think we have an opportunity to really get in here and be a major player. And I actually think the timing of our launch in November is good because it's not going to get lost at the launch of football season. The end of football season So noisy. Everybody is spending like crazy trying to drive top of funnel on the acquisition side.

Speaker 2

I like how this lays out. Now it's a product Glad decision for us to launch with ESPN Vet in November, but strategically I like it because We're going to be out there launching at a time where maybe with everyone else, new customers have kind of burned through those Promotional dollars on first time deposit match and we're going to be mid season offering something that probably isn't being offered by others or it's already been utilized with the other competitors. And so we like it and we're fine with this being a show me story. We'll be happy to share Results and you're going to see those real time, November, December heading into 2024 and we'll have a lot more to share on our overall thoughts, We feel like the launch timeline is actually really good in this case.

Speaker 11

Okay, got you. And then Jay, if we sat here a couple, I think it 3 years ago, you originally invested into Barstool. And if I remember correctly, when you did that call, I think you made Some claims about how great of a partnership Barstool was going to be. And so I guess, I'm just trying to understand why this Deal is so much different versus Barstow. Look, I understand ESPN is a whole different animal.

Speaker 11

I get that. But maybe a different way of asking that is, what did you Overestimate with Barstool or maybe what did you get wrong with Barstool? And I'm trying to ask that as nicely as I can as you look back on that deal and I probably assume you're somewhat restricted in terms of how you can answer that.

Speaker 2

Well, I guess the way I would answer it is that We felt great at the time that we were partnering and launching with Barstool and we had a great 3.5 year run With our partners at Barstow and I'm sure most if not all of you watched Dave's emergency press conference on this last night. I thought he summed it up really well. It just Became obvious to both parties that there's probably long term only one natural owner of Barstool Sports And that's Dave Portnoy and Barstool Sports. And being part of a publicly held highly regulated licensed gaming company, it became Clear that we were an unnatural owner. And so I think today is a great day.

Speaker 2

It's great for Dave And Barstool Sports, it's great for Stu Lee's, it's great for Penn's, great for ESPN. Everyone's feeling great about the future and where we're headed and We're not really focused or going to spend too much time talking about the past. We're going to really stay focused on where we're headed.

Operator

Our next question comes from Joe Stauff with Susquehanna. Please proceed.

Speaker 12

Thank you. Good morning. Jay, I was wondering if you could maybe just touch on a few things. In terms of your new tech stack and the product offering, questions largely about kind of just how stress tested And kind of ready for prime time and higher levels of capacity going into the football season is, can you talk about your Parley product? Is that product something that you are pricing?

Speaker 12

Or do you outsource certain pieces of it? And maybe some of the plans that you have In terms of maybe getting into New York or how far or how long it'll take If you were able to integrate ESPN's maybe streaming signal within the app, things like that?

Speaker 2

Yes. There's a lot there, Joe. Things like that. There's a lot there. I'll try to tackle those.

Speaker 2

And if I don't address Your questions specifically then just jump back in. Part of why we're launching in November is that we want to make sure we have the time not just to do The reskinning of the app to ESPN bet in a way that is branded appropriately, but also has of course a great UI and UX. It also is because we want to make sure that we have the capacity to handle significantly more volume as we move forward. And so that's part of why it's being driven by a November launch. There's a lot of hardware that's we already had hardware, but we're going to be ordering more servers to handle more volume.

Speaker 2

And I think those are good problems to have. But Stress tested, we've gotten through a full year of operating in Ontario, including Super Bowl. We've got, I think, best in class Technology and products and engineering team in our Penn Interactive unit and we feel great about handling significantly more volume as we move forward and we'll be ready for that when we launch in November. With regard to how we think about risk and trading services, Nothing really changes. We have our own risk and trading team that's been built out, proven.

Speaker 2

We're very happy with the progress that we've made in Ontario as well Here in the U. S. Post migration, we've already seen a lot of benefits around having your own risk and trading team and What that can do for how you price not just parlays, but how you even think about taking VIP bets and at what levels. And so Feel really good about that. Of course, you're taking some of your feeds from third parties.

Speaker 2

Everybody does that to some extent. But I think the value Owning your own risk and trading team is really making those little decisions that can make a big difference in terms of what your overall whole percentage looks like How you price your parlays both in game, as well as just general parlays. So that hasn't changed, but we certainly are getting I was going to address your last one and then feel free to jump in there on access to other states. Look, I think with and Dave covered some of this in his emergency press conference. I think going in with ESPN that Set you up to get access pretty much anywhere.

Speaker 2

Now some states there's limited licenses and things of that nature, but there's I think where there's a will, there's a way and there's creative ways to get into some of the states that we're not currently in. And that's something that's a high priority for both us and And we'll continue to make that a high

Speaker 12

priority. I see. That makes a lot of sense. And again, like I'm sure it's something that's on the come, but is there plans eventually to maybe integrate the signal, ESPNs in particular within your app, I don't know in 24, how long does that would that take in theory?

Speaker 2

Yes. I would say that's a real forward looking question, Joe. The answer is, of course, those are things that we're going to prioritize, but I'd rather wait until our Investor Day more toward the end of this year. And we're really focused on launch And ramping and getting through football season, but we'll have a lot more to share with you on how we're thinking about product roadmap and enhancements and media integrations Between ESPN and ESPN bet and feeds and the other questions you have, we'll be happy to address all of those or as many of those as we can later this year.

Operator

Our next question comes from Brad Montour with Barclays. Please proceed.

Speaker 4

Thanks everybody for taking my question. So we've covered a lot. My first question is The retail sportsbook, the Barstool brand of retail sportsbook that you've been rolling out, what happens to those? And can you do you have access to the ESPN Bet brand in sort of potentially rebranding those as ESPN Bet Sportsbooks?

Speaker 2

Yes, good question. So we have invested pretty significant capital. I think we have best in class retail sportsbooks Across the portfolio today, which is awesome. The arrangement that we have with Dave and team at Barstool is that we've got a period of time They need some support from us as we transition and we're going to need to have some time to obviously get the ESPN bet app launched as well as Take down some of the Barstool specific branding inside of our retail sports box, but we're working cooperatively together on a number of issues And transition issues. And with regard to what does that end up being or looking like, that's TBD, we're still we're working through ESPN.

Speaker 2

Folks have not had a chance to visit our properties yet. And so we're going to go through a process and There could be some potentially some ESPN branded retail sportsbooks on prem. And if not, we still have what we believe to be best in class destinations on the retail Sports betting side and sports bars connected to almost all of them.

Speaker 4

Okay. Thanks for that. And then just as a follow-up, We went over this a little bit, but the extra 150 ish of off channel marketing, recognize That's not you have a $150,000,000 commitment to ESPN through a fee. This is in addition to that, but this is not necessarily with ESPN. Is this extra 150 ish completely discretionary or is it part of the agreement with ESPN that you're going to be doing this off channel marketing just to support Product, is there connectivity with broader Disney assets that you could utilize to spend that?

Speaker 4

And then where did you just How do you just come up with that level? Where do you why do you think that's the right number?

Speaker 2

Yes. I mean, we put a lot of thought into what we believe We're trying to accomplish scaling and in addition to the support and marketing Service that we're getting from ESPN, what are we missing? And so we feel like that level of spend allows you to do Really most if not all of everything else that you want to do or plan to do. There's no commitment to your first part of your question, Grant, on How much we will or won't spend in off channel is part of this deal. This is what we believe is the right level of spend and our partners at ESPN feel good about it too.

Speaker 2

So we're both excited about marketing spend both within the ESPN ecosystem as well as outside of that.

Operator

Our next question comes from John DeCree with CBRE. Please proceed.

Speaker 13

Hi, Jay. Thanks for taking the questions. Maybe one, I think In Joe's question, you kind of talked about the incremental spend in 4Q, but I was wondering if you could give us some parameters on what the annual Kind of marketing spend, 150 ESPN and roughly 150 off channel compares to What you were doing prior using the Barstool brand, how much of an uptick is this relative to say the last year or 2 in terms of total marketing dollars?

Speaker 2

Yes. Well, we've I think we've talked about this before. And John, it's a good question. We were going through product migration for the last 12, almost 18 months as I mentioned in my prepared remarks. And so we were very careful not to be aggressive in marketing spend Outside of the things that we were doing on an integration basis and organically with our friends and partners at Barstool.

Speaker 2

And so That's now done. We feel great about the products. We feel great about how migration occurred. It was seamless. It was uneventful and that's amazing given that we Converted all 16 of our markets in the U.

Speaker 2

S. In a matter of 24 hours. So again, hats off to Benjie and the team at Penn Interactive on that. So I think Generally speaking, we feel really good about where things are as it sits today and we obviously Can pivot and whatever we want to do on a go forward basis, but we feel good.

Speaker 13

Okay. Fair enough. Maybe one question you touched on earlier about I think some of the ESPN, maybe emails, the Fantasy Database subscriber list. Are you able to directly market to those emails? Are there restrictions around that?

Speaker 13

And then I guess the second part of that question would be ESPN Vet customers. Is that Are those customers and customer information owned by Penn or ESPN or shared?

Speaker 2

Well, ultimately Anyone who is in the ESPN bet, specifically the ESPN bet ecosystem is owned by Penn. You have to be fully regulated and licensed to Be able to have that information on gaming customers. And so that's pretty clear cut. I think as it relates to The e mailable database at ESPN, we're not going to get into a ton of specifics on that. I would just say that, again, ESPN has been working on this For some time behind the scenes and they've got a robust plan.

Speaker 2

It's comprehensive. It's exciting. And they also If you read the which I'm sure most of you did, if you read the release that ESPN put out yesterday, one of the things that have a tremendous amount of alignment on and they take very seriously is around responsible gaming. And they're putting together A committee within ESPN that will work very closely with the folks that are on our committee here at Penn. And we feel like we've got a path forward And a roadmap on how to market to the database in a very responsible way and make sure that those we're marketing to In certain ways, we have age verification completed and all the things that we would typically think about on the gaming side.

Operator

Our next question comes from Stephen Grambling with Morgan Stanley, please proceed.

Speaker 14

Thanks. Many of the other media partnerships, I think, ultimately acquired customers that then Lost them or you saw them dwindle in year 2. How will you measure conversion effectiveness with ESPN and or track KPIs to ensure that you're acquiring beyond that kind of first test. And as a related follow-up, how do the CAC assumptions embedded in your market share projections compared to what you provided in the past for the digital business?

Speaker 2

Good questions, Stephen. And Look, I would say with regard to some of the KPIs, we'll get into more of that at the end of the year in our investor presentation. Again, we're really focused on launch right now. But I don't I think we're getting a lot of questions around other media deals and I just I think it's apples to eggplants. People go to ESPN to consume sports content every day, all day, Scores, stats, stories, I mean, they're the best in the world.

Speaker 2

And so we're going to be able to retain people because they love the brand. They have an affinity for it. We're going to give them every reason in the world to stay in the ecosystem and treat them amazingly well. And people are going to be going back over and over again to ESPN Media Assets and be reminded in case they forgot that we're still there. And We feel great about what our year 2 retention capabilities will be cross sell opportunities, such a great brand.

Speaker 2

And with regard to CAC, I think we've always been pretty clear that we think that because of our media relationships that we can run best in class customer acquisition costs. I would expect that the environment right now has been good. We haven't spent into it because we didn't have a competitive product. Now we do. And so I think the environment is good.

Speaker 2

You're seeing customer acquisition costs In that $200 to $300 range, in some cases lower, and I think those are pretty healthy levels. And so assuming that the environment is there or better, Then I think it gives us a great opportunity to spend and feel good about LTV and how you're thinking about returns on those customer acquisition costs.

Speaker 14

On that then, would you be willing to if the ROI is there, and the CAC is lower, would you be willing to go above the 5 turns of leverage? Or is there a way to get additional capital infused into this to pursue market share more aggressively?

Speaker 2

Yes. I mean, look, let's wait and see. Stephen, I think right now we've got a really good plan that I've laid out for everybody and given you some parameters and how we're thinking about the business. And By Investor Day, assuming we do that sometime in December, we'll have been live for call it a few weeks and I think have some really good information to share and how we're thinking about some of the topics

Operator

Our next question comes from David Katz with Jefferies. Please proceed.

Speaker 15

Hi, good morning, everyone. Thanks for taking my questions. Congrats on your deal. I wanted to ask, And Jay, I think you've talked about this a bit, but I wanted to get any thoughts you may have on how from a product perspective, You're thinking about defining yours in a differentiated way, right? We've seen over the past Several months to a year that there are some differences in the kinds of offerings and the manner in which apps are defining themselves to capture not only share, but do so profitably.

Speaker 2

Yes. It's a good question. I think that really the key differentiation for us, medium term, long term, David is going to be the things that we can do around integration, media integration, video and maybe potentially live streaming. There's a lot of things We can do because of who our partner is here that others won't be able to do in the same way. I think there's been a lot of attention as there should have been Given to same game parlays and who's best at those and to me those are going to end up being Largely commoditized because they're betting offerings that we're all going to be at the same level in a very short period of time.

Speaker 2

But certain things that we're going to be able to do because of the media partnership and who ESPN is that others just won't be able to emulate.

Speaker 15

Understood. And if I may just follow-up quickly, with respect to the cross selling opportunities here, have you talked about Sort of the concentric circles around customers in one database versus the other. Obviously, one is much, much larger than the other. But how many of your pen people are ESPN people and or vice versa?

Speaker 2

We don't have a good Feel for that today, David. I'd imagine that there's going to be some overlap, but not a lot. I mean, this is a huge to partner with ESPN. And yes, I think most of it's going to be incremental to what we have today. Frank, if we can maybe just do one more question, that'd be great.

Operator

Our next question comes from Jason Pilchon with Canaccord Genuity. Please proceed.

Speaker 13

Great. Yes. Thanks for taking the question. I was curious in terms of, I know you mentioned market access earlier, specifically when it comes to Connecticut, given Rush Street's plans to exit there, given that ESPN's home state, How you would handicap your chances of obtaining that 3rd license and where in that process you currently stand?

Speaker 2

Yes. That decision hasn't been made yet. And we obviously would like to be in Connecticut. So we'll see where that when that decision is made and if we're fortunate to be A new operator in Connecticut and we've talked before about New York. I don't no one loves the tax rate in New York, but There could be opportunities in the short term or medium term to get access to New York creatively.

Speaker 2

And those are things that we're working on behind the scenes. It's like I said earlier, it's really important To be a scale player, they have access to the states that matter. And I don't think Ambe is really making money in New York today, but I think from a Database cultivation and hopefully down the road there's opportunities to work with the state on a win win scenario between the state and the operators to Have a more favorable operating environment there. So those are things that we're going to be working on behind the scenes and we'll keep everyone posted with regard to how we're thinking about market All right. Thank you everyone for joining this morning.

Speaker 2

Very excited and look forward to continuing to connect with you on this What we view to be such an amazing strategic alliance and the future looks bright. So look forward to

Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.

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Earnings Conference Call
PENN Entertainment Q2 2023
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