PENN Entertainment Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Penn Entertainment First Quarter 2023 Results 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

Thanks, Frank. Good morning, everyone, and thank you for joining Penn Entertainment's 2023 First Quarter Conference Call. Now I'll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward looking statements within the meaning of the Private Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward looking terminology such as Specs, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussion of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, Capital expenditures and operating results.

Speaker 1

Such forward looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward looking statements are described in today's news announcement and the company's filings with Today's call and webcast will include non GAAP financial measures within the meaning of SEC Regulation G. When required, reconciliation of all non GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. With that, it's now my pleasure to turn the call over to the company's CEO, Jay Snowden.

Speaker 1

Jay, please go ahead.

Speaker 2

Thanks, Joe. Good morning, everyone. I have here with me in a while missing our CFO, Felicia Hendrix and our Head of Operations, Todd, George as well as other members of the executive team who can help answer any questions that you may have during Q and A. As for the first time as an official member of our Penn family, we're also joined by Erica Ayers, CEO of Barstool Sports. As you know, we completed our acquisition of Barstool on February 17, and our integration efforts to date have gone as planned, but more on that in a moment.

Speaker 2

First, we're pleased to report that Penn delivered another solid quarter with consistent retail performance across most of our portfolio. Our properties proved to be more resilient than initially anticipated given the increased supply in a few markets and the ongoing uncertain macroeconomic environment. Turning to Slide 4 in our investor presentation. Penn generated 1st quarter revenues of $1,670,000,000 and adjusted EBITDAR $478,200,000 with strong performance in our Northeast segment helping to offset softer year over year results in the South. As you'll see on Slide 56, our retail EBITDAR margins were negatively impacted by approximately 100 basis Due to the regional shift in our gaming revenues year over year to the Northeast, which has a higher blended tax rate of strong in the final two weeks, including having our number one company wide slot volume weekend of the year so far in the last weekend of April.

Speaker 2

Given our Q1 performance combined with current trends, we are increasing our prior revenue guidance for the year to reflect the acquisition of Barstool Sports, while maintaining our current adjusted EBITDAR guidance. Felicia will be providing more color on our guidance in a few minutes. Turning to Slide 9, we generated over 350 1,000 new sign ups this quarter for our industry leading customer loyalty program, which is a 13% increase year over year. 63% of our Q1 database growth came from our online offerings. Notably, in Q1, we saw the strongest growth rates in our 65 plus year old age segment and rated theoretical revenue.

Speaker 2

These guests appear to be returning to more normal pre COVID behavior of late and are responding well to our added amenities and continued improvements in our non gaming offerings. At the same time, the 21 to 44 year old age demographic was stable in Q1 year over year after very strong growth throughout 2021 2022 and continues to grow significantly when compared to 2019. This aids segment has grown from 13% of total rated theoretical in Q1 2019 to 18.5% in which is designed to help better align all of our brands under the Penn Entertainment umbrella and create a more seamless omnichannel experience. Some of the new perks include the ability for day 1 customers to begin immediately earning meaningful rewards just by signing up. In addition, members can now earn loyalty points across all of our business verticals, interactive as well as retail gaming and Members also have access to entertainment experiences with Penn Partner Brands, including Live Nation and Choice Hotels.

Speaker 2

Penn Play is supported by our industry leading 3 Seas technology, which we've talked about before and which is currently deployed at 21 of our Collectively representing 70% of our retail EBITDAR. We've grown our total Penn Wallet customers to 195,000 received $104,000,000 in total Penn deposits as of the end of the Q1. As we've emphasized in the past, those guests who use the digital wallet demonstrate And as you'll see on Slide 11, Our effective cross marketing efforts, combined with our ability to deliver a seamless best in class customer experience, has led to a significant increase in guests to engage with us across multiple channels, which is the key to our future growth. Our Interactive segment saw revenue improvement during the Q1, driven in part by our acquisition of Barstool Sports as well as our recent sportsbook launches, including Ohio and Massachusetts. In addition, As highlighted on Slides 1718, we're continuing to generate impressive results from the ScoreBet and iCasino in Ontario, While we're live with our fully owned best in class tech stack, which has helped generate record gross revenues from sports betting in March and for GGR through March and 26% higher online sports betting to Icasino cross sell than in the U.

Speaker 2

S, which while also enhancing our iCasino product with new content and bonus mechanics. In addition, with an improved customer experience post migration, we will be well positioned to drive stronger loyalty and retention, while offering seamless cross play in our omnichannel ecosystem. As I mentioned at the outset of our call, Our integration efforts with Barstool Sports thus far have been going very smoothly, and we've enjoyed exploring new opportunities for growth across numerous verticals. On the media side, Barstool demonstrated strong audience and viewership growth in the Q1, achieving record cross platform views, up More than 40% from the prior year and growing more than 60% in both YouTube subscribers and TikTok followers. During the quarter, Barstool Golf's new partnership with the PGA Tour also led to co branded merchandise at the Players and Waste Management tournaments.

Speaker 2

Meanwhile, the Scores mobile business is also delivering strong results in both revenue and engagement metrics, with total user sessions up 22% year over year. The Scores award winning digital media app is providing its highly engaged audience with up to date scores, news, community chat features And betting lines proving to be a perfect second screen for watching live sports and another strong acquisition funnel for our retail And with that, I'll now turn it over to Felicia.

Speaker 3

Thanks, Jay. We reported another solid quarter. Our retail properties generated adjusted EBITDAR of $511,200,000 and an adjusted EBITDAR margin of 35.5%. The combination of a stronger mix of revenues from our high tax geographic segments, combined with the settlement of certain property litigation matters, created a headwind of roughly 100 basis points to the Q1 2023 adjusted retail EBITDA margin. Our Interactive segment EBITDA results of a loss of $5,700,000 reflect our January 1 sports betting launch in Ohio, our March 10 launch in Massachusetts and low hold in January February.

Speaker 3

Roughly half of the loss was due to low hold and half was attributable to Barstow Sports due to seasonality and the sports calendar. With the acquisition of 100% of Barstow On February 17, we now record 100 percent of Barstool Sports revenue and EBITDA in our interactive segment. As we show on Slide 7 of our slide deck, our total Q1 'twenty three revenues include $28,200,000 from Barstool Sports post acquisition. As a reminder, previously, with our 36% interest in Barstool Sports, We did not record any Barstool revenues on our P and L and only recorded our portion of Barstool's net income or loss, I'd like to take a moment to talk about the cadence of Barstool I'll start the year soft and the 3rd and 4th quarters are the strongest quarters due to the ramp of ad sales as well as the sports calendar. So as you think about modeling Barstool, I would keep this cadence in mind.

Speaker 3

Now regarding overall company guidance, our new revenue range is 6 $370,000,000,000 to $6,810,000,000 up from the prior $6,150,000,000 to 6 $580,000,000 and assumes revenues of roughly $220,000,000 to $230,000,000 from Barstool for the year from the time of the 100 percent acquisition on February 17. On a full year standalone basis, We expect Barstow to generate 2023 revenues of approximately $250,000,000 Regarding EBITDAR, our 2023 guidance Of $1,875,000,000 to $2,000,000,000 is unchanged given Q1 performance and our expectation for Barstow Sports EBITDA to be break Our land based casino outlook continues to take into consideration new competition in Nebraska, Kentucky and Lake Charles and ongoing competition in Chicagoland and also continues to imply a retail EBITDAR margin of approximately 36% given the competition, gaming tax mix and the economy. For our Interactive segment, we expect the 4th quarter to be profitable, while the second and third quarters should look very similar to each other. Given the light sports calendar, build up to our migration in the second quarter This could be greater than the losses we reported in our Interactive segment for the Q1, with the 4th quarter more than offsetting the year to date cumulative losses from the 1st through 3rd quarters.

Speaker 3

Now on to the numbers. Corporate expense in the Q1 inclusive Cash settled stock based awards was $26,300,000 Cash payments to our REIT landlords was $233,200,000 Cash taxes were $1,100,000 and cash interest on traditional debt was $46,400,000 Total CapEx was $63,200,000 of which $9,200,000 was project CapEx mostly associated with our 4 new development projects. Our fully diluted weighted average common shares outstanding As of March 31, 2023, was $169,500,000 which reflects 2,400,000 shares issued for the purchase of Barstool Sports. There are a few additional items on our P and L that I'd like to call out, the details of which you will find In our 10 Q filed later today. For the quarter, we reported a gain on the Barstool Sports acquisition of 83,400,000 We also reported a gain on REIT transactions of 500 $800,000 which reflects a net benefit to our balance sheet following the amended and restated Penn Master lease and the subsequent lease reclassifications associated with our 4 new growth projects.

Speaker 3

You likely notice The impact of the amended and restated Penn Master lease on our income statement. The majority of the year over year increase in G and A, All of the year over year decrease in D and A and the majority of the decline in interest expense are all due to the lease reclassification. Importantly, none of these changes affect our cash rent payments to GLPI or VICI. To further help you with your modeling for 2023, we expect 23 corporate expense of roughly 105,000,000 Total CapEx for 2023 and all of its components is in line with our prior guidance of $388,000,000 net of insurance proceeds. For cash interest expense, we forecast $133,000,000 for the full year 2023 after roughly $30,000,000 of interest income.

Speaker 3

Cash taxes will be roughly $155,000,000 for full year 2023 and our weighted average fully diluted And share count for 23, assuming no further share repurchases is projected to be 169,100,000. We repurchased 1,600,000 shares in the Q1 for $50,000,000 at an average price of $30.36 per share. Subsequent to quarter end, we repurchased an incremental 647,000 shares for $19,000,000 or $29.21 per share. We have $80,000,000 remaining under our February 2022 authorization and $750,000,000 remaining under our December 2022 authorization. In the Q1, we ended the year with $2,300,000,000 in liquidity, inclusive of $1,300,000,000 in cash and cash equivalents, 1 $300,000,000 in cash and cash equivalents.

Speaker 3

Traditional net debt at the end of the quarter was $1,400,000,000 an increase of roughly $300,000,000 from December 31, 2022 due to a lower cash balance reflecting a net cash payment of approximately $315,000,000 for the acquisition of Barstool and recent activity under our share repurchase program. We ended the quarter with lease adjusted net leverage of 4.6 times compared to 4.4 times on December 31, 2020 2, 85% of our debt is fixed rate if you include our leases and our nearest debt maturity is in 2026. We expect our lease adjusted net leverage to end the year at roughly 4.5 times. And with that, I'll turn it back to Jay.

Speaker 2

Thanks, Alicia. In closing, I want to call special attention to our 2022 Corporate Social Responsibility Report, which was published on April 25 and is available for download on our website. I'm really proud of how much our ESG initiatives have grown over the last 2 years since we issued our first report. I want to thank the members of our ESG and Diversity Committees as well as our Board's Nominating and Governance Committee, which helps to oversee and guide our efforts And all of our property and interactive leadership teams across the country for their continued support of our ESG journey. Slide 22, excuse me, details some of our most recent activities, including holding numerous events to drive open and meaningful conversation around DE and I, providing disaster relief to those affected by tornadoes in Mississippi and Barstool's efforts to help raise awareness for mental health issues on college campuses.

Speaker 2

So before I turn it over to the operator, I just wanted to extend a giant thank you to all of our retail casino, interactive and media team members for continuing to give us And we'll take a look at our customers, guests and fans across North America. And with that, Frank, I'll turn it back over to you to open it up for questions. Thank

Operator

Our first question comes from Barry Jonas With Truist Securities, please proceed.

Speaker 4

Hey, guys. Last quarter, you noted the midpoint of EBITDAR guidance could be conservative,

Speaker 2

Hey, Barry. Good morning. I would say no change to how we felt when we had our call in It's still very early in the year. So, it really depends on the macro and your guess And speculation around what's going to be the environment 3 months or 6 months from now is probably better than mine or as good as any. So we're I think it's too early in the year to consider doing something like that.

Speaker 2

I would just highlight what we said earlier during the prepared remarks in terms of our Core retail casino businesses and momentum, we had our strongest slot volume weekend of the year, the last weekend of April after a relatively slow start around Easter. So it's really it's hard to pay. We talk about it a lot internally and you go through these pockets of 2 or 3 weeks where trends start to soften up and then they come back strong and we're still kind of going through that real time. So as of right now, We're feeling really good about the volumes and customer trends and behavior, but I would say too early in the year. And yes, is the answer to your question on interactive.

Operator

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

Speaker 5

Hey, good morning. It's Omar Alexander on for Joe. You mentioned in the past that you're likely to reinvest more or increase your marketing and get more active in promos in your digital Through 2024 as your competitors likely ratchet down those activities. And this is the reason why the arc of ramp and profitability may look different for Penn and your And the hockey stick shaped profit growth will be more in 2025 and beyond. Can you please talk about how you're presently thinking about this and what directionally this might look like in 2024 and 2025 relative to 2023 digital profitability?

Speaker 2

Hey, Omer, great question. And I would say that your summary is consistent with how we're thinking about things. It's a little too early to get into a detailed discussion around what that stick is going to look like in 2024 versus 2025. I would say that we're very encouraged by the products based on our trends in Ontario. We shared a lot of stats around Retention and the success of our promotional engine, the momentum we have in not just online sports betting, but importantly, we continue to set new records The U.

Speaker 2

S. And that technology stack is going to allow us to do much better than we do today here in the U. S. I mean, you have to recall that We really had kind of a frozen product for the last 6 to 9 months, and it will continue to be frozen until we Migrate in July. Everything is on track for that migration.

Speaker 2

Benjie Levy and our team at the SCOR and Penn Interactive have been doing a great job getting ready for July. Everything is on track. And I would say more to come in terms of how we're thinking about what Football season this year and then going into 2024 what that looks like. But I think you're right about, we have a great product, we're going to invest in that product And make sure that people know we've got a brand new product that we believe is going to be as good, if not better than most everything out there. And you can't just launch a product without supporting it from a marketing standpoint.

Speaker 2

So we will do that. And yes, I think 2025, Obviously, it will be really important for a year and when you'll start to see the EBITDA growth really start to make a difference as we report numbers on a quarterly and annual basis.

Operator

Great.

Speaker 5

Thanks. And then a follow-up to that. How do you think about the profitability in Barstool Sports in 2024? What drives the improved profitability versus the top line growth? How profitability is going to be different going forward?

Speaker 5

I guess, I'm sure what's the bulk case versus the base case.

Speaker 2

Yes, sure. And I'll Erica, Feel free to jump in. I'll just make a couple of comments on that. We provided this morning revenue cadence throughout the year of how things We'll likely play out from a quarter to quarter basis here in 2023. You should assume that from a seasonal perspective Our seasonality perspective, that would look the same in 2024.

Speaker 2

And we're assuming roughly breakeven here in 2023. We have and will continue to make investments in top talent as well as new potential business verticals for us, of which we're exploring a number of With Barstool Sports now, so I don't want to get into a 2024 discussion around Barstool Sports and guidance. We'll do that at the right time more toward the end of the year. As we sit here today, I think you should continue to see revenue growth We've been showing strong revenue growth every year. As a reminder, Barstool Sports revenues have more than doubled since we made our initial investment 3 years ago, And 2023 is going to show nice growth on 2022.

Speaker 2

We'd expect to see that in 2024 as well. But with regard to 2024 and some of the things that we're working on and are excited about. Erica, I'll hand it over to you to make a few comments.

Speaker 6

Sure. So When I look at this quarter in particular, we had record growth. So we did $19,000,000,000 cross platform video views, Nearly 6 of those were original content. When you think about the future, our vision is to monetize those impressions fully. We're beating our peers in terms of our year over year revenue growth and our audience continues to grow and we continue to grow on multiple platforms.

Speaker 6

So being sure that we maximize that with a diverse revenue set will continue to be our priority. And then we'll obviously get more efficient about how and where we do it.

Operator

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

Speaker 7

Hey, thanks. Good morning, everyone. Jay, Felicia, when you guys think about kind of the segments in the Q1 where you And obviously with the Pennsylvania growth that you guys saw and the tax rate there, it's understandable. But you're also in both segments lapping periods where Clearly, more employment came back on, more amenities came back on, etcetera, and staffing levels were higher. When do we start to see over the Of course of this year, flow through start to normalize to what you guys have experienced in the past in those regions?

Speaker 2

I'll let Todd answer that one, Carlo.

Speaker 8

It's a great question. Hey, Carlo. So I think you're kind of seeing it now. And I think what Had been happening with some of the expense creep. There was some inflationary pressure in there, but I think what we're seeing is that starting to moderate more kind of muted growth in there.

Speaker 8

And then as we've added the amenities back, we've been More strategic than we were and you still look at 2019 and what we are flowing through then compared to what we're flowing through now and we're still showing tremendous improvement. As we start looking at our models, our playbook, We're more strategic in our offerings. We're trying to avoid the entitlement programs that were there in the past the offerings that were there in the past that really didn't add a tremendous amount of value. So, I think what we're seeing, especially February March timeframe, starting to see what will be normalized as we go forward. There's still obviously going to be seasonality in some of the different regions.

Speaker 8

But That growth coming from the lower segments compared to 2019 and finally starting to see the older demographics come back, It's feeling more like we can start looking to traditional trends in this area.

Speaker 2

And I would just add one thing to Todd's comment, We hit a little bit in the prepared remarks and the earnings release that and you've noted this Carlo, most have that there was some new supply that entered the market over course of the last, call it, 6 to 12 months between Blackhawk, Council Bluffs, obviously, Lake Charles with the Horseshoe opening there. And We've been pleasantly surprised. We had estimates kind of worst case, base case, best case in terms of what the impact would be. And I would say that we've held up better in most all of those markets with new supply. Todd and our team of regional executives and general managers And those markets have done a great job really focusing on the customers that are of highest value and that we have very strong long term relationships So that continues to be a good story, and you can see that on the revenue growth, in terms of being ahead of where I think a lot of us estimated we would in Q1, maybe a little bit less so for this quarter on the earnings for all the reasons that we've covered and making some additional reinvestment at the VIP and strong core player level in some of those key markets.

Speaker 2

But I agree with everything Todd said, and you're starting to see things settle out here. And it's This is probably, I would say, maybe April of this year, should be the last time that we're really talking about noise on a year over year basis. I think for the 1st 4 or 5 months of this year, you probably still want to compare to 2019 to see what the trends really look and feel like because last year, Jan, Feb, you had softness between weather and omicron hangover and then you had pent up demand in March, April. And so those year over year comps Look a little odd, but I think April is a good example of you'll want to look at it versus 2019 also. Once we get to May, Certainly, June, I think you can just start looking finally year over year and going forward that will be the case.

Speaker 7

Great. Thanks, Todd, and thank you, Jay. Jay, one more follow-up And you kind of gave a little bit of a prelude to the question I'm about to ask. But I think if you just look at the 4 regions year over year, EBITDA is down about 3%. Obviously, the mix of revenue and the tax impact that that has was a factor.

Speaker 7

But when you isolate the assets that did not see year over year competition or said differently, How much of that year over year was stemmed from some of the competitive impacts that you guys mentioned?

Speaker 2

Yes. I mean and Todd, feel free to jump in here. I guess I would answer it this way, Carlo, that as you look at our portfolio of properties, Market by market and asset by asset, we have some that are showing very strong growth on the top line, bottom line And even margins despite how strong the margins were last year. And then you've got some offsets in some markets where you've got new supply Or you've got assets that are more tired, some of which we're addressing obviously like the 2 in Illinois, Joliet and Aurora. So it's a bit of a mixed bag.

Speaker 2

But Certainly, when you look at markets like Ohio and Missouri and even it's interesting because even though we are Down year over year and I always stress year over year in the South, if you look at our results region by region compared to 2019, The South region is still showing the strongest results from a top line and bottom line perspective of all of the regions. So it's down a little bit. There's some noise in Jump in with anything? Yes.

Speaker 8

The only thing I'd add Carlo, that South segment, yes, it's down year over year, but It was such an amazing quarter last year. So it's still an amazing quarter this year, just comparatively speaking, it's down slightly. And then maybe a little more color on the new competition. What we're seeing is Traditionally, when new competition had come into a market, it really came in very aggressive. And they were trying to get people to come over and kick the tires.

Speaker 8

But I think what we're seeing is a more rational approach, trying to come out of the gate very responsibly. So it's led to A really good competitive environment in all the markets that we're seeing. And Jay and I and others were recently Traveling around viewing our own properties, but also some of the competition. It's well thought out. It's well done.

Speaker 8

And the goal will be that they'll continue to

Operator

Our next question comes from Shaun Kelley with Bank of America. Please proceed.

Speaker 4

Hi, good morning, everyone. Thanks for taking my questions. Jay, I just wanted to start with the younger demographic. So kind of going back to the Slide deck, I think you pointed out there that in the lowest demographic cohort, things actually did slow A little bit year on year, just kind of how would you characterize that? I think broadly speaking, you're still up a lot from where we were in Dean, is this just a little bit of behavioral normalization?

Speaker 4

Kind of what are your people on the ground telling you about that change?

Speaker 2

Yes. I think, Sean, another good question. I think it's probably more of a last year dynamic than a this year dynamic. We're not hearing or Anything from our folks on the ground telling us that things have changed. And the point that you made about what these age demographics look like versus 2019, I think, is really important.

Speaker 2

And when you're looking at it versus 2019 in Q1, that 21 to 34 year old age segment is still up 76% versus 2019. The 35 to 44 year old segment is up 51% versus 19, 45% to 54% is up 38% compared to 2019, and 55% to 64% is up 12%, and then you have a decline 13% at 65 plus. So we feel really good about the mix, and we've been trying to answer because we haven't had a great Sir, on why is that 65 plus still down and when is it going to normalize and return. And I'm not sure that you get back to flat There on a versus 2019 basis just because some of those older segments were your most frequent visitors on buffets and things that Pattern behavior return right now, I think, is probably a good goal. And if we can keep these other segments continuing to grow With such strong growth versus 2019, but even if we have a small hiccup in this current quarter of down 5% versus last year, Growth in all of the other segments obviously more than offset that.

Speaker 2

And we've been adding so many new amenities that I think appeal to all of the age demographics, but in particular the younger. Todd and team have done a great job figuring that out, and we've seen a ton of success as we've shared every quarter for the last couple of years.

Speaker 8

Yes. Sean, just a couple of other adds and sorry to throw more percentages at you. But even at younger demographic, the much of the growth from 2019 is coming from the value on a per trip basis. So that alone is up over 51% for that 21 to 44 segment. And then, even on the 55 plus, it's maybe fewer trips, but we are seeing them And then Jay and I and Felicia, others were talking about this last week.

Speaker 8

A lot of that younger demographic, comes back in during Kind of the spring summer months when we have outdoor events and outdoor concerts and things like that to kind of drive the overall experience. So we're very comfortable with Where we're at now as well as the programming we have for the upcoming months.

Speaker 4

Appreciate all the color. And As my follow-up, maybe turning to Barstool and Eric a little bit. Obviously, there's a pretty big event as it relates to Social media and the Barstool team last night. I was just wondering if you could comment on that. Jay, maybe for Jay, do you expect any Financial impact or fallout from that.

Speaker 4

And for Erica, more of the cultural question, how do you protect Kind of the content and the talent acquisition side as you start to grow into this bigger platform with 10 with obviously a different That kind of cultural guardrails than maybe you had in the past?

Speaker 2

Yes. I'll hit that first and then Erika can jump in on the second part of your question. Sean, we're obviously not Commenting on personnel issues on the call or publicly, it was something that happened inside the company that we dealt with. We felt like we dealt with it appropriately. And I would also say that you've been following us and the relationship and I think the public markets and Financial community has gotten to know Barstow pretty well over the last 3 plus years and there's going to be some drama sometimes.

Speaker 2

There's going to be some things that pop up here and there and We'll manage through those as we always have. It's one of the strongest sports media brands certainly in the U. S, if not the world. It's high growth. We've got tremendous people at Barstool, tremendous IP, great leadership and have a very exciting future ahead of us.

Speaker 2

But Erica, feel free to jump in on any of the cultural questions or anything else that you want to address.

Speaker 6

Sure. So the way we think about things, we have about 100 And when you think about Barstool Sports, in one in some ways we're a media company and in other ways we're a collection of influencers. And when you look at our business overall, there's very, very few competitors left. Most people who play in the digital media space Or the cable media space or the print media space don't exist or are faltering. And when you look at the success of our business, a lot of that is due to the fact of how we run our creative team and how the freedom we give them, The tools we give them, the entrepreneurial spirit that exists inside of Barstool.

Speaker 6

We also are a company that talks about anything and everything incessantly, Right. This is a company that's authentic. It's a company that's unapologetic. It's a company that exists on the Internet 20 fourseven. And that's part of what makes Barstool Sports interesting is that we are not particularly corporate in how we think about the culture of content.

Speaker 6

Now there are certain lines you don't cross. There's guardrails that exist. Those have obviously increased now that we're in a highly regulated category. And we knew that going into the Penn acquisition. We knew it prior to that going into the Penn investment.

Speaker 6

And what we really believe is that There is no place like Barstool Sports to make content. There is no platform that will give a talent or a creator a laptop, a microphone and camera and to enable them to broadcast opinions, creative thoughts, franchises, All sorts of content and to be able to have the promotion of Barstool Sports as well as the monetization engine underneath it. And we feel really strongly about that. That's how we've built the top podcast brands in the world. That's how we've built some of the most captivating creators and influencers in this country, and we will continue to do that.

Operator

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

Speaker 9

Good morning. Thanks for taking my question. Just in terms of the iGaming conversation, earlier in the year, it sounded like there was a lot of momentum in 6 or 7 states, Good. Just kind of legislative support all at this point, I believe have died. Jay, curious how you're thinking about what the industry We learned and kind of where the conversation is, maybe the setup for next year, which would obviously be a big catalyst for Interactive and for the industry.

Speaker 9

Thanks.

Speaker 2

Yes. Chad, I would say that it's obviously well covered, well documented that it looks like there's probably no movement here in 2023. There absolutely could be in 2024. It's really hard to handicap because it does depend on A number of factors, probably well known but not worth getting into on a year to year basis. I think The way we think about this is that it's only a matter of time and the states that have already legalized online sports betting that is online And so online casino is very likely to come.

Speaker 2

It's a question of what does that cadence look like? Is it staggered? I think once you get a State or 2 in the Midwest, it usually becomes an arms race for revenue tax revenue purposes. And so it will probably start to move faster once you get Indiana, Illinois or Iowa, it will probably start to move from there. So nothing imminent.

Speaker 2

I'm not going to try to put I would say that from our perspective, given the timing of our technology and product migration this Summer, this is actually setting up quite well for us because we have an inferior product today, and we don't believe that's going to be the case the second half of this year. And as we At end of 2024, we're going to be in a position to be able to launch standalone online casino apps. And today, it's all mixed in with what we do on the online sports betting side. And so we've got a lot in front of us that's exciting. And so the timing of legalization being maybe pushed off to 2024, 2025 and start to really roll from there, we think that sets up very well for Penn.

Speaker 9

Thanks, Jay. And then, Erica, you mentioned, just the changes with Barstow now being part of a bigger and more regulated industry, bigger company, With recent valuation adjustments for high growth companies, are there things that maybe you decided not to do in the past couple of years just because of You know where your North Star was and kind of how you were running the company. And now that it's part of a bigger company with different goals, maybe there could be other

Speaker 6

Yes, absolutely. It's a great question. It's something I spend a lot of time thinking about. When you look at if you look at the last 6 to 9 months, we are putting on major scale live sporting events with our own comedy, With our own personality, with our own with our own commentators on those broadcasts. We are entirely doing that because It's of something that Penn has made possible for us.

Speaker 6

That's not something we would have been able to do prior to the investment or prior to the acquisition. And I really look at Barstool Sports as a company that can create and do most anything. And Penn provides guns, money and steel for us to be able to do that. So whether that's hiring new personalities or extending into new demographics, new categories, new topics or taking on more traditional sports in terms of broadcasting events, hosting events, you name it. So We look at a lot of that and the acquisition exactly to your point has made much of that possible, whereas That was not something in the last 6 years, 7 years that we would have been able to afford nor been able to execute.

Operator

Our next question comes from Ryan Sigal with Craig Hallum Capital. Please proceed.

Speaker 10

Good morning. I want to start or stay on Barstool. I don't think you've commented, but curious how what your thoughts were on the start in Massachusetts, 6 GGR share there in the 1st partial month, but obviously Barstool's home state.

Speaker 2

Yes, happy to, Ryan. Look, It's interesting because as you saw in Ohio and then again in Massachusetts, every state provides a little bit different level of granularity in what they report. There has been, I would say, the launches at these states have been more promotional than they were initially In many cases, and so we have made the decision that we're not going to get into that initial launch arms race of promotional spend and have negative NGR for the 1st 3 or 4 months. So we took a similar approach in Massachusetts. I would expect that as things settle out, you'll see that Percentage of market share continue to grow.

Speaker 2

I also think that you just have to keep in mind and this has Very strategic on our part and you have to have patience when thinking about it, but we have not been aggressive because our product Really is substandard today and we know that. And so you have to think about that as you're launching and how much money do you want to spend And so we have to think through all of that. I think we've been very thoughtful And judicious in our approach for these state launches, we're able to generate positive NGR after the 1st month and profitability really by month 3 In almost every case, so that's been the approach. I think you'll see us transition when we have a product that we believe stands up well to the competition that we'll be more aggressive in getting some marketing dollars dedicated toward getting new people into the ecosystem, downloading the app, registering and depositing and engaging with us because we feel like our retention Results will be significantly higher based on the new capabilities and the new promotional engine and how we'll think about the business. So I I think the setup for us is actually it's again sort of like the iCasino question, but the setup for us on OSB is I think a good one in that There clearly is a focus amongst the top 5 or 6 players, of which we're one of.

Speaker 2

There's a clear focus on getting to profitability quickly, which means that Most of the top tier are going to have to pull back significantly on their marketing and promotional expense. That's the path to getting to profitability quickly. And we're in a position with a much improved product and an ability to support some additional spend to get people onto the platform and engage with us. I think that's a good setup for us We get to the

Speaker 8

end of the year and certainly into 2024. Yes, Ryan, the only thing I would add, this is Todd, is if you look at Slide 15, that's also a big part of the story for us. And looking at that growth in Massachusetts of over 14% from our traditional core product is pretty A lot of that is new to our brand and new to the property, and it's very much driven by the new sports book offerings.

Speaker 10

Then just a quick clarification for my follow-up. 2,400,000 shares issued to Bar within the diluted share count. I guess is that stock options or was that part of the purchase price of the company? And if it's The latter, was that the company's decision or was that the Barstow Owner's decision to take part stock, part cash? Thanks.

Speaker 3

Yes. So Ryan, if you go back and we've Kind of put this out in our financial in our Ks and our Qs over time. When we had the put call options, there was also an option on the part of Penn to in terms of the mix of cash and stock.

Speaker 2

So it mirrored the initial award, Ryan. Remember the ownership group The churn in group was the majority owner and that was all cash. And then for those who were owners from Barstool, Founder, Dave Portnoy, Erica, Dan and a number of others who had equity in Barstow, they received 55% Consideration was Penn stock and 45% consideration was cash. And so when we moved from 36% owners to 100%,

Operator

Our next question comes from Bernie MacPherson With Needham and Company, please proceed.

Speaker 11

Good morning. Thanks for taking the questions. Maybe to start, Jay, you've talked a lot about Retention capabilities that will be coming that you don't have access to now once you have your own tech stack in the U. S. Can you just talk about some of those, whether it's Like the ability to segment customers if it's certain product capabilities, basically just trying to get at what's driving the better retention in Ontario versus the U.

Speaker 11

S. Currently.

Speaker 8

Hey, Bernie, this is Todd. I'm happy to share some of that. So basically everything you just said is what we're focused on and What we're seeing in Ontario, not only 3 months, but going out 6 months, it's the ability to kind of personalize and tailor the messaging and the reinvestment levels Will be a tremendous help to us where we don't have an easy way to do that now. It's much more of a manual process. So It will bring more automation to the process, allow us to be much more nimble, and really allow us to do a lot better promotions.

Speaker 8

But Traditionally, that reinvestment that you would see with a gaming customer, we're excited to have that capability post migration. To Todd's point,

Speaker 2

I think about what we've been able to do to date on 3rd party platforms is really more shotgun style marketing, Not personalized really at all, so we do a promotion. It's kind of a promotion for all. That's not an effective And the promotions based on what we know about the user and a lot of our competition, they're there on their way there And we're doing it in Ontario and we're looking forward to being able to bring that level of personalization in our marketing efforts A new promotional engine here to the U. S. Here soon.

Speaker 2

Great.

Speaker 11

And then just a follow-up for Barstool. Erica, would you possibly get a breakdown of Barstool revenue just advertising versus e commerce. I know we got the mix pre pandemic, but I'm sure it's been shifting since then.

Speaker 2

Hey, I would just add, Eric, I don't think we're ready to provide that level of detail. I think Bernie, we might do that down the But I think it's too early and we're trying to keep the results within the interactive at a pretty high level. So I would say more to come. As you would imagine, advertising is the biggest driver, but we're not going to get into exact breakdowns on the revenue mix today.

Speaker 11

Fair enough. Thank you all.

Speaker 2

Thanks, Bernie.

Operator

Our last question comes from John DeCree with CBRE, please proceed.

Speaker 12

Hi, good morning, everyone. Thank you for taking my question. Maybe just one to round it out On brand strategy, it's pretty early still, but are there other thoughts or plans, especially in light of the new loyalty program to integrate some of your brands or with the idea to be to kind of continue to run a multi brand strategy. And I guess the question may be specifically for the media properties, Barstool and the score, if there are some ideas and kind of cross pollinating, but also more broadly across Hollywood or any of the other retail brands?

Speaker 2

Yes. Todd, I'll let you jump on that one from PenPlay launch perspective and how we're thinking about sort of enhanced features and

Speaker 8

how we're thinking about the Pen Entertainment brand umbrella and everything that fits underneath it. Thanks, Jay. And John, really the Penn Play moving from My Choice to Penn Play It was a huge step for us as we work to try to create that brand loyalty and allow people to kind of play across the different channels we have. So When you start thinking about what we've been able to add and it's really listening to what the consumers want and making Sure that we can integrate technology where appropriate as well as make it very seamless for them. So kind of a host for all approach where we We have different options that we can create through technology, a more seamless experience where people can start engaging with us Long before they come to a property or start engaging in wagering or gaming activity, improvements in our app, improvements Our cashless technology, sharing information, being transparent with our reward statements, offering greater flexibility with unified The Penn Cash option and then eventually having one wallet to play across not only online, but taking that into one of our properties.

Speaker 8

And then really that increased awareness that we have. And I think, you can look to a lot of the hotel companies that are out there that may have multiple brands in their But they're all tied to the major flag whether that's a Hilton, a Hyatt, a Marriott. So we'll have we'll continue to have different brands Because they really have a lot of value in the specific markets that we're in, but we'll make sure that people understand that it's part of the broader Penn family.

Speaker 12

Great. The hotel analogy is perfect. Thank you.

Speaker 2

Thanks. Thanks, John, and thank you all for dialing in this morning, and we look forward to speaking with you again next quarter. Have a good one.

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Earnings Conference Call
PENN Entertainment Q1 2023
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