Q1 2022 Rush Street Interactive Inc Earnings Call

The opportunity for continued growth online casino is tremendous.

Especially since we deliver a top quality user experience with strong differentiation.

Have demonstrated larger profitability and achieved it more quickly.

Measured by handle in our live markets.

We estimate our overall market share in the U S remained stable at around 10% for online casino and just inside 5% for online sports betting.

Yes, as a management team we continue to view by NASA statement revenues has been the best indicator of the ability to attract and retain players.

It is important to keep in mind when evaluating our performance that our strategy is centered on achieving profitability and markets relatively quickly.

As such on a relative basis, we are generally disciplined and prudent in initial promotion and marketing spend.

We estimate that last year, we bought it at 35% less than our largest competitors.

We believe firmly that players will come to and more importantly stay with the brands like ours that they enjoy and trust bonus them in a fair and consistent way.

We don't believe loyalty is achieved by bonuses heavily for early action.

And then pulling back on that one of the thing down the road.

Rather we believe loyalty are achieved through the user experience and how we treat our customers.

As a result, our strategy of leads us to target new customers, who we believe over the long term will place a greater value on experience.

Rather than bonus thing.

Aside from targeting the right type of players another key driver of player retention is a top notch customer service operation.

This is a focus of ours from the very beginning and one in which we continued to invest in from both an internal training and development perspective, as well as technologically and employing the tools needed to continuously measures satisfaction levels.

Customers notice when we reduce friction for them.

When we addressed or issues in a professional and timely fashion.

And do the little things to delight and earn their trust.

This is why we are very proud to have won the customer service of the year Award at last week's E Gaming Review Awards in North America.

The gold standard for industry Awards in.

In fact this is the only online gaming award that we're aware of in North American market. Our focus is purely on a quality of customer service.

<unk> is now one at all three times it has been awarded in its history.

We are very proud of this stock because we believe it reinforces our focus and dedication on engaging and retaining players a differentiator for us that we see as a sustainable competitive advantage.

After all we have invested 10 years into our technology platform and product features aimed to reduce player friction.

Including automating many processes that we believe many of our peers still managed manually.

In addition to a recognition for exemplary customer service.

We were thrilled to have one of the top award of the AGR North American Awards event last week for operator of the year in North America in 2022 as voted on by independent panel of industry experts.

This award is a reflection of our growth commercial success operational excellence innovation and product differentiation and influence on the larger online gaming ecosystem.

This is quite an achievement given the large number of competitors.

We actually scored a hat trick up event as we add a third award to that award was for social casino operator of the year, a validation of the quality of our differentiated cross platform free to play social gaming product that we've used over the years to acquire customers and pre regulated markets.

Of course, the awards and recognition IV industry is nice however.

However, more importantly.

We think the recognition is reflective of our unmatched focus and effort on the hardest part of the business retaining players.

We measure our return on our investment by looking at financial statements net revenue growth over time.

Rather than published revenue reports by state regulators, which typically don't account for bonuses.

To that end I wanted to follow up on a couple of more significant recent launches to provide a sense of how we view these markets.

I'll start with Connecticut, where we launched in October and have since opened nine of 15 retail sports books in this state during.

During the first couple of months after launch we were seeing 6% to 7% online and low share in.

In the last two months, we are running around 11%.

Underlying these topline results, we continue to grow mouse in this state, which represent a balanced combination of growth and retention.

Shifting to New York market is quickly, becoming one of the largest online sports with states in the country.

So down from what we viewed as the rationale during January and February is still remains substantial promotional spend at a rate above what we've seen in other states.

We touched on this last call, but I will repeat it again.

We have taken a more measured approach on a relative basis.

So our spend is above what we have typically spends and other online sports book only market states.

However, even with the higher spend our focus remains on targeting and attracting high quality customers and retaining them by delivering a premier experience.

In New York, we purposefully decided to focus on quality over quantity and not run with more aggressive sign up offers like some of our peers.

As we fill those offers will attract the opportunistic group of bonus shopping customers, who in many cases.

Would not be long term profitable customers.

Similar to other markets, we expect to expand market share over time.

During the first quarter, we saw this play out.

Although still relatively small since opening in January .

Through our New York handle share each month during quarter one.

Next up is Ontario.

On April 4th we launched our online casino and sports book in Ontario It.

It's still very early however, we have seen a strong start over the first month.

Obviously, Canada is a great market for many many years for many brands have existing strong awareness and large existing online gaming customer databases.

Given that Ontario has offered licenses to those gray market brands and operators.

It is a highly competitive market from day one.

That said, we are seeing a strong appetite for our regulated product.

And we offer a very competitive and high quality product that is resonating well with customers.

We had a very seamless launch and strong start to building our brand and reputation in the market.

We believe we have achieved our goal of establishing the <unk> brand as one of the most trusted in the market and.

An attribute that we expect will help us grow in that market over the longer term.

The most recent comparable markets, Ontario, and our view would be Michigan due to both market offering.

Online casino and sports book.

Interestingly during the first 10 days in Ontario, we are running about 33% of the daily handle that we saw in the first 10 days in Michigan.

For the most recent 10 days, we're running closer to 50%.

Through a couple of key differences that are worth pointing out.

First is that advertising content and promotions in Ontario are materially more restrictive than we've seen in other new markets in large part.

<unk> allowed to advertise any bonus offers or inducements for customers, who sign up with your brand, meaning the initial rate of customer acquisition by regulated operators may be slower than in other markets.

Second.

Is that with a well established long tenures green market. There isn't the same level of initial pent up demand for online gaming a launch as we've experienced in other markets.

This means it's likely that it will take longer for this market to build but the demand exists.

Especially for high quality betting experiences like the ones we offer.

Our strategy during the prelaunch period to generate brand awareness and excitement around that rivers has allowed us to get off to a quick start and establish ourselves as a premium option for customers.

We are very familiar and comfortable with entering a market after others, who have existing databases.

And building share steadily over time.

Unlike what we saw in New York, We expect Ontario to contribute positive revenue from the beginning.

Turning to marketing we.

We remain data driven applying a dynamic approach to acquiring converting retaining and re engaging players.

We are optimizing spend based on real time data insights around the specific jurisdictions in which we operate marketing channel predictive of long term values and player behaviors to yield a return on investment focused model.

This allows us to be nimble and reallocate spend to those channels that work most efficiently.

The results we are seeing our what we would like to see.

As I mentioned, we grew from Q4 to Q1 by 24%.

The approach is working as we are steadily attracting and retaining the types of high quality customers we seek.

Given the four new online forsberg launches since last fall, which includes New York and aggressive level of marketing investment in the state during Q1 art Mal predictably came in a little lower sequentially at $265 for the quarter.

A reminder, as we look ahead in general online Casino art now are higher compared to online sports book our Mt.

In addition, our new states, such as New York and Louisiana. During Q1. It is not unusual for us to see negative art now around the launch which naturally depresses art Mount in the shorter term.

We also continue to see benefits from the convergence of content and gaming.

In Q1, we laid the groundwork for our brand New bet Rivers network.

Within network, our aims to deliver unique voices and sports lifestyle and casino entertainment with exclusive content and podcasts.

A key highlight during the first quarter was the signing of New York Sports Broadcasting legend, Mike from SASSA to an exclusive brand and content deal.

He will provide network and social media content through hosting a twice weekly podcast series as well as hosting a series of digital videos that will appear on that rivers in place figure out various platforms.

Francesca will also be appearing at select sporting events throughout the year, where he will create special honors seen videos for fans.

We also had our first major release of the <unk> with Daniel tool podcast.

Dan a longtime Canadian television sports anchor for TSN Sports Center.

It has been featured in many of our Ontario ads.

In fact, our launch of its podcast corresponded with our investment in Ontario, and our Olympics campaign, which also feature Dan.

During that time period, the potash setup to top of all podcast in Canada on Apple podcast.

We cannot be happy with the quality and substance of both podcasts and we see a bright future for both US listener response has been overwhelming.

Between our major launches.

Also we're building up our bedding weekly studios, which focuses on niche sports and leaks and speaks more to the core better.

All of these content efforts are geared towards brand building.

Satisfying a wide range of our core customers, giving our customers a chance to enjoy quality sports content or to get expert analysis for the sports so I'd like to bet on them.

We look forward to giving our customers more quality programming and to innovate casino and sports content as we go making our bet River is in place <unk> brands not only reliable for their gaming.

But also for branded content that they can enjoy listening to watching and engaging with outside of the app.

We continue to invest in improving the quality of our online sports within our gaming products.

As an operator focus on the customer experience and continually reducing any friction we.

We see continual improvement in product and tech as a great source of consistent revenue growth.

As we reviewed on our last call. We continue to see great reception to our recently launched iOS App and combined casino and sports book markets.

This is reflected in the feedback we received directly from our users.

And rapidly improving App store ratings are now more closely reflecting the positive experience, we know our players experience spending with us.

The constant stream of improvements we make to our user experience. We know it's both appreciate it.

And noticeable to our players and we will continue to focus on improving the user experience.

As an example in Michigan, our iOS App users are generating 50% more handle the nos play on other devices.

With that I'll turn the call over to Kyle.

Thanks Richard.

First quarter revenue was $134 9 million up 21% year over year.

Richard mentioned earlier and as we've discussed at length in prior calls with this run of recent new state launches we were in a heavy investment mode. During the quarter, which were comfortable doing knowing that existing markets, where we operate continue to perform and grow nicely as a result, our first quarter adjusted EBITDA loss was $43 4 million.

New York launch was the biggest contributor to our loss during the quarter with almost two thirds of our adjusted EBITDA loss coming from New York.

As we previewed on our last quarterly call. We had negative revenue contribution from New York during the first quarter, providing a headwind of almost $6 million on the revenue line.

This combined with our New York launch marketing and brand building efforts during the quarter contributed significantly to our loss.

Good news is we're now producing solid positive revenue in the state and marketing costs have been and will continue to be reduced meaningfully in New York at the NBA and NHL seasons conclude.

Adjusted advertising and promotions expense was $66 3 million during the first quarter of 2022 compared to $64 million during the fourth quarter of 2021.

As Richard noted we spent a similar amount in marketing get acquired more than twice the number of players than we did in the prior quarter.

We've had fantastic recent success in lowering our cost to acquire new players as we continue to refine our marketing efforts and also as a result of more rational behavior across the industry.

The marketing increase over last quarter reflects increased marketing efforts in New York, Louisiana, and even Ontario ahead of launch as we sought to generate brand awareness and.

In advance of our launch there.

We expect marketing expense in New York to reduce significantly in the second quarter and going forward.

But we will also have increased costs in the second quarter in Ontario related to our exciting recent launch in a market where were optimistic we will see solid returns given that online casino is legal in this market.

While we will remain flexible with our marketing initiatives, it's likely that Q1 will be the high watermark for the year in terms of marketing expenses.

As we expected and discussed on our last call. Our gross margins were lower during the first quarter largely due to the impact of New York We.

We expect gross margins to continue to improve from here as the year moves forward.

Our adjusted G&A grew to $12 4 million during the first quarter up from $11 6 million during the fourth quarter G&A.

G&A is expected to continue to grow throughout the year as we build out our technology teams and our corporate infrastructure.

Turning to the balance sheet, we continue to be in a position of strength.

We ended the quarter with $232 million in unrestricted cash on hand, and we have no debt.

Positioned well to comfortably get to profitability and cash flow positive with our existing cash position.

As Richard highlighted we are increasing our full year 2022 revenue guidance to largely reflect the opening of Ontario.

We are raising our expected 2022 revenue to range between $600 million to $650 million up from between $580 million to $630 million.

At the midpoint, the increase guidance implies 28% year over year top line growth.

As a reminder, our policy towards revenue guidance is to include only those states, which are currently lie thus our revised guidance adds in Ontario, but still does not include Mexico or any other markets that may launch later this year.

In addition, Richard highlighted in his early remarks, our expectation for profitability.

We expect our losses to continue to decline meaningfully as we move through 2020 to improve.

Improving profitability on a market by market basis, and less investments in new market launches relative to our overall size gives us confidence in our ability to be adjusted EBITDA profitable for the back half of next year of 2023, and this includes our expected market launches in Mexico, Maryland, and Ohio over the coming quarters.

We continue to execute well and see a clear path to profitability on a market level and overall business perspective and.

And we'll be excited to share additional details with you as we get closer to that Mark.

With that operator, please open the line for questions.

Thank you at this time to ask a question you will need to press star one on your telephone.

That is star one to ask a question.

Q1 should be driving your question <unk>.

Please stand by while we compile the Q&A roster.

Yes.

Your first question comes from the line of Bernie Mcternan from Needham. Your line is now open.

Great. Thanks for taking the questions I guess, maybe to start Richard your comment on candidate will take longer to build was that an industry comment or an RF rsi specific comment.

We'd love to get your thoughts or insights on how large you think the market currently is and how big you think it can get.

Sure yes so.

This is a view of the industry given the gray market existing there and the fact that you have to have restrictions on inducing any inducements to attract a new player to play at a site is going to take longer to get those players in because you arent promoting like you do in the other markets in North America.

Offer a promotional offer free spin offer bonus codes anything of that nature are prohibited so due to that restriction youre going to have a slower time acquiring new players other than if you have an existing database from operating in a great market previously in terms of the size of the market. It's unclear at this point, we only know how we're performing.

Certainly you've seen some people.

People anticipating numbers based on downloads and things of that nature, we don't put a lot of weight into some of those items frankly because.

Our strategies are driven by getting downloads directly from the store and the way those are measurable and certainly we know that you can have a large volume of downloads, but not have a large number of depositors. So.

That's one of the things, we're going to wait and see the market size from when the regulators announced their numbers publicly.

Understood.

The upcoming Mexico launch is there a way we should be thinking about that market opportunity.

Whether it's the launch cost relative to Canada potential revenue may be comping at the Columbia as well.

I think what's exciting for us about Mexico is obviously, we have a partner there that we're excited media partner that we're very excited about it and they've been very helpful. In a very collaborative environment, so far with us and them.

Like Columbia, and Mexico, We will also be launching online casino and online sports book on the same on the same day.

So those are the two positives the thing that I want to make clear, though is that our plan is to build that business over the long term. So we will focus on ensuring that we have the proper user experience. They're all the right payment methods are working the way, we want them to to forget Theres a lot of new vent.

Vendors that we're using for the first time with that market and so.

I want to make sure the registration flows and the payment methods that we're implementing are working as designed so we're going to really make sure. The user experience is right before we.

Spend on and invest in the marketing.

I think the marketing.

There is no specific date in that market like there are many other states we operate in where everyone launches at the same time because that market is existing market. There isn't a time sensitivity to have to launch and go with a full marketing plan. Initially so we plan to ramp up as we see the user experience meeting our expectations.

Understood. Thank you very much and appreciate all the color provided in there.

Thank you Mark is really helpful.

Thank you.

Your next question comes from the line of Dan <unk> from Wells Fargo. Your line is now open.

Hey, good afternoon, everyone. Thanks for taking my questions.

The first one.

To clarify in terms of the payback period, I know you mentioned you're profitable in Michigan after four quarters.

How should we think about that.

Payback period in a market, where you have I gaming and sports betting versus the payback period in a market where you just have to have the online sports betting.

Yeah. Good question I think we've been pretty clear and evident from the markets, where we have gotten profitable first as when it has both casino and sports.

We're going to get get to profitability sooner and it's going to take a little bit longer in a sports only market.

With all factors equal obviously.

The competitive nature in a market the tax rate those are all going to impact overall profitability as well, but I think youre on the right track that when we've got casino.

Our path to profitability is a lot sooner and evidenced by by Michigan being in just the fourth full quarter of operation getting there already.

Got it and then I think since last time, we spoke there has been some some additional consolidation in the <unk> space.

As a leading I gave me operator, operator to what extent are you seeing additional opportunities come across your desk and should we expect this pace of consolidation.

Continue or accelerate from here.

So we've shared this before that.

We're in the discussions often about consolidation primarily because we have a lot of things that others, probably find attractive which is obviously strong online casino business, our own technology driving that online casino business.

A large number of scale at the top.

For an online casino revenues in the country.

The fact of our diversified and not in across the Americas.

The fact that we are.

Pretty close to being profitable getting much on a path of a line of sight towards profitability. So I think certainly there's a lot to our product I think a lot of our competitors sort of view casino is more of just the aggregation of library of games and if you add more games than youre going to be more successful, but we don't view it that way, we think it's a whole lot of proprietary technology you have to be.

Build into the casino experience to create something differentiated and to have unique selling points.

I think because of the headstart advance product that we have there we're continuing to look for ways to grow and casino markets by do we come up often in those rumors and things of that nature. Given the fact that a lot of companies are recognizing that <unk> was to be stronger in the casino category.

Got it and then just one more quick one.

Sorry go ahead.

Yes go ahead.

I was just going to ask you if I could sneak one more in just from California, There's been some it's been a news lately.

Is this a state where you have a path to market access or are working on it.

I guess any update there or how should we be thinking about that.

Sure we've been investing in California market access conversations have a lot of great relationships with different parties. There for a long time and the truth is is that it's too early to speculate which direction is going to go whether it's going to be in the mobile market is several.

Referendums there will be held in November .

And as soon as the third one is <unk> <unk>.

After for signatures and the framework is going to vary dramatically based on that we've done is create ourselves optionality for ourselves of having some relationships that we think will be very meaningful and helpful should the direction of the legislation go one direction versus others that if we go direct we certainly have that opportunity as well. So I think we're just sort of keeping all of our options open but we do have some very good relationship.

There, we've established and continuing to maintain.

Got it thanks, so much I'll pass it on.

Your next question comes from the line of David Katz from Jefferies. Your line is now open.

Afternoon, everyone. Thanks for taking my question.

I wanted to just with the water under the bridge so far just talk about scale.

And how you think about scale and are there actually scale benefits so far as far as you can tell and how does that.

Evolve in the future or.

Is it the bigger the opportunity the bigger the investment.

And whether that math is better or worse.

Sure.

Said it before but it's really clear is seen as an industry for 20 years and it's been pretty much clear across the board no matter what market you're in what ultimately online user experience wins, so marketing as necessary to attract players, but long term players will migrate to those sites that they like the best and so when it comes to a product like sports book.

Casino the two primary revenue generating category in the industry, where you play against the house.

The scale doesn't really change the user experience depending on the size of your operation doesn't change how will you treat the player what type of innovative experience you can create what kind of bonus structures you create I think as long as the user experience.

Scalable and is scaling with the rest of the competition for example, making sure that you have enough scale to invest in the proper data feeds the streaming fees things of that nature, which we've been market leading on as long as you are able to offer the players experienced by investing in those things and having the ability to justify those expenses, which we are able to do.

We plan to continue to expand our focus in those areas. We think the scale is less relevant than it is for example in our poker market where often the.

Inferior products, sometimes wins, because it's all about liquidity and the number of players you have whereas in the casino category and sports because I mentioned it doesn't work that way. So we're very optimistic and excited by continuing to build innovation on the product side is going to differentiate our user experience of the players have a reason to play with us.

When they have a choice.

Understood Thanks very much.

Yeah.

Your next question comes from the line of Chad Beynon from Macquarie. Your line is now open.

Hi, good afternoon, Thanks for taking my question.

Your path to profitability comments were very helpful and maybe even ahead of expectations for the full back half of next year. When we think about a year or two beyond that just thinking about kind of a.

A stable EBITDA margin does anything change in terms of where you believe you can get to and is that more driven off of further revenue growth from your users were from cost reduction.

Promo reduction to those players thanks.

Yes, Jed I'll take that.

Our view Hasnt changed.

<unk>.

I don't want to peg a exact timeframe to it but we still feel very good about being able to get to EBIT margins that are in the mid to high 20%.

I think in addition to a tailwind of new states that that should be coming online over the coming years.

We're seeing more and we've talked about on this call. We are seeing more markets approach profitability or reach profitability. We see many more of those markets getting there by the end of this year and into the coming years. So I think that will that will allow us to see that that operating leverage.

But I think we're still pretty pretty early in the industry and our company.

Growth timeframe, so the Leverages and income over time, we'll get that over technology investments over the corporate infrastructure that we're putting in place to support the growth.

And then there has been.

No shortage of discussion about us ramping up marketing in the near term we've had all of these markets launch in the most recent quarters, Ontario this quarter. So.

Over time, the marketing spend is going to normalize and level off.

The declines in markets that are that are more mature. So that will also help pretty significantly and then maybe.

Maybe the last piece that I think you mentioned was just the margins will improve.

Gross margins will improve.

Some of our state mix changes were pretty heavy in Pennsylvania, which has a much higher tax rate, but as this industry matures and we mature they will also be ways to find.

Opportunities to take costs out of our cost structure to improve the gross margins, which will obviously flow through to the.

The EBIT margins.

Great. Thanks, and then you were nice enough to call out the revenue impact and essentially the EBITDA impact from New York in the quarter. I was wondering if you were willing to do the same from a hold standpoint, if the lower sports betting hold in the first quarter impacted your revenue and EBITDA.

Understanding it wasn't meaningful but if that was a couple million dollars that you would've had in the quarter. Thanks.

Sure. So so I, probably won't get as specific as you would like me to but.

Our hold in the quarter was probably not probably but a little under where we would've expected it to be and sports and a little over where we expected it to be and casino, probably not not netting out to a big difference.

I think people are generally focused on the sports hold in what's happening in the.

And the big events are in the different <unk>.

Leagues, and we probably saw a little of that same impact that others have talked about but not not a needle mover overall from hold in the in the quarter.

Thank you very much I appreciate it.

Your next question comes from the line of Mike Hickey from Benchmark company.

Hey, Richard Kyle Good morning.

Thanks for taking my questions.

We can hear me okay.

Yes Kyle.

On your <unk>.

Guidance.

Your updated guidance.

For the year.

If you look at it ex Canada are you basically reiterating your view.

And then on Canada.

It sounds like most of these headwinds you probably knew.

Where they are before you enter the market or was this something that surprised you and he's sort of lower.

Your expectations for the Canadian market.

The headwinds that you noted and I have a follow up thanks guys.

Sure.

Yes, so I'll answer and if Richard wants to add anything great.

I would say in aggregate.

So far in 2022 things have played out pretty much as we've expected in our existing markets.

So to your point our increase in guidance is largely due to the launch of Ontario.

We feel really good about continuing to grow our revenue this year quarter after quarter as we've done for the last three years.

And.

Part of that just to reminder, more of our revenue comes from a casino.

So the revenue stream is generally a little more predictable and less less subject to seasonality or the sports calendar.

From a I'd say from a financial perspective.

Canada, Canada has not been a surprise for us I think we've been we've been pleased with that.

And so no surprises there.

And I would agree with that there hasnt really been any surprises that the only thing I will note is that some of the marketing restrictions and the process for the transition from a growth side to a regulated site.

We werent very well defined until relatively close to the launch, but having said that we recognize that the size of the gray market. There and we are aware that this is going to be a market, where you've got a lot of existing operators with brands that have a lot of existing players already from day one.

Awesome guys. Thanks for the color.

Second question for me is on marketing spend.

Just sort of curious if you're seeing any.

Change in behavior from some of your competitors.

I think at least one has been pretty public that.

They are pulling back.

And the amount of spend being.

Being more disciplined maybe sort of gained where you've always been just sort of curious the competitive profile in new states or maybe existing states, if you're seeing more rationalized spend.

From your competitors and then for you guys. Obviously, you had a big spend in the quarter that makes sense. You said, it's going to go down from there that's great.

Are you still tracking to budget.

On spend.

Or are you.

Are you changing I'm guessing being more conservative here versus elevating spend thanks guys.

Okay I'll take the first part of the question, maybe causing the second.

When it comes to rationalization, yes. We are we are seeing a more rational approach to marketing in fact, we track and noticed that.

Almost all of our top competitors have reduced our marketing intensity since the Super Bowl. So this has been a consistent theme that we continue to see and we're excited about that because it does give us opportunity to continue to see the great results that we've seen where we've been able to essentially double the new players for the same price we were paying before.

So we hope that we expect that to continue and we're excited that we're seeing some rationalization in the marketplace.

Yes, so I would just.

Add there.

And Richard said this in the opening remarks, but we just had really great success, bringing in new players or our ftes. During the first quarter. We mentioned that we added twice as many U S. First time depositors compared to Q4 and spent only a little bit more so.

We think thats, great and we've seen those attractive CPA is continuing so far in Q2.

So I think that's all all really exciting I mentioned that it's likely that Q1 will be the high point of the year for marketing expenses in terms of what we spent during the quarter, but we'll also we're going to remain flexible with our spending and we take advantage of good opportunities we pullback when.

When those arent presented so maybe to your point about where we are relative to our budget.

We haven't published a budget so I don't necessarily want to give you an exact data point on that but what I would say is we're always.

Balancing when we see these great opportunities do we do we push harder and spend more than the budget.

Or do we do we.

Save some of that too to improve the opportunity for profitability and that just might mean, some bringing some less players and so I think I think our marketing team does a great job of looking at the returns that are available in markets. What we see from those those players through those marketing channels.

What our margins are in those states, depending on the different different landscape what the competitive.

Set looks like so we will continue to be dynamic there and I think I think our team's proven to do really well at that just to add one quick comment is that we are also largely avoided long term marketing commitments, which has allowed us to remain nimble and flexible in adjusting the allocations as appropriate we always felt that from the beginning of your debt to these many years many law.

Long term deals you won't get the same consistency in flow of players that you need to justify the ROI. So that does give us the flexibility that we're using to be able to take and choose the right opportunities that makes sense for us based on ROI.

Alright, Thanks, guys. Good luck.

Thanks. Your next question comes from the line of Edward Engel from Roth capital.

Hi, Thank you for taking my question based on what Youre seeing Ontario, I will take the promotional environment is a bit more rational than maybe some of the other U S market.

Can we assume that CPA might also be lower as well and then I guess similarly for Mexico, where CP is our lower.

Could we maybe see lay a path to breakeven in that market.

The shorter than the traditional U S or Canada market.

Sure when it comes to the CPA is I don't think were point, where we're disclosing cpa's for on a market basis, but what I will say is that.

Obviously, it's a large population in Ontario.

I'd say.

Lodging day, one was helpful for CPA is having a product that really works well day, one strong customer service as a differentiator I think that really help us of course differentiation customer service players don't notice that initially it's only after the sign up with us, but I would say though is that.

Because youre not able to offer entitlements and.

Such as the free play aggressive AAA bonuses, which typically are numbers that we offer are smaller than what many other competitors promote it actually gives us an advantage to really market things that we think matter most of the user experience, which are the unique selling points for a player.

<unk>.

<unk> market in Tysons, we can talk to the players and plan on continuing to talk to the players about all the things we do that give them an experience is differentiated and unique.

Relative to other products in the marketplace, but it is helpful. For us we would have a market that way I think it does reduce some of that focus our many of our competitors, which historically are focused very much on promoting a larger dollar amount that everybody else to try to get attention. So in this market, it's less about the <unk>.

All our amount on the offer and more about the user experience that we plan to offer to the player.

In terms of Mexico.

It's early and we haven't launched yet there. So certainly we don't have specific details on that other than just as I mentioned earlier.

Being really excited that we have a really well regarded well respected partner there on the media side, who is going to be leveraging a lot of the assets. They have to help us get off to a strong start.

As I've said earlier, though we want to execute on all of those assets. Initially until we have the comfort that the product experience is where it needs to be.

And maybe then just on the kind of the path to profitability part of the question.

As I mentioned before to a previous different question, we do see that.

Path being shorter when we're in markets with casino.

And are they include both casino and sports I should say, so I Wouldnt expect Ontario in Mexico to be any different in that regard that they will.

They will get to profitability faster than if they were just sports only markets.

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But as Richard said Theyre, both Ontario is very early in Mexico, Hasnt launched so I wouldn't want to yet peg it against a place like Michigan, where we we got there in just the fourth quarter, but I feel very good about about getting getting to profitability in both those markets in a very reasonable timeframe.

Great. Thank you and then I guess, even adjusting store in New York It looks like your cost of revenue as a percent of sales.

The increase a bit sequentially.

I guess, what's kind of the opportunity there to kind of.

Improve efficiencies.

Gross margin side over time.

Yes.

To make sure I understood. Your question you are saying that.

Ex New York.

Your math is getting to a little bit lower gross margins as that.

Is that what you were saying yes.

Yes, and I think that's generally right. So so.

New York, probably cost us somewhere in the neighborhood of.

600 basis points of gross margin during the quarter.

A lot of that is temporary.

When you have to generate negative revenue and you incur operating cost to support that revenue.

Provides a pretty good headwind.

But most of that is temporary a little of the permanent depending on how big that market is relative to our others, but I would expect the margins to continue to kind of sequentially approve improve as the year goes on here and we'll probably get back up to to mid 30% gross margins by the end of the year.

Something in that range in terms of longer term and how we how we improve those margins.

The margins are typically better in casino than they are in sports obviously it depends on the tax rate I think as we continue to diversify away from not away from but adding other new markets that that become bigger relative to Pennsylvania, which has little lower.

Margins higher tax rate.

That will naturally improve things and then there's a bunch of other initiatives that we that we have some short some longer term where.

But we'll be able to take costs out of.

Our operating costs improve those margins over the coming quarters and years.

Great. Thank you for the color.

Again as a reminder to ask a question you will need to press star one on your telephone keypad.

Again that is star one to ask a question.

Okay.

There are no further questions at this time.

I'll now turn the call back over to Richard Schwartz, Chief Executive Officer.

Thank you for joining us for this call and we look forward to speaking again soon thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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